focused
2018 ANNUAL REPORT
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
1
Our stores. Our colleagues. Our strategy.
Everything we do reinforces the passion for
customers that sits at the heart of our organization.
Day in and day out, through our five operating divisions, we strive to be the best in food,
health and beauty. We believe that by rapidly expanding our use of data-driven insights and
consistently delivering process and efficiency excellence, we will strengthen our core business
while enabling ongoing investments in our future – in areas like everyday digital retail, payments
and rewards, and connected healthcare. As we drive towards this vision of our future, we are
grounded by a commitment to social responsibility and compliance, and driven by a shared
set of values and culture that inform the decisions of our outstanding colleagues.
We are focused
on our purpose:
Live Life Well®.
Everyday
Digital Retail
We are an omni-channel retailer. We take
pride in operating many of the country’s
top store banners while simultaneously
layering in the kinds of digital experiences
Canadians now expect.
Payments
and Rewards
Driven by the data from millions of weekly
customer interactions, we are able to offer
unparalleled personalization and rewards
to our customers.
Process and Efficiency
Excellence
We have an ambitious strategy, which
calls for investment in areas that matter
most to our customers. Delivering on this
strategy requires the adoption of more
efficient processes and a continuous
improvement mindset.
Data-driven
Insights
We have a rich set of data that offers
unique insight into almost every aspect of
our business. As we continue to enhance
our analytical capabilities, we are already
seeing the benefits of smarter promotional
decisions and improved assortment.
Connected
Healthcare Network
We continue to build upon the combination
of Canada’s single largest Electronic Medical
Records (EMR) platform and Loblaw’s
network of pharmacies and healthcare
professionals to empower Canadians with
their own health information.
Best in Food, Health
and Beauty
We offer a variety of grocery options to
meet all tastes and budgets, operate more
than 1,750 pharmacies across the country,
provide access to over 5,000 health and
wellness professionals, and remain a top
beauty destination for Canadian women –
all designed to meet and surpass the
needs of our customers.
2
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
F I N A N C I A L H I G H L I G H T S
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
3
+
+
1.1%
Food Retail
Same Store Sales1
+
+
2.4%
Drug Retail
Same Store Sales
+
+
3.5%
++
1.2%
Front of Store
Pharmacy
1.1%
Food Retail
Same Store Sales1
2.4%
Drug Retail
Same Store Sales
1.5%
4.0%
1.1%
3.0%
2.4%
0.3%
2016
2017
2018
2016
2017
2018
h
0.2%
Revenue3
46,587
46,693
46,295
29.4%
Adjusted Retail Segment
Gross Margin2
29.4%
28.5%
27.0%
h
0.2%
Consolidated
Adjusted EBITDA2, 3
($ millions)
3,521
3,528
3,333
7.6%
Consolidated Adjusted
EBITDA Margin2, 3
7.6%
7.6%
7.2%
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
h
1.8%
Adjusted Diluted Net Earnings
per Common Share2, 3
($)
3.99
4.06
3.60
h7.9%
Dividend Declared
per Common Share
($)
1.155
1.03
1.07
TABLE OF CONTENTS
3 Financial Highlights
4 Chairman’s Message
8 Our Divisions
10 Strategic Enablers
12 Corporate Social Responsibility
14 Corporate Governance Practices
16 Board of Directors
16 Leadership
17 Shareholder and Corporate Information
18 Forward-Looking Statements
2016
2017
2018
2016
2017
2018
1 Excluding the impact of gas bar
2 See the Non-GAAP Financial Measures section of the 2018 Annual Report – Financial Review
3 Excluding the spin out of Choice Properties business to George Weston Limited
XX%
Revenue1
Revenue1
1.1%
Food Retail
Same Store Sales1
2.4%
Drug Retail
Same Store Sales
28.1%
Adjusted Retail Segment
Gross Margin2
46,587
46,693
46,295
1.5%
4.0%
1.1%
3.0%
27.0%
2.4%
29.4%
28.5%
3,521
3,528
3,333
h
h
X.X%
Consolidated
Adjusted EBITDA2, 3
($ millions)
7.6%
Consolidated Adjusted
EBITDA Margin2, 3
7.6%
7.6%
7.2%
h
X.X%
Adjusted Diluted Net Earnings
per Common Share2, 3
($)
3.99
4.06
3.60
h
X.X%
Dividend Declared
per Common Share
($)
1.16
1.03
1.07
0.3%
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
4
LOBLAW COMPANIES LIMITED
Galen G. Weston
Executive Chairman
C H A I R M A N ’ S M E S S A G E
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
5
This year, our strategic framework took hold as
our five operating divisions delivered stable trading
performance, more effective data-driven insights,
greater process and efficiency management,
and a passion for the customer across all levels
of the organization.
We are focused
on maintaining our
momentum and
delivering even more
for our customers.
Dear shareholders,
I am pleased to share several highlights relative to both
We delivered on this target while making meaningful
our financial and strategic performance in 2018. As you
investments in the business.
will see, we set thoughtful but ambitious objectives and
we followed through with meaningful results.
Focused on stable trading
In 2018, our financial plan called for essentially flat
adjusted net earnings growth, despite facing more than
$440 million in expected incremental cost headwinds.
On a continuing operations basis, we delivered same-
store sales increases of 2.4 per cent in drug retail and
1.1 per cent in food retail, with revenue of $46,693 million
or +0.2 per cent. Consolidated adjusted EBITDA was
$3.53 billion, up 0.2 per cent, and adjusted diluted net
earnings per share were $4.06, or +1.8 per cent. We
continued to return capital to shareholders, raising our
6
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
dividend by 7.9% and repurchasing 16.6 million shares
under a common share repurchase program. We also
simplified Loblaw as a pure-play retailer by spinning out
Choice Properties REIT, enabling us to concentrate on
our core strategy.
Focused on strategic investment
Looking back, 2018 was just as strong strategically as
it was financially, as we rapidly accelerated growth in
three areas that we know matter most to our customers:
everyday digital retail, payments and rewards, and
connected healthcare.
Last year, we pledged to blanket Canada with everyday
digital retail conveniences and that’s precisely what
we accomplished. Today, 75% of Canadians are within
ten minutes of one of 670 PC Express pick-up sites.
Our home delivery offering grew rapidly, and 65% of
Canadians now have access to Instacart through one of
233 stores. During the year, we shortened both our
pick-up and delivery window, and in many regions our
online orders are now fulfilled the same day they
are placed.
Our tendency to speak most about our digital food
business often overshadows our broader digital initiatives
across beauty, pharmacy and apparel. Each of these
offerings have become meaningful businesses unto
themselves – growing, adding categories and brands,
and driving online sales. We have released these offerings
at an incredible pace and on an unprecedented scale,
and customers are responding: in 2018, our e-commerce
sales surpassed half a billion dollars.
Our payments and rewards strategy is underpinned
by our PC Optimum loyalty program, which we launched
just over a year ago. The program now boasts over
18 million members, and customers are using their
2018 was just as strong strategically as it was financially. LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
7
We will be leaders in analytics and automation, frequent
adopters of artificial intelligence, and an employer
of choice for experts in these areas.
PC Optimum cards on two-thirds of our retail
We are also seeing remarkable traction with respect
transactions. More broadly, we entered into a strategic
to data-driven insights. As we improve our analytical
partnership with Esso, we successfully introduced
capabilities, we have a better understanding of the
our PC Insiders subscription service to over
25,000 Canadians, and our PC Financial® Mastercard® –
which JD Power ranked #1 for customer satisfaction
millions of customer transactions we manage, allowing
us to make better promotional and pricing decisions and
fundamentally enhance our core business for both our
in 2018 – is in the wallet of roughly two million Canadians.
Together, these products and services have created a
customer and our colleagues. This will continue to be
an area of focus in the years ahead.
loyalty loop that rewards customers personally, while
encouraging them to return to our stores and services
more frequently.
Our connected healthcare strategy brings together
our thousands of health and wellness colleagues, and
We have confidence in our strategy, and our strong
financial performance puts us on solid ground as we
continue to face regulatory headwinds and growing
competition. Looking ahead, we have a focused
financial plan, a leadership team focused on execution,
the services they provide, to make the customer, patient
and a workforce focused on helping deliver on our
and caregiver experience easier and more digital. This
purpose: Live Life Well. I have all the confidence that – as
includes digital prescriptions, auto-refills, and the power
we did in 2018 – we will deliver on this plan in 2019 and
of QHR – a leading electronic medical records (EMR)
beyond.
company – bringing physicians, pharmacies and patients
closer. In 2018, we achieved 15% growth in our EMR
subscriber base, continued to roll-out our EMR platform
Accuro® to nearly 800 of our pharmacies, received our
license to sell medical cannabis online, and more.
Focused on efficiency and insights
We are focused on process and efficiencies as a means
Galen G. Weston
Executive Chairman
of strengthening our core business and enabling ongoing
investments in new digital services, new categories of
activity, new consumer offers, and new applications for
data and technologies. We will be leaders in analytics and
automation, frequent adopters of artificial intelligence,
and an employer of choice for experts in these areas.
At the same time, we will continue to maintain the same
customer-centric bricks-and-mortar network that our
customers have come to trust and rely on.
8
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
O U R D I V I S I O N S
We operate stores and pharmacies in hundreds of Canadian
communities, and 90% of Canadians live within 10 kilometres
of these locations. That means we are interwoven with the
communities we serve, and we take great pride in helping our
customers lead better and healthier lives.
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 platform. This unique collection of assets offers
convenient access to the best in health, beauty and food –
either online, in-store or business-to-business.
Our Discount division operates over 115 Real Canadian
Superstore locations, as well as 90 Maxi, 23 Maxi & Cie.,
and nearly 260 no frills stores from coast to coast.
Combined, these stores proudly offer Canadian families
easy access to affordable necessities and collectively
stand ready to Feed Everyone by providing freshness,
value and a broad assortment of quality products in
equal measure.
®
®
TM
®
MC
®
Joe Fresh brings the elements of modern style to
life through great 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.
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
9
Our Market division operates over 390 stores – including
Loblaws, Loblaws City Market, Your Independent Grocer,
Atlantic Superstore, Zehrs, Provigo, Provigo Le Marché,
Real Canadian Wholesale Club, Real Canadian Liquorstore,
Fortinos and T&T – each led by a team of colleagues
that are passionate about food, creating great customer
experiences, and being the recognized leaders in quality.
Our assortment of products reflects the latest and greatest
food trends and inspires Canadians to bring more to
the table.
PC Financial offers value, convenience and simplicity
by enabling customers to earn rewards on everyday
purchases. With more than 2 million cardholders,
PC Financial is redefining our customers’ online, in-store
and loyalty experiences.
10
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
11
Our organizational focus on delivering value and solutions to our
customers runs through every part of our business. We have a
strategy to achieve our goals, the internal infrastructure to deliver
against our expectations, and a colleague base that is aligned by a
unique culture and common set of values.
Brands
Our product developers travel the
world in search of new and unique food
experiences, and the result is a portfolio
of control brand products – including
President’s Choice, no name and Life
Brand – that has become synonymous
with quality and innovation.
PC Optimum
Launched in January, PC Optimum is
unique in its size, scale and customer
engagement, having already achieved
over 18 million members. We continue
to refine and enhance the program
in search of even greater value and
personalization – which we know our
customers are craving.
Colleagues, Culture
and CORE Values
We understand the importance of an
engaged and collaborative workforce.
We embrace authenticity, trust and
encourage strong connections, all while
striving to reflect our CORE Values –
Care, Ownership, Respect, Excellence –
in our daily decision-making.
Strong strategic
enablers support
our ambitions.
Technology
In recent years we have aggressively
expanded our digital and store-level
infrastructure, by rapidly scaling innovation
and improving our organizational efficiency
through automation, machine-learning
and more.
Supply Chain
Our Supply Chain is among the most
efficient, responsive and customer-centric
networks in North America. We continue
to adopt new processes and technology to
increase our capacity, while also embracing
automation as a means of improving our
performance.
Compliance
In 2018, we reaffirmed our focus on
compliance in meaningful ways, by ensuring
our colleagues know the rules and risks
associated with their jobs and how to take
action when necessary. These efforts led
us to receiving third-party assurances that
our Competition Law Compliance Program
meets ISO standards.
12
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
Corporate
Social
Responsibility
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
13
Our approach to Corporate Social Responsibility (CSR) is driven
by our company purpose – Live Life Well. By sourcing responsibly,
respecting the environment and making a positive difference in our
communities, we aim to earn the trust of our customers and be
recognized as a leading contributor towards a thriving Canadian
society – today and for generations to come.
Community
Our community investment activities centre around tackling childhood hunger, putting women’s health first,
and funding research that helps advance solutions to sustainable food challenges.
• President’s Choice Children’s Charity announced a commitment of $150 million over ten years
to help tackle childhood hunger (Feed Kids Good Food) and deliver nutrition education to children
(Feed Kids Food Knowledge). Since 2008, the Charity has granted more than $54 million and fed
more than 500,000 children annually.
• Over the past eight years, fundraising efforts of the SHOPPERS LOVE. YOU. program have
contributed $70 million, benefiting more than 250,000 Canadian women, with a focus on sharing
the expertise of its partners at leading women’s health organizations, offering new health resources,
and connecting women with others in support of local women’s health initiatives across Canada.
• We are heavily invested in the communities we serve, providing millions to charities and non-profit
organizations across Canada with the help of our customers, colleagues, business partners, and
franchisees and their employees.
Environment
Our aim is to continue reducing the environmental impacts of our operations, specifically as they relate to
carbon, food waste and packaging.
• We announced a commitment to reduce our carbon footprint 20% by 2020 and 30% by 2030. We
are already ahead of schedule, thanks to an action plan focused on reducing emissions associated
with electricity consumption, absolute refrigerants, transportation and waste diversion.
• We continued to implement waste diversion initiatives across our operations, with a commitment to
reduce food waste 50% by 2025.
• The Company joined the Circular Economy Leadership Coalition to encourage and enable
collaboration with industry peers and government in the development and implementation of circular
economy solutions aimed at reducing waste.
• Loblaw Companies Limited, in conjunction with George Weston Limited, provides seed funding for
research and technology development to address sustainable food challenges.
Sourcing
We are proud of our continued activity and leadership with respect to product sourcing and global
transparency leadership.
• We were one of the first signatories to the Transition Accord, which will carry on the important work
and progress of the original 2013 Accord on Fire and Building Safety in Bangladesh.
• Twice a year, we publicly disclose the factories which supply our apparel and footwear as part of our
efforts to provide our customers with more information about where our products are sourced.
.
14
LOBLAW COMPANIES LIMITED 2018 ANNUAL 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, Majority Voting
Policy, the position description for the Executive Chairman
and 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 92 per cent of the directors on the Board are
independent. The independent directors meet separately
following each Board meeting.
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 Executive Chairman of the Board.
The Executive Chairman directs the operations of the Board.
He chairs each meeting of the Board, is responsible for the
management and effective functioning of the Board generally
and provides leadership to the Board in all matters. These
and other key responsibilities of the Executive Chairman are
set out in a position description established by the Board.
The Board has also appointed an independent director,
Thomas C. O’Neill, to serve as lead director. The lead director
provides leadership to the Board and particularly to the
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, compliance
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.
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
15
Governance, Employee Development, Nominating
and Compensation Committee
The Governance Committee is responsible for the oversight
of the Company’s governance practices, including the
development and implementation of good governance
principles, consistent with high standards of corporate
governance. The Governance Committee oversees the
succession planning and compensation for the Board and
Senior Management. 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 overseeing the
administration, management, design and governance of the
Company’s pension plans, as well as the administration and
management of the Company’s benefit obligations.
Risk and Compliance Committee
The Risk and Compliance Committee (formerly the Environmental,
Health and Safety Committee) is responsible for overseeing
the Company’s legal and regulatory compliance program,
ERM program, corporate social responsibility program, policies,
management systems and performance with respect to various
matters including pharmacy/pharmaceutical matters and food
safety and product safety matters.
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
integrity 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 integrity of the Company’s financial statements
and related public disclosure. In doing so, the Audit Committee
oversees the Company’s internal controls over financial
reporting, disclosure controls and procedures and internal audit
function. The Audit Committee also oversees procedures for the
receipt, retention and follow-up of any complaints regarding the
Company’s accounting, internal controls and auditing matters.
16
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
Board of
Directors
GALEN G. WESTON, B.A., M.B.A.
Executive Chairman, Loblaw Companies
Limited; Chairman and Chief Executive Officer,
George Weston Limited; Director, Wittington
Investments, Limited.
1
PAUL M. BEESTON, C.M., F.C.A., F.C.P.A.
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., National Baseball Hall of Fame;
Former Chairman, Centre for Addiction and
Mental Health; Former Director, Newport Partners
Income Fund.
1, 4
SCOTT B. BONHAM, B.SC., M.B.A.
Corporate Director and Co-Founder of Intentional
Capital; Former Co-Founder of GGV Capital;
Former Vice-President, Capital Group of
Companies; Director, Magna International Inc.,
The Bank of Nova Scotia; Board Member of
Canadian Institute of Advanced Research and
the DenmarkBridge.
2, 4*
WARREN BRYANT, B.S., M.B.A.
Corporate Director; former Chairman, President
and Chief Executive Officer, Longs Drug Stores
Corp.; former Executive, Kroger Co.; Director,
Dollar General Corporation; Former member
of the Executive Advisory Committee, Portland
State University Food Industry Leadership
Center; 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; Former
Director, George Weston Limited, Pathmark
Stores, Inc. and Office Depot Inc.
Leadership
GALEN G. WESTON
Executive Chairman
SARAH R. DAVIS
President, Loblaw Companies Limited
DARREN MYERS
Chief Financial Officer
GORDON A.M. CURRIE
Executive Vice President, Chief Legal Officer
and Secretary
1*, 3, 4
CHRISTIE J.B. CLARK, B. COMM., M.B.A.,
F.C.A.
Corporate Director; Former Chief Executive Officer
and Senior Partner, PricewaterhouseCoopers LLP;
Former Director of Hydro One Inc., Hydro One
Limited; Director, Air Canada; Trustee, Choice
Properties Real Estate Investment Trust; Former
Director, IGM Financial Inc., Brookfield Office
Properties Inc.
1, 2
WILLIAM A. DOWNE, C.M.
Corporate Director, Former Chief Executive
Officer, BMO Financial Group; Former Director
of the Board of Bank of Montreal and its
subsidiaries, BMO Nesbitt Burns Holding
Corporation and BMO Financial Corp.; Lead
Director of ManpowerGroup Inc.
1, 3, 4
M. MARIANNE HARRIS, B.SC., J.D., M.B.A.
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,
Sun Life Financial Inc.; Former Director of
Hydro One Inc., Hydro One Limited; Former
Chair, Investment Industry Regulatory
Organization of Canada (IIROC); Former
Investment Committee of the Princess Margaret
Cancer Foundation; Member of Dean’s
Advisory Council, Schulich School of Business;
Advisory Council of the Hennick Centre for
Business and Law.
2, 4
CLAUDIA KOTCHKA, B.B.A., C.P.A.
Corporate Director; Former Vice President,
Design Innovation & Strategy, Procter & Gamble;
Former Trustee, Cooper Hewitt Smithsonian
Design Museum; Director, American Red Cross
Greater Miami and the Keys.
2, 4
NANCY H.O. LOCKHART, O. ONT.
Corporate Director; Former Chief Administrative
Officer, Frum Development Group; Former Vice
President, Shoppers Drug Mart Corporation;
Former Director, Barrick Gold Corporation,
Director, Atrium Mortgage Investment Corporation,
Gluskin Sheff & Associates Inc., Member,
Sotheby’s Canada Advisory Board; Former Chair,
Ontario Science Centre; Former Director, Centre
for Addiction and Mental Health Foundation.
2*
THOMAS C. O’NEILL, B. COMM., F.C.A., F.C.P.A.
Corporate Director; Retired Chairman, BCE Inc.;
Retired Chairman, PricewaterhouseCoopers
Consulting; Former Chief Executive Officer and
Chief Operating Officer, PricewaterhouseCoopers
LLP; Director, Adecco S.A., Chairman, The Bank
of Nova Scotia; Former Director, Nexen Inc.;
Former Chair, St. Michael’s Hospital; Former
Vice Chair, Board of Trustees, Queen’s University;
Member, Advisory Board at The Stephen J.R.
Smith School of Business at Queen’s University.
1, 4
BETH PRITCHARD, B.A., M.B.A.
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; Former Director,
Cabela’s Incorporated, Shoppers Drug Mart
Corporation, Zale Corporation, The Vitamin
Shoppe, Inc., Border Free Inc.
2, 3*
SARAH RAISS, B.S., M.B.A.
Corporate Director; Former Executive,
TransCanada Corporation; Director, Commercial
Metals Company and Ritchie Bros. Auctioneers;
Former Chair, Alberta Electric System Operator
Board of Directors; Former Director, Canadian Oil
Sands Limited, Shoppers Drug Mart Corporation,
Vermillion Energy Inc.
NOTES
1 Audit Committee
2 Governance, Employee Development, Nominating
and Compensation Committee
3 Pension Committee
4 Risk and Compliance Committee
* Chair of the Committee
GARRY SENECAL
Chief Customer Officer
ROB WIEBE
Chief Administrative Officer
GREG RAMIER
President, Market Division
IAN FREEDMAN
President, Joe Fresh
JEFF LEGER
President, Shoppers Drug Mart
JOCYANNE BOURDEAU
President, Discount Division
BARRY K. COLUMB
President, President’s Choice Financial
MARK WILSON
Executive Vice President, Human Resources
and Labour Relations
KEVIN GROH
Senior Vice President, Corporate Affairs and
Communication
LOBLAW COMPANIES LIMITED 2018 ANNUAL REPORT
17
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 | Website: 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
At year-end 2018, W. Galen Weston,
directly and indirectly, including through
his controlling interest in Weston, owns
approximately 50.4% of the Company’s
common shares.
At year-end 2018, there were 372,877,667
common shares issued and outstanding.
The average daily trading volume of the
Company’s common shares for 2018 was
560,168.
PREFERRED SHARES
At year-end 2018, there were 9,000,000
second preferred shares, Series B, issued
and outstanding.
The average daily trading volume of the
Company’s second preferred shares,
Series B for 2018 was 4,816.
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 licensors and where used in this
report are shown in italics.
Instacart is a registered trademark of
Maplebear Inc. dba Instacart, used under
license.
Mastercard is a registered trademark of
Mastercard International Incorporated,
used under license.
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.
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 2019 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 2019 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 2019 Annual Meeting of Shareholders
of Loblaw Companies Limited will be
held on Thursday, May 2, 2019 at
11:00 a.m. (EDT), at the Toronto Centre
for the Arts – Lyric Theatre, 5040 Yonge St.,
Toronto, Ontario, Canada, M2N 6R8.
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).
18
LOBLAW COMPANIES LIMITED 2018 ANNUAL 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 6.2 “Financial Services
Segment”, Section 7 “Liquidity and Capital Resources”, Section 15.3 “Future Accounting Standards”, 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 2019 is based on certain assumptions including
assumptions about healthcare reform impacts, anticipated cost savings, operating efficiencies from Process & Efficiency initiatives 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 2018 Annual Report –
Financial Review, and the Company’s 2018 Annual Information Form (for the year ended December 29, 2018).
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 2018 AIF (for the year ended December 29, 2018).
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.
focused
2018 ANNUAL REPORT – FINANCIAL REVIEW
focused
2018 ANNUAL REPORT – FINANCIAL REVIEW
2018 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
65
74
138
140
Financial Highlights(1)
On November 1, 2018, Loblaw Companies Limited (the “Company”) and its parent George Weston Limited (“Weston”) completed a
reorganization under which the Company distributed its approximate 61.6% effective interest in Choice Properties Real Estate Investment
Trust (“Choice Properties”) to Weston on a tax-free basis to the Company and its Canadian shareholders (“the reorganization” or “the spin-
out”). The Company no longer retains its interest in Choice Properties and has ceased to consolidate its equity interest in Choice
Properties from its consolidated financial statements as of the date of the reorganization. The Company’s interest in Choice Properties has
been presented separately as Discontinued Operations in the Company’s current and comparative results. Unless otherwise indicated, all
financial information represents the Company’s results from Continuing Operations.
As at or for the years ended December 29, 2018 and December 30, 2017
(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
Continuing Operations
Discontinued Operations
Net earnings attributable to shareholders of the Company from Continuing Operations
Net earnings available to common shareholders of the Company(i)
Continuing Operations
Discontinued Operations
Adjusted net earnings available to common shareholders of the Company(2)
Continuing Operations
Discontinued Operations
Consolidated Per Common Share ($)
Diluted net earnings
Continuing Operations
Discontinued Operations
Adjusted diluted net earnings(2)
Continuing Operations
Discontinued Operations
Dividends
Dividends declared per common share ($)
Consolidated Financial Position and Cash Flows(ii)
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)
$
$
$
$
$
$
$
$
$
$
$
$
2018
(52 weeks)
2017(4)(5)
(52 weeks)
$
$
$
$
$
$
$
$
$
$
$
$
46,693
0.2%
1,923
3,528
7.6%
564
387
606
580
26.8%
800
753
47
719
754
707
47
1,746
1,539
207
1.99
1.87
0.12
4.60
4.06
0.54
1.155
1,159
2,501
1,334
366
1.9x
12.6%
9.8%
46,587
0.6%
2,049
3,521
7.6%
374
374
365
596
26.9%
1,541
1,310
231
1,286
1,505
1,274
231
1,797
1,585
212
3.79
3.21
0.58
4.52
3.99
0.53
1.070
2,344
3,209
1,259
1,479
1.9x
12.6%
9.8%
(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.
(ii)
Includes amounts from Continuing and Discontinued Operations.
The Financial Highlights include the impacts of the consolidation of franchises.
2018 Annual Report - Financial Review Loblaw Companies Limited 1
Financial Highlights(1)
As at or for the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
2018
(52 weeks)
2017(4)(5)
(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
The Financial Highlights include the impacts of the consolidation of franchises.
$
$
$
$
$
$
$
$
$
$
45,836
1,717
13,459
29.4%
3,332
7.3%
1,487
1.1%
2.4%
1.2%
3.5%
70.4
550
535
1,337
1,082
137
3,073
3,329
167
13.1%
3.1%
45,867
1,843
13,053
28.5%
3,329
7.3%
1,444
0.6%
3.0%
3.1%
2.9%
70.3
559
534
1,334
953
150
2,908
3,100
47
13.2%
3.7%
2 2018 Annual Report - Financial Review Loblaw Companies Limited
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
Retail Segment
Financial Services 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
9.1
9.2
Results by Quarter
Fourth Quarter Results
10. Disclosure Controls and Procedures
11.
Internal Control over Financial Reporting
12. Enterprise Risks and Risk Management
12.1
12.2
Operating Risks and Risk Management
Financial Risks and Risk Management
13. Related Party Transactions
14. Critical Accounting Estimates and Judgments
Consolidation
Inventories
Impairment of Non-Financial Assets (Goodwill, Intangible Assets and Fixed Assets)
Impairment of Franchise Loans Receivable and Certain Other Financial Assets
Customer Loyalty Awards Programs
Impairment of Credit Card Receivables
Fair Value of Investment Properties
Income and Other Taxes
Segment Information
14.1
14.2
14.3
14.4
14.5
14.6
14.7
14.8
14.9
14.10 Provisions
15. Accounting Standards
15.1
15.2
15.3
Accounting Standards Implemented
Changes to Significant Accounting Policies
Future Accounting Standards
16. Outlook
17. Non-GAAP Financial Measures
18. Additional Information
4
5
5
6
7
8
13
15
16
18
20
20
22
23
24
25
25
27
27
28
29
29
31
39
39
39
40
44
45
48
48
48
48
49
49
49
49
49
50
50
50
50
54
54
55
56
63
2018 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 65 to 139 of this Annual Report – Financial Review (“Annual Report”).
The Company’s annual audited consolidated financial statements and accompanying notes for the year ended December 29, 2018 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 20, 2019, unless otherwise noted. A glossary of terms used throughout this Annual
Report can be found on page 140.
Unless otherwise indicated, all comparisons of results for the fourth quarter of 2018 (12 weeks ended December 29, 2018) are against
results for the fourth quarter of 2017 (12 weeks ended December 30, 2017) and all comparisons of results for the full-year of 2018
(52 weeks ended December 29, 2018) are against the results for the full-year 2017 (52 weeks ended December 30, 2017).
On November 1, 2018, the Company and its parent George Weston Limited (“Weston”) completed a reorganization under which the
Company distributed its approximate 61.6% effective interest in Choice Properties Real Estate Investment Trust (“Choice Properties”) to
Weston on a tax-free basis to the Company and its Canadian shareholders (“the reorganization” or “the spin-out”), as described in
Section 5 “Overall Financial Performance Business Developments” of this MD&A. The Company no longer retains its interest in Choice
Properties and has ceased to consolidate its equity interest in Choice Properties from its consolidated financial statements as of the date of
the reorganization. The reorganization has been presented separately as discontinued operations in the Company’s current and
comparative results. Unless otherwise indicated, all financial information represents the Company’s results from continuing operations.
1. Forward-Looking Statements
This Annual Report, including this MD&A,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 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 5.1 “Consolidated Results of Operations”, “ Section 6.1 “Retail Segment” Other Retail Business Matters, Section 6.2
“Financial Services Segment”, Section 7 “Liquidity and Capital Resources”, Section 15.3 “Future Accounting Standards”, 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 2019 is based on certain assumptions including
assumptions about healthcare reform impacts, anticipated cost savings and operating efficiencies from Process and Efficiency initiatives
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 2018 Annual Information Form (“AIF”) (for the year ended December 29, 2018). Such risks and uncertainties include:
•
changes to the regulation of generic prescription drug prices, the reduction of reimbursements under public drug benefit plans and the
elimination or reduction of professional allowances paid by drug manufacturers;
•
•
the inability of the Company’s IT infrastructure to support the requirements of the Company’s business, or the occurrence of any
internal or external security breaches, denial of service attacks, viruses, worms and other known or unknown cybersecurity or data
breaches;
failure to realize benefits from investments in the Company’s new IT systems;
4 2018 Annual Report - Financial Review Loblaw Companies Limited
•
•
•
•
•
•
•
•
•
•
failure to realize the anticipated benefits associated with the Company’s strategic priorities and major initiatives, including revenue
growth, anticipated cost savings and operating efficiencies or organizational changes that may impact the relationships with
franchisees and associates;
failure to effectively respond to consumer trends or heightened competition, whether from current competitors or new entrants to the
marketplace;
failure to maintain an effective supply chain and consequently an appropriate assortment of available product at store level;
failure to execute the Company’s e-commerce initiatives or to adapt its business model to the shifts in the retail landscape caused by
digital advances;
public health events including those related to food and drug safety;
errors made through medication dispensing or errors related to patient services or consultation;
adverse outcomes of legal and regulatory proceedings and related matters;
changes to any of the laws, rules, regulations or policies applicable to the Company’s business;
failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements; 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 2018 AIF (for the year ended December 29, 2018). Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect the Company’s expectations only as of the date of this MD&A. Except as
required by law, the Company does not undertake to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
2. Overview
The Company has two operating segments: Retail and Financial Services. The Retail segment consists primarily of corporate and
franchise-owned retail food and Associate-owned drug stores, includes in-store pharmacies and other health and beauty products, apparel
and other general merchandise and supports the PC Optimum program. The Company’s Financial Services segment provides credit card
services, the PC Optimum program, insurance brokerage services, and telecommunication services. As a result of the spin-out of Choice
Properties to Weston, announced in 2018, the Company no longer holds an 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 - a model that fuels truly customer-centric
investments in Everyday Digital Retail, Payments and Rewards, and a future Connected Healthcare Network.
The Company strives to be the “best in food, health and beauty.” The approach to offering “best in food” is driven by fresh food selection, 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, and delivering a diverse and differentiated beauty offering.
All of these objectives require our customers to have the convenience to shop, when, where and how they want - which is the fundamental
strength of the Company’s omni-channel strategy.
2018 Annual Report - Financial Review Loblaw Companies Limited 5
Management’s Discussion and Analysis
4. Key Financial Performance Indicators
The Company’s interest in Choice Properties has been presented separately as Discontinued Operations in the Company’s current and
comparative results. Unless otherwise indicated, all financial information represents the Company’s results from Continuing Operations.
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 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Consolidated:
Revenue growth
Operating Income
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Net earnings
Continuing Operations
Discontinued Operations
Net earnings attributable to shareholders of the Company from Continuing Operations
Net earnings available to common shareholders of the Company(i)
Continuing Operations
Discontinued Operations
Adjusted net earnings available to common shareholders of the Company(2)
Continuing Operations
Discontinued Operations
Diluted net earnings per common share ($)
Continuing Operations
Discontinued Operations
Adjusted diluted net earnings per common share(2) ($)
Continuing Operations
Discontinued Operations
Cash and cash equivalents and short term investments
Cash flows from operating activities(ii)
Free cash flow(2)(ii)
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
2018
(52 weeks)
2017(4)(5)
(52 weeks)
$
$
$
$
$
$
$
$
$
$
$
0.2%
1,923
3,528
7.6%
800
753
47
719
754
707
47
1,746
1,539
207
1.99
1.87
0.12
4.60
4.06
0.54
1,159
2,501
366
1.9x
12.6%
9.8%
1.1%
2.4%
1,717
13,459
29.4%
3,332
7.3%
137
13.1%
3.1%
$
$
$
$
$
$
$
$
$
$
$
0.6%
2,049
3,521
7.6%
1,541
1,310
231
1,286
1,505
1,274
231
1,797
1,585
212
3.79
3.21
0.58
4.52
3.99
0.53
2,344
3,209
1,479
1.9x
12.6%
9.8%
0.6%
3.0%
1,843
13,053
28.5%
3,329
7.3%
150
13.2%
3.7%
(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.
(ii)
Includes amounts from Continuing and Discontinued Operations.
6 2018 Annual Report - Financial Review Loblaw Companies Limited
5. Overall Financial Performance
Business Developments
Spin-out of Choice Properties On November 1, 2018, the Company and its parent Weston completed a reorganization under which the
Company distributed its approximate 61.6% effective interest in Choice Properties to Weston on a tax-free basis to the Company and its
Canadian shareholders. In connection with the reorganization, the common shareholders of the Company, other than Weston and its
subsidiaries, received 0.135 of a common share of Weston for each common share of the Company held, which was equivalent to the
market value of their pro rata interest in Choice Properties as at the announcement date of the spin-out, and Weston received the
Company’s approximate 61.6% effective interest in Choice Properties.
The Company no longer retains its interest in Choice Properties and ceased to consolidate its equity interest in Choice Properties from its
consolidated financial statements, which resulted in a reduction in total assets and liabilities as at October 31, 2018 of approximately
$11.2 billion and $11.1 billion, respectively with the difference recorded in retained earnings. The reduction includes balances acquired with
Choice Properties’ acquisition of CREIT in the second quarter of 2018. The spin-out represents a decrease in total assets and liabilities of
$4.8 billion and $4.5 billion, respectively compared to December 30, 2017. The transaction has no significant impact on the ongoing
operating relationship between the Company and Choice Properties and the Strategic Alliance Agreement and leases, remain in place. The
Company continues to be Choice Properties' largest tenant.
The reorganization has been reflected separately as Discontinued Operations in the current and comparative results. Unless otherwise
noted, all comparisons of operating results exclude the results of Choice Properties. The results of Continuing Operations reflect
transactions between the Company and Choice Properties in the current and comparative period, including, but not limited to, rent
payments made by the Retail segment to Choice Properties for the annual period. Prior to the reorganization, these transactions were
eliminated on consolidation. All intercompany transactions prior to the spin-out have been eliminated as part of Discontinued Operations.
Impact on Consolidated Financial Results, including Discontinued Operations The Company’s 2018 consolidated financial results, including
Discontinued Operations, reflect Choice Properties financial results up until October 31, 2018. Subsequent to the spin-out, from
November 1, 2018 to December 29, 2018, the Company’s consolidated financial results no longer include Choice Properties' rent received
from third party tenants, depreciation and amortization on properties owned by Choice Properties or net interest expense and other
financial charges related to trust unit distributions to third parties and Choice Properties’ debt.
In addition, post spin-out, the Company’s consolidated financial results reflect the on-going operating relationship between the Company
and Choice Properties, including but not limited to rent paid to Choice Properties from November 1, 2018 to December 29, 2018, which is
no longer eliminated on consolidation, as well as incremental depreciation and amortization as a result of the change in estimated useful
life of certain building components owned by the Company, as discussed below.
As a result of the above, the spin-out had a negative year-over-year impact on the total Company consolidated financial performance in
2018. The spin-out negatively impacted adjusted net earnings available to common shareholders of the Company(2), including
Discontinued Operations by approximately $30 million ($0.08 per common share) compared to 2017.
Impact on Retail Segment Results The Company has restated the financial results of the Retail segment on a Continuing Operations basis,
to include amounts paid between the Company and Choice Properties in the current and comparative period. The Company’s current and
comparative period Retail segment results include rent and lease surrender payments paid to Choice Properties, gains related to the sale
leaseback of properties to Choice Properties and site intensification payments received from Choice Properties. In addition, the Retail
segment no longer includes depreciation and amortization on properties owned by Choice Properties previously treated as own use fixed
assets. See Section 13, “Related Party Transactions”, of this MD&A for more information on the transactions between the Company and
Choice Properties.
Post spin-out the Retail segment no longer includes depreciation and amortization on Choice Properties owned land and building and
includes incremental depreciation and amortization as a result of the change in estimated useful life of certain building components owned
by the Company. Prior to the spin-out, buildings owned by Choice Properties and leased by the Company as well as any related building
components owned by the Company were considered own use fixed assets and were depreciated over 40 years. As a result of the spin-
out, buildings owned by Choice Properties and leased by the Company will be accounted for as operating leases. The building
components associated with these leases post spin-out are classified as leasehold improvements and depreciated over the lesser of the
lease term and useful life up to 25 years. The remaining average lease term on the leases related to these leasehold improvements as of
the date of the reorganization was approximately 10 years. The impact of this change is expected to be an increase in depreciation and
amortization of approximately $85 million compared to 2018. The Company’s 2018 financial results includes incremental depreciation and
amortization for the post spin-out period.
The spin-out did not have a significant impact on the Company’s Retail segment fourth quarter and 2018 financial performance as the
Company’s current and comparative period financial results have been restated to reflect the ongoing operating relationship with Choice
Properties, as discussed above.
2018 Annual Report - Financial Review Loblaw Companies Limited 7
Management’s Discussion and Analysis
Gas Bar Network The disposition of the Company’s gas bar operations in the third quarter of 2017 had a negative year-over-year impact
on financial performance in 2018. The disposition negatively impacted Retail sales growth by $843 million, adjusted EBITDA(2) by
approximately $45 million, and adjusted net earnings available to common shareholders of the Company(2) by approximately $26 million
($0.06 per common share), compared to 2017. Net earnings available to common shareholders of the Company in the third quarter of
2017 included a post-tax gain of $432 million, net of related costs from the disposition. The disposition did not have a year-over-year
impact on fourth quarter results.
5.1. Consolidated Results of Operations
The Company’s interest in Choice Properties has been presented separately as Discontinued Operations in the Company’s current and
comparative results. Unless otherwise indicated, all financial information represents the Company’s results from Continuing Operations.
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Revenue
Operating income
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Depreciation and amortization
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(2)
Income taxes
Adjusted income taxes(2)
Adjusted income tax rate(2)
Net earnings attributable to shareholders of the Company from
Continuing Operations
Net earnings available to common shareholders of the Company(i)
Continuing Operations
Discontinued Operations
Adjusted net earnings available to common shareholders of the Company(2)
Continuing Operations
Discontinued Operations
Diluted net earnings per common share ($)
Continuing Operations
Discontinued Operations
Adjusted diluted net earnings per common share(2) ($)
Continuing Operations
Discontinued Operations
2018
(52 weeks)
46,693
$
2017(4)(5)
(52 weeks)
46,587
$
1,923
3,528
7.6%
2,049
3,521
7.6%
$ Change % Change
0.2 %
106
$
(126)
7
(6.1)%
0.2 %
$
1,497
$
1,454
$
564
387
606
580
374
374
365
596
26.8%
26.9%
$
$
$
$
$
$
$
$
719
754
707
47
1,746
1,539
207
1.99
1.87
0.12
4.60
4.06
0.54
$
$
$
$
$
$
$
$
1,286
1,505
1,274
231
1,797
1,585
212
3.79
3.21
0.58
4.52
3.99
0.53
$
$
$
$
$
$
$
$
43
190
13
241
(16)
(567)
(751)
(567)
(184)
(51)
(46)
(5)
(1.80)
(1.34)
(0.46)
0.08
0.07
0.01
3.0 %
50.8 %
3.5 %
66.0 %
(2.7)%
(44.1)%
(49.9)%
(44.5)%
(79.7)%
(2.8)%
(2.9)%
(2.4)%
(47.5)%
(41.7)%
(79.3)%
1.8 %
1.8 %
1.9 %
Diluted weighted average common shares outstanding (in millions)
379.3
397.3
(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.
8 2018 Annual Report - Financial Review Loblaw Companies Limited
2018 Select Annual Highlights In 2018, the Company completed the spin-out of Choice Properties. The reorganization simplifies the
Company as a pure-play retailer by spinning out a non-strategic business and allows the Company to focus on pursuing its core retail,
connected healthcare, digital retail and payments and rewards strategy. The Company’s 2018 financial results from Discontinued
Operations include ten months of Choice Properties’ financial results compared to a full year in 2017.
The following annual highlights include both continuing and Discontinued Operations and also reflect the impact of the consolidation of
franchises and the disposition of gas bar operations in the Retail segment as well as the acquisition of Canadian Real Estate Investment
Trust (“CREIT”) by Choice Properties. The Company’s year-over-year financial performance were negatively impacted by minimum wage
increases and incremental healthcare reform.
•
Inclusive of Discontinued Operations, net earnings available to common shareholders of the Company were $754 million, a decrease
of $751 million compared to 2017. Diluted net earnings per common share were $1.99, a decrease of $1.80 compared to 2017.
Net earnings available to common shareholders of the Company and diluted net earnings per common share were negatively
impacted by the charge related to Glenhuron Bank Limited (“Glenhuron”) in the third quarter of 2018. Net earnings available to
common shareholders of the Company and diluted net earnings per common share were also negatively impacted year-over-
year by the 2017 gain on disposition of gas bars operations.
•
Inclusive of Discontinued Operations, adjusted net earnings available to common shareholders of the Company(2) were $1,746 million,
a decrease of $51 million, or 2.8%, compared to 2017. Adjusted diluted net earnings per common share(2) were $4.60, an increase of
$0.08, or 1.8%, compared to 2017. Normalized for the impact of the reorganization, Choice Properties acquisition of CREIT and the
2017 disposition of gas bar operations, adjusted net earnings available to common shareholders of the Company(2) increased by
approximately $3 million ($0.22 or 5.0% per common share) compared to 2017.
The spin-out of Choice Properties in the fourth quarter of 2018 had a negative year-over-year impact on financial performance
in 2018. The spin-out negatively impacted adjusted net earnings available to common shareholders of the Company(2) by
approximately $30 million ($0.08 per common share) compared to 2017.
Choice Properties completed the acquisition of CREIT in the second quarter of 2018. In 2018, the acquisition resulted in an
increase in adjusted net earnings available to common shareholders of the Company(2) of $2 million. The acquisition had a
nominal impact on adjusted diluted net earnings per common share(2) in 2018.
The disposition of the Company’s gas bar operations, in the third quarter of 2017 had a negative year-over-year impact on
financial performance in 2018. The disposition negatively impacted adjusted net earnings available to common shareholders of
the Company(2) by approximately $26 million ($0.06 per common share) compared to 2017.
Net Earnings Available to Common Shareholders of the Company from Continuing Operations and Diluted Net Earnings Per
Common Share from Continuing Operations Net earnings available to common shareholders of the Company from Continuing
Operations were $707 million ($1.87 per common share) in 2018, a decrease of $567 million ($1.34 per common share) compared to
2017. The decrease was driven by a decline in underlying operating performance of $20 million, excluding the unfavourable impact of the
disposition of gas bar operations of approximately $26 million, and the unfavourable year-over-year net impact of adjusting items totaling
$521 million, as described below:
•
decline in underlying operating performance of $46 million ($0.11 per common share), was primarily due to the following:
the Retail segment (excluding the impact of the consolidation of franchises), driven by an increase in selling, general and
administrative expenses (“SG&A”), an increase in depreciation and amortization and the unfavourable impact of the
disposition of gas bar operations of approximately $26 million, partially offset by an increase in adjusted gross profit(2); and
an increase in adjusted net interest expense and other financing charges(2), primarily as a result of an increase in interest rates
on borrowings in the Financial Services segment.
•
•
the unfavourable year-over-year net impact of adjusting items totaling $521 million ($1.41 per common share) primarily due to the
following:
the prior year gain on the disposition of gas bars operations of $432 million ($1.09 per common share); and
the charge recorded in 2018 related to Glenhuron of $367 million ($0.97 per common share);
partially offset by,
prior year charges related to the PC Optimum Program of $137 million ($0.34 per common share); and
the year-over-year favourable impact of restructuring and other related costs of $128 million ($0.32 per common share).
the increase in diluted net earnings per common share also included the favourable impact of the repurchase of common shares
($0.18 per common share).
2018 Annual Report - Financial Review Loblaw Companies Limited 9
Management’s Discussion and Analysis
Adjusted net earnings available to common shareholders of the Company(2) from Continuing Operations were $1,539 million ($4.06 per
common share) in 2018, a decrease of $46 million (increase of $0.07 per common share) compared to 2017. Normalized for the
disposition of gas bar operations, adjusted net earnings available to common shareholders of the Company(2) decreased by approximately
$20 million, for the reasons described above. Adjusted net earnings per common share(2) from continuing operations also included the
favourable impact of the repurchase of common shares ($0.18 per common share). Normalized for the disposition of gas bar operations,
adjusted diluted net earnings per common share(2) increased by approximately 3.3%.
Discontinued Operations Net earnings available to common shareholders of the Company from Discontinued Operations were negatively
impacted year-over-year by the spin-out of Choice Properties on November 1, 2018. The Company’s 2018 financial results from
Discontinued Operations include ten months of Choice Properties’ financial results compared to a full year in 2017.
Net earnings available to common shareholders of the Company from Discontinued Operations were $47 million ($0.12 per common
share) in 2018, a decrease of $184 million ($0.46 per common share) compared to 2017. The decrease included a decline in underlying
operating performance of $5 million ($0.01 per common share), primarily due to unfavourable year-over-year impact of the spin-out, and
the unfavourable year-over-year net impact of adjusting items totaling $179 million ($0.47 per common share). The impact was primarily
driven by:
•
•
•
partially offset by,
•
acquisition and other costs related to Choice Properties’ acquisition of CREIT of $119 million ($0.31 per common share);
the fair value adjustment to the Trust Unit Liability of $43 million (0.12 per common share); and
the fair value adjustment on investment properties of $30 million ($0.08 per common share);
the gain on sale of air rights of $11 million ($0.03 per common share).
Net earnings available to common shareholders of the Company from Discontinued Operations also included the favourable impact of the
repurchase of common shares ($0.02 per common share).
Revenue
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Consolidation and Eliminations
Revenue from Continuing Operations
2018
(52 weeks)
45,836
1,082
(225)
46,693
$
$
$
$
2017(4)(5)
(52 weeks)
45,867
$ Change
(31)
$
% Change
(0.1)%
953
(233)
46,587
$
129
8
106
13.5 %
3.4 %
0.2 %
Revenue was $46,693 million in 2018, an increase of $106 million, or 0.2%, compared to 2017, primarily due to an increase in Financial
Services segment sales of $129 million driven by higher year-over-year sales attributable to The Mobile Shop as well as higher interest
and interchange income, partially offset by a decrease in Retail segment sales. Excluding the consolidation of franchises, Retail segment
sales decreased by $369 million, or 0.8%. The decrease was primarily due to the impact of the 2017 disposition of gas bar operations of
$843 million, partially offset by positive same-store sales growth.
10 2018 Annual Report - Financial Review Loblaw Companies Limited
Operating Income Operating income was $1,923 million in 2018, a decrease of $126 million compared to 2017. The decrease in
operating income was driven by a decline in underlying operating performance of $39 million and the unfavourable year-over-year net
impact of adjusting items totaling $87 million, as described below:
•
the decline in underlying operating performance of $39 million was primarily due to the Retail segment, partially offset by the
improvement in underlying operation performance of the Financial Services segment. The Retail segment year-over-year performance
included the favourable contribution from the consolidation of franchises of $10 million and the unfavourable impact of the 2017
disposition of gas bar operations; and
•
the unfavourable year-over-year net impact of adjusting items totaling $87 million primarily due to the following:
the prior year gain on the disposition of gas bars operations of $501 million; and
the year-over-year unfavourable impact of fixed asset and other related impairments, net of recoveries of $30 million;
partially offset by,
prior year charges related to the PC Optimum Program of $187 million;
the year-over-year favourable impact of restructuring and other related costs of $167 million; and
the year-over-year favourable impact of prior year charges related to the Loblaw Card Program of $103 million.
Adjusted EBITDA(2)
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Adjusted EBITDA(2)
2018
(52 weeks)
3,332
196
3,528
$
$
$
$
2017(4)(5)
(52 weeks)
3,329
192
3,521
$
$ Change % Change
0.1%
$
3
4
7
2.1%
0.2%
Adjusted EBITDA(2) was $3,528 million in 2018, an increase of $7 million compared to 2017. The increase in adjusted EBITDA(2) was
primarily due to improvements in the Financial Services segment and the Retail segment. The Retail segment included the favourable
contribution from the consolidation of franchises of $26 million and an increase in adjusted gross profit(2), partially offset by an increase in
SG&A and the unfavourable impact of the 2017 disposition of gas bar operations of $45 million.
Depreciation and Amortization Depreciation and amortization was $1,497 million in 2018, an increase of $43 million compared to 2017,
primarily driven by the consolidation of franchises, an increase in IT assets and the change in estimated useful life of certain building
components as a result of the spin-out of Choice Properties. Included in depreciation and amortization is the amortization of intangible
assets related to the acquisition of Shoppers Drug Mart Corporation (“Shoppers Drug Mart”) of $521 million (2017 – $524 million).
Net Interest Expense and Other Financing Charges
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Net interest expense and other financing charges
Add (deduct) impact of the following:
Charge related to Glenhuron
Spin-out of Choice Properties
Adjusted net interest expense and other financing charges(2)
2018
(52 weeks)
564
(176)
(1)
387
$
$
$
$
2017(5)
(52 weeks)
374
$ Change % Change
50.8 %
$
190
—
—
374
$
(176)
(1)
13
(100.0)%
(100.0)%
3.5 %
Net interest expense and other financing charges were $564 million in 2018, an increase of $190 million compared to 2017. The increase
was primarily due to the charge related to Glenhuron of $176 million, as described in “Other Business Matters” below.
Adjusted net interest expense and other financing charges(2) were $387 million, an increase of $13 million compared to 2017 driven by
higher interest expense in the Financial Services segment, primarily due to an increase in interest rates on borrowings related to credit
card receivables and a net increase in Guaranteed Investment Certificates (“GICs”).
2018 Annual Report - Financial Review Loblaw Companies Limited 11
Management’s Discussion and Analysis
Income Taxes
For the years ended December 29, 2018 and December 30, 2017
(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
Charge related to Glenhuron
Remeasurement of deferred tax balances
Adjusted income taxes(2)
Effective tax rate
Adjusted income tax rate(2)
$
$
2018
(52 weeks)
606
165
(191)
—
580
44.6%
26.8%
$
$
2017(4)(5)
(52 weeks)
365
$ Change
241
$
% Change
66.0 %
(49)
(191)
(17)
(16)
(22.9)%
(100.0)%
(100.0)%
(2.7)%
$
214
—
17
596
21.8%
26.9%
The effective tax rate in 2018 was 44.6% compared to 21.8% in 2017. The increase in the effective tax rate was primarily attributable to a
charge of $191 million related to Glenhuron and the impact of the non-deductible interest related to Glenhuron, as described in “Other
Business Matters” below, as well as the impact of other non-deductible items. In 2017, there was a recovery due to the impact of the non-
taxable portion of the gain on disposition of gas bar operations and 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.
The adjusted income tax rate(2) in 2018 was 26.8% compared to 26.9% in 2017. The decrease in the adjusted income tax rate(2) was
primarily attributable to a decrease in certain non-deductible items.
Other Business Matters
Process and Efficiency The Company continues to execute on a multi-year plan, initiated in 2018, focused on improving processes and
generating efficiencies across its administrative, store, and distribution network infrastructures. Many initiatives are underway to reduce the
complexity and cost of business operations, ensuring a low cost operating structure that allows for continued investments in the
Company’s strategic growth areas. Management anticipates investing capital as well as recording restructuring and other charges related
to these initiatives in 2019 and beyond.
Charge related to Glenhuron On September 7, 2018, the Tax Court of Canada (“Tax Court”) released its decision relating to Glenhuron, a
wholly-owned Barbadian subsidiary of the Company that was wound up in 2013. The Tax Court ruled that certain income earned by
Glenhuron should be taxed in Canada based on a technical interpretation of the applicable legislation.
On October 4, 2018, the Company filed a Notice of Appeal with the Federal Court of Appeal. Although the Company believes in the merits
of its position, it recorded a charge during the third quarter of 2018 of $367 million, of which $176 million was recorded in interest and
$191 million was recorded in income taxes. The Company believes that this provision will be sufficient to cover its ultimate liability if the
appeal is unsuccessful.
In the third quarter of 2018, the Company made a cash payment of $235 million to fund the tax and interest owing in light of the decision of
the Tax Court.
12 2018 Annual Report - Financial Review Loblaw Companies Limited
5.2 Selected Financial Information
The selected information presented below has been derived from and should be read in conjunction with the annual consolidated financial
statements of the Company dated December 29, 2018, December 30, 2017 and December 31, 2016. The analysis of the data contained in
the table focuses on the trends and significant events or items affecting the financial condition and results of the Company’s operations
over the most recent three years. The reorganization has been presented separately as Discontinued Operations in the Company’s current
and comparative results. Unless otherwise indicated, all financial information represents the Company’s results from Continuing
Operations.
For the years ended December 29, 2018 and December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Revenue
Operating Income
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Depreciation and amortization
Adjusted net interest expense and other financing charges(2)
Adjusted income tax rate(2)
Net earnings
Continuing Operations
Discontinued Operations
Net earnings attributable to the shareholders of the Company from
Continuing Operations
Net earnings available to common shareholders of the Company(i)
Continuing Operations
Discontinued Operations
Adjusted net earnings available to common shareholders of the Company(2)
Continuing Operations
Discontinued Operations
Basic net earnings per common share ($)
Continuing Operations
Discontinued Operations
Diluted net earnings per common share ($)
Continuing Operations
Discontinued Operations
Adjusted diluted net earnings per common share(2) ($)
Continuing Operations
Discontinued Operations
Diluted weighted average common shares (in millions)
Dividends declared per common share ($)
Dividends declared per Second Preferred Share, Series B ($)
2018
(52 weeks)
46,693
1,923
3,528
7.6%
1,497
387
26.8%
800
753
47
719
754
707
47
1,746
1,539
207
2.00
1.88
0.12
1.99
1.87
0.12
4.60
4.06
0.54
379.3
1.155
1.325
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017(4)(5)
(52 weeks)
46,587
2,049
3,521
7.6%
1,454
374
26.9%
1,541
1,310
231
1,286
1,505
1,274
231
1,797
1,585
212
3.82
3.24
0.58
3.79
3.21
0.58
4.52
3.99
0.53
397.3
1.070
1.325
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016(5)
(52 weeks)
46,295
1,675
3,333
7.2%
1,435
380
27.4%
990
918
72
911
971
899
72
1,655
1,471
184
2.40
2.22
0.18
2.37
2.20
0.17
4.05
3.60
0.45
409.1
1.030
1.325
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(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.
2018 Annual Report - Financial Review Loblaw Companies Limited 13
Management’s Discussion and Analysis
Revenue Revenue was $46,693 million in 2018, an increase of $106 million compared to 2017. Food retail same-store sales growth was
1.1% (2017 – 0.6%) and excluding gas bar operations was 1.1% (2017 – 0.3%). Drug retail same-store sales growth was 2.4% (2017 –
3.0%).
Revenue was $46,587 million in 2017, an increase of $292 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 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. In 2016 the 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 when deflation in
food prices returned to inflation. Through 2018, the Company experienced food price inflation while drug retail prices were negatively
impacted by the effects of incremental healthcare reform. Retail segment sales over the past three years were also impacted by the
consolidation of franchisees 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.
Net Earnings Available to Common Shareholders of the Company from Continuing Operations and Diluted Net Earnings Per
Common Share from Continuing Operations Net earnings available to common shareholders of the Company from Continuing
Operations and diluted net earnings per common share from Continuing Operations fluctuated over the past three years and were
impacted by certain adjusting items set out in Section 17 “Non-GAAP Financial Measures” and the changes in the underlying operating
performance of the Company. The fluctuations in net earnings available to common shareholders of the Company from Continuing
Operations and diluted net earnings per common share from Continuing Operations were primarily due to:
•
changes in underlying operating performance of the Retail segment, including positive same-store sales growth in both Food retail
and Drug retail in 2018, 2017 and 2016;
•
•
•
•
•
•
cost savings and operating efficiencies from process and efficiency initiatives and benefits from strategic initiatives;
improvements in the performance of the Financial Services segment including the continued investments in strategic initiatives;
the favourable impact of the repurchase of common shares for cancellation;
the impact of certain adjusting items, including:
the gain on disposition of gas bar operations;
the charge related to Glenhuron Bank;
asset impairments, net of recoveries;
the wind-down of PC Financial banking services;
the remeasurement of deferred tax balances;
the impact of healthcare reform on inventory balances;
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.
negative year-over-year impact from the disposition of gas bar operations; and
negative impact from minimum wage increases and incremental healthcare reform.
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.
14 2018 Annual Report - Financial Review Loblaw Companies Limited
Total Assets and Long Term Financial Liabilities
The Company’s consolidated balance sheet as at December 29, 2018 reflects the spin-out of Choice Properties as of November 1, 2018.
The consolidated balance sheet amounts for the comparative periods include Choice Properties.
(millions of Canadian dollars)
Total Assets
Total Long Term Debt
Trust Unit Liability
Long term financial liabilities
As at
December 29, 2018
30,153
$
As at
December 30, 2017
35,147
$
As at
December 31, 2016
34,436
$
$
$
8,026
—
8,026
$
$
11,177
972
12,149
$
$
10,870
959
11,829
In 2018, total assets of $30,153 million decreased by 14% compared to 2017. The decrease was primarily driven by the decrease in fixed
assets due to the spin-out of Choice Properties. Long term financial liabilities of $8,026 million decreased by 34% compared to 2017,
primarily driven by the spin-out of Choice Properties.
In 2017, total assets of $35,147 million increased by 2.1% compared to 2016. The increase 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 Credit
Card Trust® (“Eagle”) debt issuance partially offset by the repayment of the Choice Properties Series 6 senior unsecured debentures.
Prior to the spin-out, the Trust Unit Liability was recognized at fair value on the consolidated balance sheets and fluctuated due to
issuances of additional units 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) and the Company held an 82.4%
(December 31, 2016 – 82.7%) effective ownership interest in Choice Properties.
6. Reportable Operating Segments Results of Operations
The Company has two 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, apparel and other general merchandise and supports 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. The Retail segment is Choice Properties’ largest
tenant and all transactions, including but not limited to rental payments, with Choice Properties are included in segment results. Prior
to July 17, 2017, the Retail segment also included gas bar operations; and
•
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.
2018 Annual Report - Financial Review Loblaw Companies Limited 15
Management’s Discussion and Analysis
6.1 Retail Segment
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Sales
Operating income
Adjusted gross profit(2)
Adjusted gross profit %(2)
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)
Depreciation and amortization
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Food retail
Drug retail
Pharmacy
Front Store
2018
(52 weeks)
45,836
1,717
13,459
29.4%
3,332
7.3%
1,487
$
$
$
$
$
$
2017
(52 weeks)
45,867
1,843
13,053
28.5%
3,329
7.3%
1,444
$
$
$ Change
(31)
$
% Change
(0.1)%
(126)
406
3
43
(6.8)%
3.1 %
0.1 %
3.0 %
2018
(52 weeks)
Same-store
sales
1.1%
2.4%
1.2%
3.5%
Sales
$
32,969
12,867
6,030
6,837
2017
(52 weeks)
Same-store
sales
0.6%
3.0%
3.1%
2.9%
Sales
$
33,288
12,579
5,959
6,620
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 $843 million;
Sales Retail segment sales were $45,836 million in 2018, a decrease of $31 million, or 0.1%, compared to 2017. Excluding the
consolidation of franchises, Retail segment sales decreased by $369 million or 0.8%, primarily driven by the following factors:
•
partially offset by,
•
Food retail same-store sales growth was 1.1% (2017 – 0.3%) for 2017, after excluding gas bar operations. Including gas bar
operations, Food retail same-store sales growth was 1.1% (2017 – 0.6%).
Sales growth in food was moderate;
Sales in pharmacy declined moderately; and
The Company’s Food retail average annual internal food price index was modestly lower than (2017 – declined and was
marginally higher than) the average annual national food price inflation of 0.8% (2017 – deflation 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 2.4% (2017 – 3.0%).
Pharmacy same-store sales growth was 1.2% (2017 – 3.1%). The number of prescriptions dispensed increased by 3.4%
(2017 – 4.3%). On a same-store basis, the number of prescriptions dispensed increased by 3.3% (2017 – 3.8%) and
year-over-year, the average prescription value decreased by 2.3% (2017 – decreased by 0.8%). Pharmacy same-store sales
growth included the impact of incremental healthcare reform; and
Front store same-store sales growth was 3.5% (2017 – 2.9%).
In 2018, 17 food and drug stores were opened, and 22 food and drug stores were closed, resulting in a net increase in Retail square
footage of 0.1 million square feet, or 0.1%.
The redemption of Loblaw Cards resulted in the delivery of approximately $74 million of free products to customers in 2018, which was
provided for in the fourth quarter of 2017. The redemptions did not benefit sales or the Company’s financial performance and Management
does not believe it had a significant impact on Food retail same-store sales.
16 2018 Annual Report - Financial Review Loblaw Companies Limited
Operating Income Operating income was $1,717 million in 2018, a decrease of $126 million compared to 2017. The decrease in
operating income was driven by the decline in underlying operating performance of $43 million and the unfavourable year-over-year net
impact of adjusting items totaling $83 million, as described below:
•
the decline in underlying operating performance of $43 million, including the unfavourable impact of the disposition of gas bar
operations, was driven by an increase in SG&A and an increase in depreciation and amortization, partially offset by an increase in
adjusted gross profit(2). The decline in underlying operating performance included the favourable contribution from the consolidation of
franchises of $10 million; and
•
the unfavourable year-over-year net impact of adjusting items totaling $83 million, primarily due to the following:
the prior year gain on the disposition of gas bars operations of $501 million; and
the year-over-year unfavourable impact of fixed asset and other related impairments, net of recoveries of $30 million;
partially offset by,
prior year charges related to the PC Optimum Program of $187 million;
the year-over-year favourable impact of restructuring and other related costs of $167 million; and
the year-over-year favourable impact of prior year charges related to the Loblaw Card Program of $103 million.
Adjusted Gross Profit(2) Adjusted gross profit(2) was $13,459 million in 2018, an increase of $406 million compared to 2017. Adjusted
gross profit percentage(2) of 29.4% increased by 90 basis points compared to 2017. Excluding the consolidation of franchises, adjusted
gross profit(2) increased by $68 million. Adjusted gross profit percentage(2), excluding the consolidation of franchises, was 27.7%, an
increase of 40 basis points compared to 2017. The increase in adjusted gross profit percentage(2) was primarily due to the favourable
impact from the 2017 disposition of gas bar operations of approximately 40 basis points. Margins were negatively impacted by healthcare
reform and positively impacted by food retail.
Adjusted EBITDA(2) Adjusted EBITDA(2) was $3,332 million in 2018, an increase of $3 million, compared to 2017 and included the
favourable impact of the consolidation of franchises of $26 million as well as the unfavourable impact of the disposition of gas bar
operations of approximately $45 million. The increase in adjusted EBITDA(2) of $3 million was driven by an increase in adjusted gross
profit(2) as described above, partially offset by an increase in SG&A of $403 million. SG&A as a percentage of sales was 22.1%, an
increase of 90 basis points compared to 2017. Excluding the consolidation of franchises, SG&A increased $91 million. SG&A as a
percentage of sales, excluding the consolidation of franchises, was 20.4%, an increase of 30 basis points compared to 2017, driven by the
following factors:
•
•
•
partially offset by,
•
the unfavourable impact from the 2017 disposition of gas bar operations of approximately 30 basis points;
higher store costs driven by minimum wage increases; and
the unfavourable year-over-year impact of foreign exchange;
lower store support costs driven by cost savings initiatives.
Adjusted EBITDA(2) included a net gain of $6 million (2017 – $7 million) related to the sale leaseback of properties to Choice Properties in
2018.
Depreciation and Amortization Depreciation and amortization was $1,487 million in 2018, an increase of $43 million compared to 2017,
primarily driven by the consolidation of franchises, an increase in IT assets and the change in estimated useful life of certain building
components as a result of the spin-out of Choice Properties. Included in depreciation and amortization is the amortization of intangibles
assets related to the acquisition of Shoppers Drug Mart of $521 million (2017 – $524 million).
2018 Annual Report - Financial Review Loblaw Companies Limited 17
Management’s Discussion and Analysis
Other Retail Business Matters
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 2018, 400 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 29, 2018 and December 30, 2017
(millions of Canadian dollars unless where otherwise indicated)
Number of Consolidated Franchise stores, beginning of period
Add: Net number of Consolidated Franchise stores in the period
Number of Consolidated Franchise stores, end of period
Sales
Adjusted gross profit(2)
Adjusted EBITDA(2)
Depreciation and amortization
Operating income
Net income attributable to non-controlling interests
$
2018
(12 weeks)
379
2017
(12 weeks)
273
2018
(52 weeks)
310
2017
(52 weeks)
200
$
21
400
264
285
35
15
20
19
$
37
310
186
202
27
11
16
14
$
90
400
1,048
1,071
92
59
33
34
110
310
710
733
66
43
23
24
Operating income included in the table above does not significantly impact net earnings available to common shareholders of the
Company as the related income is largely attributable to non-controlling interests.
The Company expects that the estimated annual impact in 2019 of new and current consolidated franchises will be revenue of
approximately $1,300 million, adjusted EBITDA(2) of approximately $130 million, depreciation and amortization of approximately $80 million
and net earnings attributable to non-controlling interests of approximately $40 million.
6.2 Financial Services Segment
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Revenue
Earnings before income taxes
2018
(52 weeks)
1,082
137
$
2017
(52 weeks)
953
$
$ Change % Change
13.5 %
$
129
150
(13)
(8.7)%
(millions of Canadian dollars except where otherwise indicated)
Average quarterly net credit card receivables
Credit card receivables
Allowance for credit card receivables
Annualized yield on average quarterly gross credit card receivables
Annualized credit loss rate on average quarterly gross credit card
receivables
As at
December 29, 2018
3,073
$
As at
December 30, 2017
2,908
$
3,329
167
13.1%
3.1%
3,100
47
13.2%
3.7%
$ Change % Change
5.7%
$
165
229
120
7.4%
255.3%
18 2018 Annual Report - Financial Review Loblaw Companies Limited
higher interest and net interchange income attributable to the growth in the credit card portfolio; and
Revenue Revenue was $1,082 million in 2018, an increase of $129 million, compared to 2017, primarily driven by:
•
•
partially offset by,
•
higher sales attributable to The Mobile Shop;
lower core banking income attributable to President’s Choice Bank’s (“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. Normal operating income from the same personal banking services ended in April 2018.
higher customer acquisition costs;
Earnings before income taxes earnings before income taxes was $137 million in 2018, a decrease of $13 million compared to 2017,
primarily driven by:
•
•
•
•
increased provision for credit losses as a result of the application of the expected credit loss (“ECL”) model under IFRS 9, “Financial
Instruments” (“IFRS 9”), as set out in Section 15 “Accounting Standards”;
higher interest expenses driven by the growth in the credit card portfolio; and
higher operating costs including investments in digital strategy;
partially offset by,
•
revenue growth, as described above.
Credit Card Receivables As at December 29, 2018, credit card receivables were $3,329 million, an increase of $229 million compared to
December 30, 2017. 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 29, 2018, the allowance for credit card
receivables was $167 million, an increase of $120 million compared to December 30, 2017 primarily due to the adoption of IFRS 9.
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 PC Financial
brand. As a result of this agreement, PC Bank received a payment of approximately $44 million, net of certain costs incurred, $20 million of
which was recognized in the first half of 2018 and $24 million which was recognized in 2017.
PC Bank continues 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.
2018 Annual Report - Financial Review Loblaw Companies Limited 19
Management’s Discussion and Analysis
7. Liquidity and Capital Resources
The Company’s interest in Choice Properties has been presented separately as Discontinued Operations in the Company’s current and
comparative results. Unless otherwise indicated, all financial information represents the Company’s results from Continuing Operations.
7.1 Cash Flows
The following Major Cash Flow Components are presented on a Total Company basis, inclusive of Continuing and Discontinued
Operations.
Major Cash Flow Components
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Cash and cash equivalents, beginning of period
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Effect of foreign currency exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents, end of period
2018
(52 weeks)
1,798
$
$
2,501
(3,296)
68
(6)
$
$
(733)
1,065
2017(4)(5)
(52 weeks)
1,314
3,209
(1,034)
(1,685)
(6)
484
1,798
$
$
$
$
$
$
$
$
$ Change % Change
36.8 %
484
(708)
(22.1)%
(2,262)
(218.8)%
1,753
104.0 %
—
— %
(1,217)
(251.4)%
(733)
(40.8)%
Cash Flows from Operating Activities Cash flows from operating activities were $2,501 million in 2018, a decrease of $708 million
compared to 2017. The decrease was primarily due to an unfavourable change in non-cash working capital and a reduction in provision
balances, partially offset by higher cash earnings and lower income taxes paid.
Cash Flows used in Investing Activities Cash flows used in investing activities were $3,296 million in 2018, an increase of $2,262 million
compared to 2017. The increase in cash flows used in investing activities was primarily driven by Choice Properties acquisition of CREIT,
an increase in security deposits, held for the redemption of the Company’s $800 million debenture subsequent to the end of 2018, and the
proceeds from disposition of gas bar operations received in 2017, partially offset by a decrease in short term investments.
20 2018 Annual Report - Financial Review Loblaw Companies Limited
Capital Investments and Store Activity
As at or for the years ended December 29, 2018 and December 30, 2017
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
2018
(52 weeks)
1,334
$
2017
(52 weeks)
1,259
$
% Change
6.0 %
35.6
16.3
18.5
70.4
550
535
1,337
2,422
9%
5%
1%
64,700
30,500
13,800
— %
— %
0.5 %
0.1 %
(1.6)%
0.2 %
0.2 %
(0.2)%
35.6
16.3
18.4
70.3
559
534
1,334
2,427
72%
48%
1%
63,700
30,500
13,800
1.6 %
— %
— %
Cash Flows used in Financing Activities Cash flows from financing activities were $68 million in 2018, an increase of $1,753 million
compared to 2017. The increase in cash from financing activities was driven by higher net issuances of short term and long term debt,
primarily related to Choice Properties acquisition of CREIT, partially offset by higher interest paid, mainly driven by interest related to
Glenhuron, and the timing of dividend payments.
The Company’s significant long term debt transactions are set out in Section “7.3 Components of Total Debt”.
Free Cash Flow(2)
The following Free Cash Flow is presented on a Continuing Operations basis.
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Cash flows from operating activities
Less: Cash flows from operating activities from Discontinued Operations(i)
Cash flows from operating activities from Continuing Operations(i)
Less:
Capital investments
Interest paid
Free cash flow(2) from Continuing Operations
2018
(52 weeks)
2,501
252
2,249
1,070
509
670
$
$
$
$
$
$
2017(4)(5)
(52 weeks)
3,209
209
3,000
1,026
323
$ Change
(708)
43
(751)
$
$
% Change
(22.1)%
20.6 %
(25.0)%
44
186
4.3 %
57.6 %
(59.4)%
1,651
$
(981)
(i) Cash flows from operating activities from Continuing Operations include distributions received in 2018 and the payment related to the conversion of Class C LP Units in
2018 from Discontinued Operations. Cash flows from Discontinued Operations include the outflow of these items.
Free cash flow(2) from Continuing Operations was $670 million in 2018, a decrease of $981 million compared to 2017. The decrease in free
cash flow(2) was primarily driven by lower cash flows from operating activities, due to an unfavourable change in non-cash working capital,
and an increase in interest paid.
2018 Annual Report - Financial Review Loblaw Companies Limited 21
Management’s Discussion and Analysis
7.2 Liquidity and Capital Structure
The Company expects that cash and cash equivalents, short term investments, future operating cash flows and the amounts available to
be drawn against committed credit facilities will enable the Company to finance its capital investment program and fund its ongoing
business requirements over the next 12 months, including working capital, pension plan funding requirements and financial obligations.
PC Bank expects to obtain long term financing for the growth of its credit card portfolio through the issuance of Eagle notes and GICs.
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 from Continuing
Operations, as monitored by management, by reportable operating segment:
(millions of Canadian dollars)
Bank indebtedness
Short term debt
Long term debt due within one year(i)
Long term debt
Certain other liabilities
Total debt
As at
December 29, 2018
As at
December 30, 2017
$
Retail
56
—
1,373
4,762
48
Financial
Services
$
— $
915
274
1,617
—
Total
56
915
1,647
6,379
48
$
Retail
110
—
392
5,622
41
Financial
Services
$
— $
640
593
1,159
—
Total
110
640
985
6,781
41
$
6,239
$
2,806
$
9,045
$
6,165
$
2,392
$
8,557
(i) Subsequent to the end of 2018, the Company redeemed, at par, the $800 million debenture bearing interest at 3.75% with an original maturity date of March 12, 2019.
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)
(i) Restated to remove Discontinued Operations.
As at
December 29, 2018
1.9x
As at
December 30, 2017(i)
1.9x
The Retail debt to retail adjusted EBITDA(2) ratio as at December 29, 2018 was flat compared to December 30, 2017 as an increase in
Retail adjusted EBITDA(2) was offset by an increase in Retail segment debt.
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”).
Covenants and Regulatory Requirements The Company is required to comply with certain financial covenants for various debt
instruments. As at December 29, 2018 and throughout the year, the Company was in compliance with their respective covenants. As at
December 29, 2018 and throughout the year, PC Bank has met all applicable regulatory requirements.
22 2018 Annual Report - Financial Review Loblaw Companies Limited
7.3 Components of Total Debt
Debentures The following table summarizes the debentures issued in 2018 related to Continuing Operations.
(millions of Canadian dollars except where otherwise indicated)
Interest Rate Maturity Date
Loblaw Companies Limited Notes(i)
Loblaw Companies Limited Notes(ii)
Total Debentures issued
3.92% June 10, 2024
4.49% December 11, 2028
(i) On December 10, 2018, the Company issued debentures of $400 million bearing interest at a rate of 3.92%, maturing June 10, 2024.
(ii) On December 10, 2018, the Company issued debentures of $400 million bearing interest at a rate of 4.49%, maturing December 11, 2028.
The following table summarizes the debentures repaid in 2018 related to Continuing Operations:
(millions of Canadian dollars except where otherwise indicated)
Shoppers Drug Mart Notes
Loblaw Companies Limited Term Loan(i)
Loblaw Companies Limited Term Loan(ii)
Total Debentures and Term Loans repaid
Interest Rate Maturity Date
2.36% May 24, 2018
Variable March 28, 2019
Variable March 29, 2019
Principal
Amount 2018
$
$
400
400
800
Principal
Amount 2018
$
$
275
48
250
573
(i) Loblaw unsecured term loan facility bearing interest at variable rates of either Prime plus 0.45% or Bankers’ Acceptance rate plus 1.45% were redeemed on
August 29, 2018.
(ii) Loblaw unsecured term loan facility bearing interest at variable rates of either Prime plus 0.13% or Bankers’ Acceptance rate plus 1.13% were redeemed on
August 29, 2018.
There were no debentures issued or repaid in 2017.
Subsequent to the end of 2018, the Company redeemed, at par, the $800 million debenture bearing interest at 3.75% with an original
maturity date of March 12, 2019.
During the second quarter of 2018, the Company repaid the remaining mortgage balance of $72 million at maturity.
Committed Credit Facilities The Company has a $1.0 billion committed credit facility with a maturity date of June 10, 2021. These
facilities contain certain financial covenants. As at December 29, 2018 and December 30, 2017, there were no amounts drawn under the
committed credit facility.
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 29, 2018
As at
December 30, 2017
$
$
750
915
1,665
$
$
900
640
1,540
During the fourth quarter of 2018, $400 million 2.91% senior and subordinated term notes issued by Eagle matured and were repaid.
In 2018, Eagle issued $250 million of senior and subordinated term notes with a maturity date of July 17, 2023 at a weighted average
interest rate of 3.10%. In connection with this issuance, $250 million of bond forward agreements were settled, resulting in a realized fair
value loss of $1 million, in Other Comprehensive Income, and a net effective interest rate of 3.15% on the Eagle notes issued.
2018 Annual Report - Financial Review Loblaw Companies Limited 23
Management’s Discussion and Analysis
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 $89 million (December 30, 2017 – $62 million), which represented approximately 10% (2017 – 10%) of the
securitized credit card receivables amount.
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 29, 2018 and throughout
2018.
The undrawn commitments on facilities available from the Other Independent Securitization Trusts as at December 29, 2018, were
$110 million (December 30, 2017 – $160 million).
Independent Funding Trusts As at December 29, 2018, the independent funding trusts had drawn $536 million (December 30, 2017 –
$551 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 29, 2018, the Company has agreed to provide a credit enhancement of $64 million (December 30, 2017 – $64 million) for the
benefit of the independent funding trusts representing not less than 10% (2017 – 10%) of the principal amount of loans outstanding.
Guaranteed Investment Certificates The following table summarizes PC Bank’s GICs activity, before commissions, in 2018 and 2017:
(millions of Canadian dollars)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
2018
852
495
(206)
1,141
$
$
$
$
2017
928
76
(152)
852
As at December 29, 2018, $274 million in GICs were recorded as long term debt due within one year (December 30, 2017 – $193 million).
Associate Guarantees The Company has arranged for its Shoppers Drug Mart Licensees (“Associates”) to obtain financing to facilitate
their inventory purchases and fund their working capital requirements by providing guarantees to various Canadian chartered banks that
support Associate loans. As at December 29, 2018, the Company’s maximum obligation in respect of such guarantees was
$580 million (December 30, 2017 – $580 million) with an aggregate amount of $466 million (December 30, 2017 – $509 million) in
available lines of credit allocated to the Associates by the various banks. As at December 29, 2018, Associates had drawn an aggregate
amount of $56 million (December 30, 2017 – $110 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)
(i) Restated to remove Discontinued Operations.
As at
December 29, 2018
12.6%
9.8%
As at
December 30, 2017(i)
12.6%
9.8%
Adjusted return on equity(2) as at December 29, 2018 was flat compared to December 30, 2017 as the decline in underlying operating
performance was offset by common share repurchases.
Adjusted return on capital(2) as at December 29, 2018 was flat compared to December 30, 2017 as the increase in total debt was offset by
common share repurchases.
24 2018 Annual Report - Financial Review Loblaw Companies Limited
7.5 Credit Ratings
The following table sets out the current credit ratings of the Company:
Credit Ratings (Canadian Standards)
Issuer rating
Medium term notes
Other notes and debentures
Second Preferred Shares, Series B
Dominion Bond Rating Service
Credit Rating
BBB
Trend
Stable
Standard & Poor’s
Credit Rating
BBB
Outlook
Stable
BBB
BBB
Pfd-3
Stable
Stable
Stable
BBB
BBB
P-3 (high)
n/a
n/a
n/a
In the third quarter of 2018, subsequent to the announcement of the spin out of Choice Properties, Standard & Poor’s and Dominion Bond
Rating Service reaffirmed the credit ratings and outlook of the Company.
7.6 Share Capital
First Preferred Shares (authorized – 1.0 million shares) There were no First Preferred Shares outstanding as at December 29, 2018
and December 30, 2017.
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)
Issued and outstanding, beginning of period
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
Number of
Common
Shares
386,293,941
2,081,235
(16,584,209)
2018
Common
Share
Capital
7,460
$
98
(381)
Number of
Common
Shares
400,829,870
1,019,610
(15,555,539)
371,790,967
$
7,177
386,293,941
$
(780,938) $
(582,500)
628,711
(734,727) $
(15)
(12)
12
(15)
(1,105,620) $
(686,000)
1,010,682
(780,938) $
2017
Common
Share
Capital
7,713
$
48
(301)
7,460
(21)
(13)
19
(15)
Issued and outstanding, net of shares held in trust, end of period
371,056,240
$
7,162
385,513,003
$
7,445
Weighted average outstanding, net of shares held in trust
376,747,429
393,764,159
(i) Common shares purchased and cancelled as at December 29, 2018 does not include the shares repurchased from the automatic share purchase plan. Common shares
purchased and cancelled as at December 30, 2017 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 2018 and 2017, the Board raised the quarterly dividend by $0.025 to $0.295 and by $0.01 to $0.27 per common share, respectively.
2018 Annual Report - Financial Review Loblaw Companies Limited 25
Management’s Discussion and Analysis
The following table summarizes the Company’s cash dividends declared for the periods as indicated:
Dividends declared per share ($):
Common Share
Second Preferred Share, Series B
2018(i)
1.155
1.325
$
$
2017
1.070
1.325
$
$
(i) The fourth quarter dividends for 2018 of $0.295 per share declared on common shares were payable on December 30, 2018 and subsequently paid on
December 31, 2018. The fourth quarter dividends for 2018 of $0.33125 per share declared on Second Preferred Shares, Series B were payable and paid on
December 31, 2018.
(millions of Canadian dollars)
Dividends declared:
Common Share
Second Preferred Share, Series B
Total dividends declared
2018
433
12
445
$
$
2017
421
12
433
$
$
Subsequent to the end of the year, the Board declared a quarterly dividend of $0.295 per common share, payable on April 1, 2019 to
shareholders of record on March 15, 2019 and a dividend on the Second Preferred Shares, Series B of $0.33125 per share payable on
March 31, 2019 to shareholders of record on March 15, 2019. 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 Canada
Revenue Agency (“CRA”).
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(i)
Reduction in Common Share Capital(ii)
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
Includes $126 million related to the automatic share purchase plan, as described below.
(i)
(ii) Includes $59 million related to the automatic share purchase plan, as described below.
2018
(52 weeks)
16,584,209
2017
(52 weeks)
15,533,527
1,082
$
1,091
886
381
790
301
582,500
686,000
$
36
24
12
48
35
13
$
$
In the second quarter of 2018, the Company renewed its NCIB to purchase on the Toronto Stock Exchange (“TSX”) or through alternative
trading systems up to 18,952,573 of the Company’s common shares, representing approximately 5% of outstanding common shares. In
accordance with the rules 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 29, 2018, the Company has purchased 8,477,182 common shares under its current NCIB.
In the fourth quarter of 2018, the Company entered into an automatic share purchase plan (“ASPP”) with a broker in order to facilitate the
repurchase 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. As at December 29, 2018, an obligation to
repurchase shares of approximately $185 million was recognized under the ASPP in trade payable and other liabilities. Subsequent to the
end of the year, the Company has completed this ASPP and repurchased 2,927,733 shares.
26 2018 Annual Report - Financial Review Loblaw Companies Limited
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 $527 million as at December 29, 2018 (December 30, 2017 – $763 million).
Guarantees In addition to the letters of credit mentioned above, the Company has entered into various guarantee arrangements including
obligations to indemnify third parties in connection with leases, business dispositions and other transactions in the normal course of
business.
The Company has provided a guarantee on behalf of PC Bank to MasterCard® for accepting PC Bank as a card member and licensee of
MasterCard®. As at December 29, 2018, the guarantee on behalf of PC Bank to MasterCard® was USD $190 million (December 30, 2017 –
USD $190 million).
Glenhuron Bank Limited Surety Bond In connection with the Canada Revenue Agency’s reassessment of the Company on certain
income earned by Glenhuron, the Company arranged for a surety bond to the Ministry of Finance in order to appeal the reassessments. As
a result of the decision of the Tax Court of Canada and incremental payments, the amount of the surety bond has been reduced to
$46 million (2017 – $149 million).
Cash Collateralization As at December 29, 2018, the Company had agreements to cash collateralize certain of its uncommitted credit
facilities up to an amount of $103 million (December 30, 2017 – $102 million), of which $2 million (December 30, 2017 – $3 million) was
deposited with major financial institutions and classified as security deposits, which is included in other assets.
7.8 Contractual Obligations
The following illustrates certain of the Company’s significant contractual obligations and discusses other obligations as at
December 29, 2018:
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
$
2019
2,975
336
1,229
142
258
$
2020
1,450
—
1,195
83
254
Payments due by year
2021
565
2022
645
$
$
—
1,140
8
259
—
1,073
—
76
2023
1,414
Thereafter
5,436
$
Total
$ 12,485
—
978
—
—
—
4,372
—
12
336
9,987
233
859
$
4,940
$
2,982
$
1,972
$
1,794
$
2,392
$
9,820
$ 23,900
(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 29, 2018.
(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 and provisions, including insurance liabilities. These long term
liabilities have not been included above as the timing and amount of future payments are uncertain.
2018 Annual Report - Financial Review Loblaw Companies Limited 27
Management’s Discussion and Analysis
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
Foreign Exchange Forwards
Bond Forwards(i)
Interest Rate Swaps
Total derivatives designated as cash flow hedges
December 29, 2018
(52 weeks)
Gain/(loss)
recorded in
operating
income
Gain/(loss)
recorded
in OCI
December 30, 2017
(52 weeks)
Gain/(loss)
recorded in
operating
income
Gain/(loss)
recorded
in OCI
Net Asset/
(Liability)
Fair value
Net Asset/
(Liability)
Fair value
$
$
1
$
2
$
— $
(1) $
(3) $
(4)
(1)
(5)
(1)
(4) $
(4) $
1
—
1
—
—
$
(1) $
6
—
3
$
1
—
—
1
(i) As a result of the issuance of Eagle notes, bond forward agreements with a notional value of $250 million were settled in 2018 (2017 - $200 million).
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
Other Non-Financial Derivatives
Total derivatives not designated in a formal
hedging relationship
December 29, 2018
(52 weeks)
Gain/(loss)
recorded in
operating
income
Gain/(loss)
recorded
in OCI
December 30, 2017
(52 weeks)
Gain/(loss)
recorded in
operating
income
Gain/(loss)
recorded
in OCI
Net Asset/
(Liability)
Fair value
Net Asset/
(Liability)
Fair value
$
$
11
$
— $
(11)
—
21
(20)
$
(10) $
— $
3
—
(23)
—
— $
— $
1
$
(7) $
— $
(23)
28 2018 Annual Report - Financial Review Loblaw Companies Limited
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 2018 and 2017 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:
The Company’s interest in Choice Properties has been presented separately as Discontinued Operations in the Company’s current and
comparative results. Unless otherwise indicated, all financial information represents the Company’s results from Continuing Operations.
Summary of Consolidated Quarterly Results
(millions of Canadian dollars except where
otherwise indicated)
Revenue
Adjusted EBITDA(2)
Net earnings available to
common shareholders of
the Company
Continuing Operations
Discontinued Operations
Adjusted net earnings available
to common shareholders of
the Company(2)
Continuing Operations
Discontinued Operations
Net earnings per common
share:
Basic ($)
Continuing Operations
Discontinued Operations
Diluted ($)
Continuing Operations
Discontinued Operations
Adjusted diluted net earnings per
common share(2) ($)
Continuing Operations
Discontinued Operations
Average national food price
(deflation) inflation (as
measured by CPI)
Food retail same-store sales
(decline) growth
Drug retail same-store sales
growth
2018
2017(4)(5)
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)
$ 10,335
$ 10,821
$ 14,319
$ 11,218
$ 46,693
$ 10,379
$ 11,053
$ 14,163
$ 10,992
$ 46,587
733
840
1,060
895
3,528
735
853
1,051
882
3,521
377
212
165
361
312
49
0.99
0.55
0.44
0.98
0.55
0.43
0.94
0.81
0.13
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
50
293
(243)
106
(26)
132
$
421
373
48
$
562
466
96
221
228
(7)
402
388
14
754
707
47
$
1,746
$
1,539
207
0.13
0.77
$
$
0.28
$
(0.07) $
(0.64) $
0.13
0.77
$
$
0.35
0.28
$
$
(0.07) $
(0.64) $
0.35
1.11
0.98
0.13
$
$
$
1.49
1.24
0.25
$
$
$
$
0.59
0.61
$
$
(0.02) $
0.59
0.61
$
$
(0.02) $
1.07
1.03
0.04
$
$
$
2.00
1.88
0.12
1.99
1.87
0.12
4.60
4.06
0.54
$
$
$
$
$
$
$
$
$
231
219
12
366
318
48
0.58
0.55
0.03
0.57
0.54
0.03
0.91
0.79
0.12
360
312
48
446
399
47
0.92
0.80
0.12
0.90
0.78
0.12
1.11
1.00
0.11
$
$
$
$
$
$
$
$
$
$
883
767
116
549
470
79
2.25
1.95
0.30
2.24
1.94
0.30
1.39
1.19
0.20
31
(24)
55
1,505
1,274
231
436
398
38
$ 1,797
1,585
212
0.08
$
(0.06) $
0.14
0.08
$
$
(0.06) $
0.14
1.12
1.02
0.10
$
$
$
$
3.82
3.24
0.58
3.79
3.21
0.58
4.52
3.99
0.53
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1.2%
0.1%
0.3%
1.7%
0.8%
(3.9)%
(1.4)%
0.3%
1.0%
(1.0)%
1.9%
0.8%
0.9%
0.8%
1.1%
(1.2)%
1.2 %
1.4%
0.5%
0.6 %
3.7%
1.7%
2.5%
1.9%
2.4%
0.9 %
3.7 %
3.3%
3.6%
3.0 %
2018 Annual Report - Financial Review Loblaw Companies Limited 29
Management’s Discussion and Analysis
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 0.2 million square feet to
70.4 million square feet.
the timing of holidays;
seasonality, which was greatest in the fourth quarter and least in the first quarter;
Net Earnings Available to Common Shareholders of the Company from Continuing Operations and Diluted Net Earnings Per
Common Share from Continuing Operations Net earnings available to common shareholders of the Company from continuing
operations and diluted net earnings per common share from continuing operations for the last eight quarters were impacted by the
following items:
•
•
•
• minimum wage increases and incremental healthcare reform;
•
•
•
•
cost savings and operating efficiencies from Process and Efficiency initiatives and benefits from strategic initiatives;
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
changes in the underlying operating performance of the Company;
the disposition of gas bar operations in the third quarter of 2017;
the gain on disposition of gas bar operations;
the charge related to Glenhuron Bank;
the PC Optimum Program;
the Loblaw Card Program;
restructuring and other related charges;
the wind-down of PC Financial banking services;
the impact of healthcare reform on inventory balances;
the remeasurement of deferred tax balances; and
asset impairments, net of recoveries.
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.
30 2018 Annual Report - Financial Review Loblaw Companies Limited
9.2 Fourth Quarter Results
The Company’s interest in Choice Properties has been presented separately as Discontinued Operations in the Company’s current and
comparative results. Unless otherwise indicated, all financial information represents the Company’s results from Continuing Operations.
The following is a summary of selected consolidated unaudited financial information for the fourth quarter of 2018:
For the periods ended December 29, 2018 and December 30, 2017
(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 from
Continuing Operations
Net earnings available to common shareholders of the Company
Continuing Operations
Discontinued Operations
Adjusted net earnings available to common shareholders of the
Company(2)
Continuing Operations
Discontinued Operations
Diluted net earnings per common share ($)
Continuing Operations
Discontinued Operations
Adjusted diluted net earnings per common share(2) ($)
Continuing Operations
Discontinued Operations
Diluted weighted average common shares outstanding (in millions)
Cash flows from (used in)(i):
Operating activities
Investing activities
Financing activities
Dividends declared per common share ($)
Dividends declared per Second Preferred Share, Series B ($)
(i)
Includes amounts from Continuing and Discontinued Operations.
2018
(12 weeks)
11,218
445
895
8.0%
356
95
94
100
155
27.4%
231
221
228
(7)
402
388
14
0.59
0.61
(0.02)
1.07
1.03
0.04
376.1
314
(796)
237
0.30
0.33125
$
$
$
$
$
$
$
$
$
$
$
$
$
2017(4)(5)
(12 weeks)
10,992
57
882
8.0%
342
89
89
(25)
157
27.4%
(21)
31
(24)
55
436
398
38
0.08
(0.06)
0.14
1.12
1.02
0.10
390.5
$
$
$
$
$
$
$
$
$
$
1,086
$
(748)
(50)
0.27
$
0.33125
$
$
$
$
$
$
$
$
$
$
$
$
$
$ Change
226
388
13
14
6
5
125
(2)
252
190
252
% Change
2.1 %
680.7 %
1.5 %
4.1 %
6.7 %
5.6 %
500.0 %
(1.3)%
1,200.0 %
612.9 %
1,050.0 %
(62)
(112.7)%
(34)
(10)
(24)
0.51
0.67
(0.16)
(0.05)
0.01
(0.06)
(772)
(48)
287
0.03
(7.8)%
(2.5)%
(63.2)%
637.5 %
1,116.7 %
(114.3)%
(4.5)%
1.0 %
(60.0)%
(71.1)%
6.4 %
574.0 %
11.1 %
The Company’s year-over-year financial performance were negatively impacted by minimum wage increases and incremental healthcare
reform. The disposition of the Company’s gas bar operations did not have a year-over-year impact on fourth quarter results.
2018 Annual Report - Financial Review Loblaw Companies Limited 31
Management’s Discussion and Analysis
Net Earnings Available to Common Shareholders of the Company from Continuing Operations and Diluted Net Earnings Per
Common Share from Continuing Operations Net earnings available to common shareholders of the Company from Continuing
Operations in the fourth quarter of 2018 were $228 million ($0.61 per common share), an increase of $252 million ($0.67 per common
share) compared to the fourth quarter of 2017. The increase included a decline in underlying operating performance of $10 million, which
was more than offset by the favourable year-over-year net impact of adjusting items totaling $262 million, as described below:
•
decline in underlying operating performance of $10 million ($0.03 per common share) primarily due to the following:
the Financial Services segment, driven by lower core banking income attributable to the discontinuation of the personal
banking services under the PC Financial brand, higher operating costs including investments in digital strategy and higher
customer acquisition costs, partially offset by higher net interchange income attributable to the growth in the credit card
portfolio;
partially offset by,
the Retail segment (excluding the impact of the consolidation of franchises), driven by a decrease in SG&A , partially offset by
an increase in depreciation and amortization and a decrease in adjusted gross profit(2).
the favourable year-over-year net impact of adjusting items totaling $262 million ($0.66 per common share) primarily due to the
following:
prior year charges related to the PC Optimum Program of $137 million ($0.35 per common share);
the year-over-year favourable impact of restructuring and other related costs of $133 million ($0.34 per common share); and
the year-over-year favourable impact of prior year charges related to the Loblaw Card Program of $79 million ($0.20 per
common share);
partially offset by,
the year-over-year unfavourable impact of fixed asset and other related impairments, net of recoveries of $20 million ($0.06
per common share);
the unfavourable impact of the prior year deferred tax liability revaluation of $17 million ($0.04 per common share);
the unfavourable impact of prior year 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 unfavourable change in fair value adjustment on fuel and foreign currency contract of $10 million ($0.03 per common
share); and
the unfavourable impact of the prior year recovery related to a prior year land transfer tax assessment of $7 million ($0.02 per
common share).
the increase in diluted net earnings from Continuing Operations per common share also included the favourable impact of the
repurchase of common shares over the last 12 months ($0.04 per common share).
•
•
Adjusted net earnings available to common shareholders of the Company(2) from Continuing Operations in the fourth quarter of 2018 were
$388 million ($1.03 per common share), a decrease of $10 million (increase of $0.01 per common share or 1.0%), compared to the fourth
quarter of 2017, primarily due to the decline in underlying operating performance, as described above. Adjusted diluted net earnings per
common share(2) also included the favourable impact of the repurchase of common shares ($0.04 per common share).
Discontinued Operations Net earnings available to common shareholders of the Company from Discontinued Operations were negatively
impacted year-over-year by the spin-out of Choice Properties on November 1, 2018. The Company’s fourth quarter of 2018 financial
results from Discontinued Operations include one month of Choice Properties’ financial results compared to three months in the fourth
quarter of 2017.
Net earnings available to common shareholders of the Company from Discontinued Operations was a loss of $7 million ($0.02 per
common share) in the fourth quarter of 2018, a decrease of $62 million ($0.16 per common share) compared to the fourth quarter of 2017.
The decrease included a decline in underlying operating performance of $24 million ($0.06 per common share), primarily due to the
unfavourable year-over-year impact of the reorganization and the unfavourable year-over-year net impact of adjusting items totaling
$38 million ($0.10 per common share). The unfavourable year-over-year net impact of adjusting items was driven by the change in fair
value adjustment to the Trust Unit Liability of $39 million ($0.11 per common share).
32 2018 Annual Report - Financial Review Loblaw Companies Limited
Revenue
For the periods ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Consolidation and Eliminations
Revenue
2018
(12 weeks)
10,976
336
(94)
11,218
$
$
$
$
2017(4)(5)
(12 weeks)
10,795
$ Change
181
$
% Change
1.7 %
274
(77)
10,992
$
62
(17)
226
22.6 %
(22.1)%
2.1 %
Revenue was $11,218 million in the fourth quarter of 2018, an increase of $226 million, or 2.1%, compared to the fourth quarter of 2017,
primarily driven by an increase in Retail segment sales of $181 million. Excluding the consolidation of franchises, Retail segment sales
increased by $103 million, or 1.0% due to positive same-store sales growth.
Operating Income Operating income was $445 million in the fourth quarter of 2018, an increase of $388 million compared to the fourth
quarter of 2017. The increase in operating income included a decline in underlying operating performance of $2 million and the favourable
year-over-year net impact of adjusting items totaling $390 million, as described below:
•
decline in underlying operating performance of $2 million were primarily due to the Financial Services segment, partially offset by the
improvement in underlying operating performance of the Retail segment, including the favourable year-over-year contribution from the
consolidation of franchises in the quarter; and
•
the favourable year-over-year net impact of adjusting items totaling $390 million primarily due to the following:
prior year charges related to the PC Optimum Program of $187 million;
the year-over-year favourable impact of restructuring and other related costs of $175 million; and
the year-over-year favourable impact of prior year charges related to the Loblaw Card Program of $107 million;
partially offset by,
the year-over-year unfavourable impact of fixed asset and other related impairments, net of recoveries of $30 million;
the unfavourable impact of prior year income earned, net of certain costs incurred, from the wind-down of PC Financial
banking services of $17 million;
the unfavourable change in fair value adjustment on fuel and foreign currency contracts of $13 million; and
the unfavourable impact of the prior year recovery related to land transfer tax assessment of $9 million.
Adjusted EBITDA(2)
For the periods ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Retail
Financial Services
Adjusted EBITDA(2)
2018
(12 weeks)
855
40
895
$
$
2017(4)(5)
(12 weeks)
829
53
882
$
$
$
$
$ Change
26
% Change
3.1 %
(13)
13
(24.5)%
1.5 %
Adjusted EBITDA(2) was $895 million in the fourth quarter of 2018, an increase of $13 million compared to the fourth quarter of 2017. The
increase in adjusted EBITDA(2) in the fourth quarter of 2018 was primarily due to improvements in the Retail segment, including favourable
contribution from the consolidation of franchises of $8 million. The increase was partially offset by the Financial Services segment.
Depreciation and Amortization Depreciation and amortization was $356 million in the fourth quarter of 2018, an increase of $14 million
compared to the fourth quarter of 2017, primarily driven by the consolidation of franchises, an increase in IT assets and the change in
estimated useful life of certain building components as a result of the spin-out of Choice Properties in the Retail segment. Included in
depreciation and amortization is the amortization of intangible assets related to the acquisition of Shoppers Drug Mart of $120 million (2017
– $121 million).
2018 Annual Report - Financial Review Loblaw Companies Limited 33
Management’s Discussion and Analysis
Net Interest Expense and Other Financing Charges
For the periods ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Net interest expense and other financing charges
Add (deduct) impact of the following:
Spin-out of Choice Properties
Adjusted net interest expense and other financing charges(2)
2018
(12 weeks)
95
(1)
94
$
$
2017(5)
(12 weeks)
89
—
89
$
$
$
$
$ Change
6
% Change
6.7 %
(1)
5
(100.0)%
5.6 %
Net interest expense and other financing charges and adjusted net interest expense and other financing charges(2) were $95 million in the
fourth quarter of 2018, an increase of $6 million compared to the fourth quarter of 2017. The increase in net interest and other financing
charges was primarily driven by interest expense related to the spin-out of Choice Properties, higher interest expense in the Financial
Services segment, due to an increase in interest rates on borrowings related to credit card receivables and a net increase in GICs.
Adjusted net interest expense and other financing charges(2) were $94 million in the fourth quarter of 2018, an increase of $5 million
compared to the fourth quarter of 2017. The increase in net interest and other financing charges was primarily driven by higher interest
expense in the Financial Services segment, due to an increase in interest rates on borrowings related to credit card receivables and a net
increase in GICs.
Income Taxes
For the periods ended December 29, 2018 and December 30, 2017
(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)
$
$
2018
(12 weeks)
100
55
—
155
28.6%
27.4%
$
$
2017(4)(5)
(12 weeks)
(25)
165
17
157
78.1%
27.4%
$
$
$ Change
125
% Change
500.0 %
(110)
(17)
(2)
(66.7)%
(100.0)%
(1.3)%
The effective tax rate in the fourth quarter of 2018 was 28.6% compared to 78.1% in the fourth quarter of 2017. The decrease in the
effective tax rate is primarily attributable to the tax recovery in the fourth quarter of 2017, which was primarily due to earnings loss reported
by the Company, the tax impact of certain non-taxable items and 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.
The adjusted income tax rate(2) in the fourth quarter of 2018 was 27.4% flat compared to the fourth quarter of 2017.
34 2018 Annual Report - Financial Review Loblaw Companies Limited
Cash Flow
The following Cash Flow is presented on a Total Company basis, inclusive of Continuing and Discontinued Operations.
For the periods ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Cash and cash equivalents, beginning of period
Cash flows from (used in):
Operating activities
Investing activities
Financing activities
Effect of foreign currency exchange rate changes on cash and cash
equivalents
Change in cash and cash equivalents
Cash and cash equivalents, end of period
2018
(12 weeks)
1,314
314
(796)
237
(4)
(249)
1,065
$
$
$
$
2017(5)
(12 weeks)
1,510
1,086
(748)
(50)
—
288
1,798
$
$
$
$
$
$
$
$
$ Change
(196)
% Change
(13.0)%
(772)
(48)
287
(71.1)%
(6.4)%
574.0 %
(4)
(100.0)%
(537)
(733)
(186.5)%
(40.8)%
Cash Flows from Operating Activities Cash flows from operating activities in the fourth quarter of 2018 were $314 million, a decrease of
$772 million compared to the fourth quarter of 2017, primarily due to an unfavourable change in non-cash working capital and a reduction
in provision balances, partially offset by higher cash earnings.
Cash Flows used in Investing Activities Cash flows used in investing activities in the fourth quarter of 2018 were $796 million, an
increase of $48 million compared to the fourth quarter of 2017. The increase in cash flows used in investing activities was primarily driven
by an increase in security deposits, held for the redemption of the Company’s $800 million debenture subsequent to the end of 2018,
partially offset by a decrease in short term investments.
Cash Flows from Financing Activities Cash flows from financing activities in the fourth quarter of 2018 were $237 million, an increase of
$287 million compared to the fourth quarter of 2017. The increase in cash flows from financing activities was primarily driven by higher net
issuances of debt.
Capital Investments In the fourth quarter of 2018, the Company invested $482 million (2016 – $487 million) in fixed asset purchases and
intangible asset additions.
Free Cash Flow(2)
The following Free Cash Flow is presented on a Continuing Operations basis.
For the periods ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Cash flows from operating activities
2018
(12 weeks)
314
$
2017(4)(5)
(12 weeks)
1,086
$
Less: Cash flows from operating activities from Discontinued Operations(i)
Cash flows from operating activities from Continuing Operations(i)
Less:
Capital investments
Interest paid
4
310
414
58
Free cash flow from Continuing Operations
$
(162)
$
81
1,005
399
40
566
$ Change
(772)
$
% Change
(71.1)%
(77)
(695)
(95.1)%
(69.2)%
15
18
3.8 %
45.0 %
$
(728)
(128.6)%
(i) Cash flows from operating activities from Continuing Operations include distributions received in 2018 and the payment related to the conversion of Class C LP Units in
2018 from Discontinued Operations. Cash flows from Discontinued Operations include the outflow of these items.
Negative free cash flow(2) from Continuing Operations was $162 million in the fourth quarter of 2018, a decrease of $728 million compared
to the fourth quarter of 2017, primarily driven by lower cash flows from operating activities, due to an unfavourable change in non-cash
working capital.
2018 Annual Report - Financial Review Loblaw Companies Limited 35
Management’s Discussion and Analysis
Retail Segment Fourth Quarter Results of Operations
For the periods ended December 29, 2018 and December 30, 2017
(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 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Food retail
Drug retail
Pharmacy
Front Store
$
$
$
$
2018
(12 weeks)
10,976
408
3,254
29.6%
855
7.8%
353
2017
(12 weeks)
10,795
(10)
3,172
29.4%
829
7.7%
339
$
$
$
$ Change % Change
1.7%
181
$
418
82
4,180.0%
2.6%
$
$
26
14
3.1%
4.1%
2018
(12 weeks)
Same-store
sales
0.8%
$
1.9%
0.6%
2.8%
Sales
7,750
3,226
1,426
1,800
2017
(12 weeks)
Same-store
sales
0.5%
3.6%
3.9%
3.5%
Sales
7,623
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 2018 were $10,976 million, an increase of $181 million, or 1.7%, compared to the fourth
quarter of 2017. Excluding the consolidation of franchises, Retail segment sales increased by $103 million, or 1.0%, primarily driven by the
following factors:
•
Food retail same-store sales growth was 0.8% (2017 – 0.5%) for the quarter.
Sales growth in food was moderate;
Sales in pharmacy were declined significantly; and
The Company’s Food retail average quarterly internal food price index was moderately lower than (2017 – marginally higher
than) the average quarterly national food price inflation of 1.7% (2017 – inflation of 1.0%), 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 1.9% (2017 – 3.6%).
Pharmacy same-store sales growth was 0.6% (2017 – 3.9%). The number of prescriptions dispensed increased by 3.3%
(2017 – 4.5%). On a same-store basis, the number of prescriptions dispensed increased by 3.1% (2017 – 4.3%) and
year-over-year, the average prescription value decreased by 3.2% (2017 – decreased by 0.1%). Pharmacy same-store
sales growth included the impact of incremental healthcare reform; and
Front store same-store sales growth of 2.8% (2017 – 3.5%).
In the last 12 months, 17 food and drug stores were opened, and 22 food and drug stores were closed, resulting in a net increase in Retail
square footage of 0.1 million square feet, or 0.1%.
The redemption of Loblaw Cards resulted in the delivery of approximately $4 million of free products to customers in the fourth quarter of
2018, which was provided for in the fourth quarter of 2017. The redemptions did not benefit sales or the Company’s financial performance
and Management does not believe it had a significant impact on Food retail same-store sales.
36 2018 Annual Report - Financial Review Loblaw Companies Limited
Operating Income Operating income in the fourth quarter of 2018 was $408 million, an increase of $418 million compared to the fourth
quarter of 2017. The increase in operating income included improvements in underlying operating performance of $11 million and the
favourable year-over-year net impact of adjusting items totaling $407 million, as described below:
•
the improvements in underlying operating performance of $11 million were driven by an increase in adjusted gross profit(2), partially
offset by an increase in SG&A and depreciation and amortization. The improvements in underlying operating performance included
the favourable year-over-year contribution from the consolidation of franchises in the quarter; and
•
the favourable year-over-year net impact of adjusting items totaling $407 million primarily due to the following:
prior year charges related to the PC Optimum Program of $187 million;
the year-over-year favourable impact of restructuring and other related costs of $175 million; and
the year-over-year favourable impact of prior year charges related to the Loblaw Card Program of $107 million;
partially offset by,
the year-over-year unfavourable impact of fixed asset and other related impairments, net of recoveries of $30 million;
the unfavourable change in fair value adjustment on fuel and foreign currency contracts of $13 million; and
the unfavourable impact of the prior year recovery related to land transfer tax assessment of $9 million.
Adjusted Gross Profit(2) Adjusted gross profit(2) in the fourth quarter of 2018 was $3,254 million, an increase of $82 million compared to
the fourth quarter of 2017. Adjusted gross profit percentage(2) of 29.6% increased by 20 basis points compared to the fourth quarter of
2017. Excluding the consolidation of franchises, adjusted gross profit(2) decreased by $1 million. Adjusted gross profit percentage(2),
excluding the consolidation of franchises, was 27.7%, a decrease of 30 basis points compared to the fourth quarter of 2017. Margins were
negatively impacted by healthcare reform and positively impacted by food retail.
Adjusted EBITDA(2) Adjusted EBITDA(2) in the fourth quarter of 2018 was $855 million, an increase of $26 million, compared to the fourth
quarter of 2017 and included the favourable impact of the consolidation of franchises of $8 million. The increase in adjusted EBITDA(2) of
$26 million was driven by an increase in adjusted gross profit(2) as described above, partially offset by an increase in SG&A of $56 million.
SG&A as a percentage of sales was 21.9%, an increase of 20 basis points compared to the fourth quarter of 2017. Excluding the
consolidation of franchises, SG&A decreased $19 million. SG&A as a percentage of sales, excluding the consolidation of franchises, was
20.1%, an improvement of 30 basis points compared to the fourth quarter of 2017 mainly driven by:
•
•
partially offset by,
•
lower store costs driven by process efficiencies and a decrease in advertising costs, partially offset by minimum wage increases; and
lower store support costs driven by previously announced cost savings initiatives;
the unfavourable year-over-year impact of foreign exchange.
Adjusted EBITDA(2) included gains of $8 million (2017 – $7 million) related to the sale leaseback of properties to Choice Properties in the
fourth quarter of 2018.
Depreciation and Amortization Depreciation and amortization in the fourth quarter of 2018 was $353 million, an increase of $14 million
compared to the fourth quarter of 2017 primarily driven by the consolidation of franchises, an increase in IT assets and the change in
estimated useful life of certain building components as a result of the spin-out of Choice Properties. Included in depreciation and
amortization is the amortization of intangible assets related to the acquisition of Shoppers Drug Mart of $120 million (2017 – $121 million).
Other Retail Business Matters
For details see Section 6.1 “Retail Segment”, of this MD&A.
2018 Annual Report - Financial Review Loblaw Companies Limited 37
Management’s Discussion and Analysis
Financial Services Segment Fourth Quarter Results of Operations
For the periods ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Revenue
Earnings before income taxes
2018
(12 weeks)
336
18
$
2017
(12 weeks)
274
$
$ Change % Change
22.6 %
62
$
52
(34)
(65.4)%
(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 29, 2018
$
3,073
As at
December 30, 2017
2,908
$
3,329
167
13.1%
3.1%
3,100
47
13.2%
3.7%
$ Change % Change
5.7%
165
$
229
120
7.4%
255.3%
Revenue Revenue in the fourth quarter of 2018 was $336 million, an increase of $62 million compared to the fourth quarter of 2017,
primarily driven by:
•
•
partially offset by,
•
higher sales attributable to The Mobile Shop; and
higher interest and net interchange income attributable to the growth in the credit card portfolio;
lower core banking income attributable 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. Normal operating
income from the same personal banking services ended in April 2018.
Earnings before income taxes Earnings before income taxes in the fourth quarter of 2018 were $18 million, a decrease of $34 million
compared to the fourth quarter of 2017, primarily driven by:
•
income earned in the fourth quarter of 2017 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
PC Financial brand;
higher operating costs including investments in digital strategy; and
higher customer acquisition costs;
•
•
partially offset by,
•
revenue growth, as described above.
Credit Card Receivables As at December 29, 2018, credit card receivables were $3,329 million, an increase of $229 million compared to
December 30, 2017. 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 29, 2018, the allowance for credit card
receivables was $167 million, an increase of $120 million compared to December 30, 2017 primarily due to the adoption of IFRS 9.
Other Financial Services Business Matters
For details see Section 6.2 “Financial Services Segment”, of this MD&A.
38 2018 Annual Report - Financial Review Loblaw Companies Limited
10. Disclosure Controls and Procedures
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable
assurance that all material information relating to the Company and its subsidiaries is gathered and reported to senior management on a
timely basis so that appropriate decisions can be made regarding public disclosure.
As required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), the Executive
Chairman 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 29, 2018.
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 Executive Chairman 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 29, 2018.
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 2018 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
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.
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.
2018 Annual Report - Financial Review Loblaw Companies Limited 39
Management’s Discussion and Analysis
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 29, 2018, which is hereby
incorporated by reference:
Healthcare Reform
Distribution and Supply Chain
Cyber Security, Privacy and Data Breaches
Electronic Commerce and Disruptive Technologies
IT Systems Implementations and Data Management
Governance, Change Management, Process and Efficiency
Food, Drug, Product and Services Safety
Legal Proceedings
Competitive Environment and Strategy
Regulatory Compliance
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, including the potential implementation of a national pharmacare system, changes in the models used to fund prescription
drugs such as the introduction of a pharmacare system, 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 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 three types of payers: (i) government or public, (ii) private insurers or
employers, and (iii) out-of-pocket by the patient or cash. These payers have pursued and continue to pursue measures to manage the
costs of their drug plans. Each provincial jurisdiction has implemented legislative and/or other measures directed towards managing
pharmacy service costs and controlling increasing drug costs incurred by public drug plans and private payers, which impact pharmacy
reimbursement levels and the availability of manufacturer allowances. Legislative measures to control drug costs include lowering of
generic drug pricing, restricting or prohibiting the provision of manufacturer allowances and placing limitations on private label prescription
drug products. Other measures that have been implemented by certain government payers include restricting the number of
interchangeable prescription drug products which are eligible for reimbursement under provincial drug plans. Additionally, the Council of
the Federation, an institution created by the provincial Premiers in 2003 to collaborate on intergovernmental relations, continues its work
regarding cost reduction initiatives for pharmaceutical products and services.
Legislation in certain provincial jurisdictions establishes 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 to private payers sector. Also, private payers (such as
corporate employers and their insurers) are looking or may look to benefit from any measures implemented by government payers to
40 2018 Annual Report - Financial Review Loblaw Companies Limited
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 payers. In addition, private 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.
Changes impacting pharmacy reimbursement programs, prescription drug pricing, manufacturer allowance funding and private label
prescription drug products, 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.
Cyber Security, Privacy and Data Breaches The Company depends on the uninterrupted operation of its IT systems, networks and
services including internal and public internet sites, data hosting and processing facilities, cloud-based services and hardware, such as
point-of-sale processing at stores, to operate its business.
In the ordinary course of business, the Company collects, processes, transmits and retains confidential, sensitive and personal information,
including personal health and financial information (“Confidential Information”) regarding the Company and its employees, franchisees,
Associates, vendors, customers, patients, credit card holders and loyalty program members. Some of this Confidential Information is held
and managed by third party service providers. As with other large and prominent companies, the Company is regularly subject to
cyberattacks and such attempts are occurring more frequently, are constantly evolving in nature and are becoming more sophisticated.
The Company has implemented security measures, including employee training, monitoring and testing, maintenance of protective
systems and contingency plans, to protect and to prevent unauthorized access of Confidential Information and to reduce the likelihood of
disruptions to its IT systems. The Company also has security processes, protocols and standards that are applicable to its third party
service providers.
Despite these measures, all of the Company’s information systems, including its back-up systems and any third party service provider
systems that it employs, are vulnerable to damage, interruption, disability or failures due to a variety of reasons, including physical theft,
electronic theft, fire, power loss, computer and telecommunication failures or other catastrophic events, as well as from internal and
external security breaches, denial of service attacks, viruses, worms and other known or unknown disruptive events.
The Company or its third party service providers may be unable to anticipate, timely identify or appropriately respond to one or more of the
rapidly evolving and increasingly sophisticated means by which computer hackers, cyber terrorists and others may attempt to breach the
Company’s security measures or those of our third party service providers’ information systems.
As cyber threats evolve and become more difficult to detect and successfully defend against, one or more cyber threats might defeat the
Company’s security measures or those of its third party service providers. Moreover, employee error or malfeasance, faulty password
management or other irregularities may result in a breach of the Company’s or its third party service providers’ security measures, which
could result in a breach of employee, franchisee, Associate, customer, credit card holder or loyalty program member privacy or Confidential
Information.
If the Company does not allocate and effectively manage the resources necessary to build and sustain reliable IT infrastructure, fails to
timely identify or appropriately respond to cybersecurity incidents, or the Company’s or its third party service providers’ information systems
are damaged, destroyed, shut down, interrupted or cease to function properly, the Company’s business could be disrupted and the
Company could, among other things, be subject to: transaction errors; processing inefficiencies; the loss of or failure to attract new
customers; the loss of revenue; the loss or unauthorized access to Confidential Information or other assets; the loss of or damage to
intellectual property or trade secrets; damage to its reputation; litigation; regulatory enforcement actions; violation of privacy, security or
other laws and regulations; and remediation costs.
IT Systems Implementations and Data Management The Company continues to undertake investments in new IT systems to improve
the operating effectiveness of the organization. Failure to successfully migrate from legacy systems to the new IT systems or a significant
disruption in the Company’s current IT systems during the implementation of new systems could result in a lack of accurate data to enable
management to effectively manage day-to-day operations of the business or achieve its operational objectives, causing significant
disruptions to the business and potential financial losses.
2018 Annual Report - Financial Review Loblaw Companies Limited 41
Management’s Discussion and Analysis
Failure to successfully adopt or implement appropriate processes to support the new IT systems, or failure to effectively leverage or
convert data from one system to another, may preclude the Company from optimizing its overall performance and could result in
inefficiencies and duplication in processes, which in turn could adversely affect the reputation, operations or financial performance of the
Company. Failure to realize the anticipated strategic benefits including revenue growth, anticipated cost savings or operating efficiencies
associated with the new IT systems could adversely affect the reputation, operations or financial performance of the Company.
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.
Governance, Change Management, Process and Efficiency Many initiatives are underway to reduce the complexity and cost of the
Company’s business operations, ensuring a low cost operating structure that allows for continued investments in the Company’s strategic
growth areas. These efforts include initiatives focused on improving processes and generating efficiencies across its administrative, store
and distribution network infrastructures. 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.
Competitive Environment and Strategy 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 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 the Company’s loyalty program must be well managed and
coordinated to preserve positive customer perception. The Company has made significant investments in support of certain strategic
priorities. Failure to achieve these strategic priorities could adversely affect the Company’s financial position and its ability to compete with
competitors.
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.
Distribution and Supply Chain The Company’s ability to satisfy its customers’ demands and achieve its cost objectives depends on its
ability to maintain key logistic and transport arrangements. The Company’s distribution and supply chain could be negatively affected by
unforeseen disruptions due to fire, severe weather conditions, natural disasters, or other catastrophic events, labour disagreements, or
other shipping problems. The loss of or disruption to these types of arrangements could interrupt product supply, which in turn could
adversely affect the assortment and product availability at store level. If not effectively managed or remedied, these events could
negatively impact customer experience and the Company’s ability to attract and retain customers, and could adversely affect the
Company’s operations or financial performance.
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.
42 2018 Annual Report - Financial Review Loblaw Companies Limited
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.
Food, Drug, Product and Services Safety 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.
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.
On August 26, 2015, the Company was served with a proposed class action, which was commenced in the Ontario Superior Court of
Justice (“Superior Court”) 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. In July 2017, the Superior Court dismissed the action and the plaintiffs
appealed. The decision of the Ontario Court of Appeal, released December 20, 2018, upheld the Superior Court’s dismissal of the action.
Costs awarded in respect of the original motion was reduced by 30%. The Company anticipates that the plaintiff’s will seek leave to appeal
to the Supreme Court of Canada.
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 Superior Court certified as a class proceeding portions of the action. The Superior
Court imposed a class closing date based on the date of certification. New Associates after July 9, 2013 are not members of the class.
In 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 2018 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 at the earlier of when a reliable estimate of liability can be determined or the matter is ultimately
resolved.
As part of its response to this issue, the Company announced the Loblaw Card Program pursuant to which the Company offered 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 associated with the Loblaw Card Program in 2017. In 2018, the Company recorded an
additional charge of $4 million. 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.
2018 Annual Report - Financial Review Loblaw Companies Limited 43
Management’s Discussion and Analysis
In August 2018, the Province of British Columbia filed a class action against numerous opioid manufacturers and distributors, including the
Company and its subsidiaries, Shoppers Drug Mart Inc. and Sanis Health Inc. The claim contains allegations of breach of the Competition
Act, fraudulent misrepresentation and deceit and negligence, and seeks damages (unquantified) for the expenses incurred by the province
in paying for opioid prescriptions and other healthcare costs related to opioid addiction and abuse in British Columbia.
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 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.
The Company is subject to externally imposed capital requirements from the 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 regulations could result in regulatory intervention and reputational damages.
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
Currency Exchange Rates
Credit
Interest Rate
44 2018 Annual Report - Financial Review Loblaw Companies Limited
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.
Currency Exchange Rates The Company is exposed to foreign currency exchange rate variability, primarily on its USD denominated
purchases in trade payables and other liabilities. A depreciating Canadian dollar relative to the USD will have a negative impact on year-
over-year changes in reported operating income and net earnings, while an appreciating Canadian dollar relative to the USD will have the
opposite impact. The Company is also exposed to fluctuations in the prices of USD denominated purchases as a result of changes in USD
exchange rates. To manage a portion of this exposure, the Company uses derivative instruments in the form of futures contracts and
forward contracts to minimize cost volatility related to foreign exchange.
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 independent franchisees, government, prescription sales and third-party drug plans, independent accounts
and amounts owed from vendors. Failure to manage credit risk could adversely affect the financial performance of the Company.
The risk related to derivative instruments, cash and cash equivalents, short term investments and security deposits is reduced by policies
and guidelines that require that the Company enters into transactions only with counterparties or issuers that have a minimum long term
“A-” credit rating from a recognized credit rating agency and place minimum and maximum limits for exposures to specific counterparties
and instruments.
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.
Interest Rates 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. An increase in interest rates could adversely affect the operations or financial performance of
the Company. 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 50.4% 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
81,465,025 of Weston’s common shares, representing approximately 53.1% of Weston’s outstanding common shares. Mr. Weston also
beneficially owns 5,096,189 of the Company’s common shares, representing approximately 1.4% of the Company’s outstanding common
shares.
In the fourth quarter of 2018, the Company and its parent Weston completed a reorganization under which the Company distributed its
approximate 61.6% effective interest in Choice Properties to Weston on a tax-free basis to the Company and its Canadian shareholders. In
connection with the reorganization, the common shareholders of the Company, other than Weston and its subsidiaries, received 0.135 of a
common share of Weston for each common share of the Company held, which was equivalent to the market value of their pro rata interest
in Choice Properties as at the announcement date of the spin-out, and Weston received the Company’s approximate 61.6% effective
interest in Choice Properties.
2018 Annual Report - Financial Review Loblaw Companies Limited 45
Management’s Discussion and Analysis
Following the reorganization, the Company no longer retains its interest in Choice Properties and has ceased to consolidate its equity
interest in Choice Properties from its consolidated financial statements. The transaction has no impact on the ongoing operating
relationship between the Company and Choice Properties and all current agreements and arrangements, including The Strategic Alliance
Agreement and leases, remain in place. The Company continues to be Choice Properties’ largest tenant, representing approximately 68%
of Choice Properties’ annual base rent revenue and 59% of its gross leasable area as at December 29, 2018 (December 30, 2017 – 88%
and 88% respectively).
The Company’s policy is to conduct all transactions and settle all balances with related parties on market terms and conditions. The
Company has reflected all transactions with Choice Properties below from the earliest period presented. Prior to November 1, 2018, these
transactions were eliminated on consolidation.
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
Transactions with Weston
Cost sharing agreements with Parent(ii)
Net administrative services provided by Parent(iii)
Lease of office space from a subsidiary of Wittington
Lease of office space to a subsidiary of Wittington
Transactions with Choice Properties
Rental expenses paid to Choice Properties(iv)
Property management and other administration fees paid to Choice Properties
Lease surrender payments
Service agreement fees received from Choice Properties
Net other income received from Choice Properties(v)
Gain on sale of properties to Choice Properties(vi)
$
$
$
Transaction Value
$
$
$
2018
649
2
30
42
19
4
—
742
1
10
(2)
(6)
(6)
2017
652
2
28
35
23
4
2
718
1
6
(3)
(4)
(7)
(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 29, 2018 was $3 million (December 30, 2017 – $6 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) Rental expenses paid to Choice Properties include base rent of $543 million (2017 – $533 million) and operating expenses of $199 million (2017 – $185 million).
(v) Net other income received from Choice Properties include site intensification payments received from Choice Properties of $6 million (2017 – $6 million). Included in
certain investment properties sold to Choice Properties is excess land with development potential. Choice Properties will compensate the Company, over time, with
intensification payments, as Choice Properties pursues development, intensification or redevelopment of such excess lands. The payments the Company receives are
calculated in accordance with a payment grid, set out in the Strategic Alliance Agreement, that takes into account the region, market ranking and type of use for the
property). The Company did not make any development capital payments to Choice Properties during the year ended December 29, 2018 (2017 – $2 million).
(vi) Prior to the spin-out, the Company disposed of one investment property to Choice Properties for a sale price of $2 million and a loss on sale of $2 million was recognized
and eliminated on consolidation. Since November 1, 2018, the Company disposed three investment properties to Choice Properties for an aggregate purchase price of
$55 million and recognized a gain of $8 million. These properties were leased back by the Company and were classified as operating leases.
46 2018 Annual Report - Financial Review Loblaw Companies Limited
The net balances due to (from) related parties are comprised as follows:
(millions of Canadian dollars)
Weston(i)
Choice Properties(ii)
As at
December 29, 2018
36
$
2
As at
December 30, 2017
48
$
(22)
(i) Balances relate to trade payables and other liabilities due to Weston, net of receivables from Weston.
(ii) Balances relate to distribution and other receivables, net of note and other payables.
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
2018
6
10
16
$
$
2017
6
9
15
$
$
Other Transactions and Agreements with Choice Properties
Strategic Alliance Agreement The Strategic Alliance Agreement established on the IPO of Choice creates a series of rights and obligations
between Choice Properties and the Company, intended to establish a preferential and mutually beneficial business and operating relationship.
The Agreement expires on July 5, 2023, ten years from the IPO.
Services Agreement The Company provides Choice Properties with administrative and other support services.
Property Management Agreement Choice Properties provides the Company with property management services for properties with third-
party tenancies on a fee for service basis for an initial two-year term with automatic one-year renewals.
Sublease Administration Agreement On July 17, 2017, in connection with the Company’s sale of substantially all of its gas bar operations,
Choice Properties agreed to provide the Company with certain administrative services in respect of the subleases to Brookfield Business
Partners L.P. (“Brookfield”) on a fee for service basis for an initial five-year term with automatic one-year renewals.
Letters of Credit As at December 29, 2018, letters of credit totaling $3 million were posted by the Company with the province of Ontario and
City of Toronto on behalf of Choice Properties related to deferral of land transfer tax on properties acquired from the Company
(December 30, 2017 – $5 million).
Distributions on Choice Properties LP Units Prior to the spin-out and the acquisition of CREIT by Choice Properties, the Company held
all the Exchangeable Units and Class C LP Units issued by Choice Properties. For the year ended December 29, 2018, the Company received
distributions totaling $238 million (2017 – $278 million) on the Units held.
Trust Unit Distributions For the year ended December 29, 2018, the Company received distributions of $13 million (2017 – $16 million) on
the Units held.
Acquisitions During 2017, the Company acquired certain gas bar capital assets with a fair value of $35 million from Choice Properties, for
cash, in order to facilitate the sale of substantially all of the Company’s gas bar operations to Brookfield. The gas bar capital assets were
leased to the Company as part of the respective tenant leases between the Choice Properties and the Company. The tenant leases
between Choice Properties and the Company related to these investment properties remained substantially unchanged.
2018 Annual Report - Financial Review Loblaw Companies Limited 47
Management’s Discussion and Analysis
Commitments The following is a summary of the Company’s commitments to Choice Properties as of December 29, 2018:
(millions of Canadian dollars)
Operating lease payments
2019
535
2020
541
2021
549
$
$
2022
555
$
2023
534
Thereafter
$ 2,516
$
$
Payments due by year
As at
December 29, 2018
Total
5,230
$
14. Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements requires management to make estimates and judgments in applying the
Company’s accounting policies that affect the reported amounts and disclosures made in the consolidated financial statements and
accompanying notes.
Within the context of this Annual Report, a judgment is a decision made by management in respect of the application of an accounting
policy, a recognized or unrecognized financial statement amount and/or note disclosure, following an analysis of relevant information that
may include estimates and assumptions. Estimates and assumptions are used mainly in determining the measurement of balances
recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that may include management’s
historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under the
circumstances. Management continually evaluates the estimates and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that the Company believes could
have the most significant impact on the amounts recognized in the consolidated financial statements.
14.1 Consolidation
Judgments Made in Relation to Accounting Policies Applied The Company uses judgment in determining the entities that it controls
and therefore consolidates. The Company controls an entity when the Company has the existing rights that give it the current ability to
direct the activities that significantly affect the entity’s returns. The Company consolidates all of its wholly owned subsidiaries. Judgment is
applied in determining whether the Company controls the entities in which it does not have ownership rights or does not have full
ownership rights. Most often, judgment involves reviewing contractual rights to determine if rights are participating (giving power over the
entity) or protective rights (protecting the Company’s interest without giving it power).
14.2 Inventories
Key Sources of Estimation Inventories are carried at the lower of cost and net realizable value which requires the Company to utilize
estimates related to fluctuations in shrink, future retail prices, the impact of vendor rebates on cost, seasonality and costs necessary to sell
the inventory.
14.3 Impairment of Non-Financial Assets (Goodwill, Intangible Assets and Fixed Assets)
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.
48 2018 Annual Report - Financial Review Loblaw Companies Limited
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 assessing the recoverability of these loans and certain other financial assets 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 at the time the award is earned by members based on the relative fair value of
the award. The relative fair value is determined by allocating consideration between the fair value of the loyalty awards earned by loyalty
program members, net of breakage, and the goods and services on which the awards were earned, based on their relative stand-alone
selling price. The estimated fair value per point for the PC Optimum program is determined based on the program reward schedule and is
$1 for every 1,000 points earned. The breakage rate of the program is an estimate of the amount of points that will never be redeemed.
The rate is reviewed on an ongoing basis and is estimated utilizing historical redemption activity and anticipated earn and redeem
behaviour of members.
14.6 Impairment of Credit Card Receivables
Judgments Made in Relation to Accounting Policies Applied In each stage of the impairment model, impairment is determined based
on the probability of default, loss given default, and expected exposures at default on drawn and undrawn exposures on credit card
receivables, discounted using an average portfolio yield rate. The application of the ECL model requires management to apply the
following significant judgments, assumptions and estimations:
• Movement of impairment measurement between the three stages of the ECL model, based on the assessment of increase in credit
risks on credit card receivables. The assessment of changes in credit risks includes qualitative and quantitative factors of the
accounts, such as historical credit loss experience and external credit scores;
•
•
Thresholds for significant increase in credit risks based on changes in probability of default over the expected life of the instrument
relative to initial recognition; and
Forecasts of future economic conditions.
14.7 Fair Value of Investment Properties
Key Sources of Estimation The fair value of investment properties is dependent on available comparable transactions, future cash flows
over the holding period, and discount rates and capitalization rates applicable to those assets. The review of anticipated cash flow involves
assumptions relating to occupancy, market rental rates, net operating expenses, and residual value. In addition to reviewing anticipated
cash flows, management assesses changes in the business climate and other factors, which may affect the ultimate value of the property.
These assumptions may not ultimately be achieved.
14.8 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.
2018 Annual Report - Financial Review Loblaw Companies Limited 49
Management’s Discussion and Analysis
14.9 Segment Information
Judgments Made in Relation to Determining the Aggregation of Operating Segments The Company uses judgment in assessing the
criteria used to determine the aggregation of operating segments. The Retail reportable operating segment consists of several operating
segments comprised primarily of food retail and Associate-owned drug stores, and also includes in-store pharmacies and other health and
beauty products, gas bars, apparel and other general merchandise. The Company has aggregated its retail operating segments on the
basis of their similar economic characteristics, customers and nature of products. This similarity in economic characteristics reflects the fact
that the Company’s retail operating segments operate primarily in Canada and are therefore subject to the same economic market
pressures and regulatory environment. The Company’s retail operating segments are subject to similar competitive pressures such as
price and product innovation and assortment from existing competitors and new entrants into the marketplace. The similar economic
characteristics also include the provision of centralized, common functions such as marketing and IT across all retail operating segments.
The retail operating segments’ customer profile is primarily individuals who are purchasing goods for their own or their family’s personal
needs and consumption. The nature of products and the product assortment sold by each of the retail operating segments is also similar
and includes grocery, pharmaceuticals, cosmetics, electronics and housewares. The aggregation of the retail operating segments reflects
the nature and financial effects of the business activities in which the Company engages and the economic environment in which it
operates.
14.10 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 and legal claims. 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
On December 31, 2017, the Company implemented IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) and IFRS 9,
“Financial Instruments” (“IFRS 9”), in accordance with International Accounting Standard 8, “Accounting Policies, Changes in Accounting
Estimates and Errors” (“IAS 8”). The impacts on implementation of IFRS 15 and IFRS 9 on the Company’s consolidated financial
statements are described below.
IFRS 15 In 2014, the International Accounting Standards Board (“IASB”) issued IFRS 15, “Revenue from Contracts with Customers”,
replacing IAS 18, “Revenue” (“IAS 18”), 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 is effective for annual periods
beginning on or after January 1, 2018.
The Company adopted the standard on December 31, 2017 and applied 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 applied the practical expedient in which contracts
that began and were completed within the same annual reporting period before December 30, 2017 or were completed on or before
January 1, 2017 do not require restatement.
Under IFRS 15, the Company recognizes revenue when control of the goods or services has been transferred. Revenue is measured at
the amount of consideration to which the Company expects to be entitled to, including variable consideration to the extent that it is highly
probable that a significant reversal will not occur.
Retail segment revenue includes the 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 amount of consideration to which the Company expects to be entitled to, net of estimated returns, sales incentives and franchise fee
reductions. The Company recognizes revenue made through corporate stores, consolidated franchise stores and Associates at the time
the point of sale is made or when service is delivered to the customers. The Company recognizes revenue made through non-consolidated
franchise stores and independent wholesale customers at the time of delivery of inventory and when administrative and management
services are rendered.
50 2018 Annual Report - Financial Review Loblaw Companies Limited
On the initial sale of franchising arrangements, the Company offered products and services as part of an arrangement with multiple
performance obligations. Prior to the implementation of the Franchise Agreement implemented in 2015, the initial sale to non-consolidated
franchise stores were recorded using a relative fair value approach.
For certain sale of goods in which the Company earns commissions, including but not limited to lottery and third party gift cards, the
Company records net revenue as an agent on the basis that the Company does not control pricing or bear inventory risk.
Financial Services segment revenue includes interest income on credit card loans, credit card service fees, commissions, and other
revenue related to financial services. Interest income is recognized using the effective interest method. Credit card service fees are
recognized when services are rendered. Commission revenue is recorded on a net basis. Other revenue is recognized periodically or
according to contractual provisions.
Choice Properties revenue, included as part of Discontinued Operations, 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 prior to the reorganization. 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.
The implementation of IFRS 15 did not have a significant impact on the Company’s Retail, Financial Services or Choice Properties
segment revenue streams, including its franchise arrangements with non-consolidated stores. IFRS 15 impacted the allocation of revenue
that is deferred in relation to the Company’s customer loyalty award programs. Under IAS 18 and related interpretations, revenue was
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 was allocated to the loyalty awards and deferred until the points were ultimately redeemed. The residual
consideration was allocated to the goods and services sold and recognized as revenue. Under IFRS 15, consideration is 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 and recorded as deferred revenue will be, on
average, lower than the amounts allocated under the residual value method. The majority of the Company’s loyalty liability, which is a
contract liability, is expected to be redeemed and recognized as revenue within one year of issuance.
In addition, in the fourth quarter of 2017, the Company recorded a charge before income taxes of $189 million under IAS 18 and related
interpretations, related to the revaluation of the existing loyalty liability for outstanding points to reflect a higher anticipated redemption rate
under the new PC Optimum program. Under IFRS 15, using the relative fair value approach, this revaluation of the loyalty liability
decreased by $24 million, resulting in a charge before income taxes of $165 million.
The impact of the above changes on retained earnings as at January 1, 2017 and December 30, 2017 is as follows:
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Loyalty liability
Income taxes payable
Deferred income tax liabilities
Retained earnings
$
As at
January 1, 2017
(43)
12
—
31
As at
December 30, 2017
(64)
$
11
7
46
The impact of this change on 12 weeks and 52 weeks ended December 30, 2017 is as follows:
Consolidated Statements of Earnings
Increase (Decrease)
(millions of Canadian dollars)
Revenue
SG&A
Income taxes
December 30, 2017
(12 weeks)
$
December 30, 2017
(52 weeks)
(3)
(24)
6
(7) $
(24)
5
The implementation of IFRS 15 had an impact on basic and diluted net earnings per share of $0.03 and $0.04 for 12 weeks and 52 weeks
ended December 30, 2017, respectively.
2018 Annual Report - Financial Review Loblaw Companies Limited 51
Management’s Discussion and Analysis
IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments”, 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 is effective for annual periods beginning on or after
January 1, 2018. The Company implemented 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. The Company also applied related amendments to IFRS 7, “Financial Instruments: Disclosures”. Refer to the Financial
Instruments and Derivative Instruments policy for significant accounting policies under IFRS 9.
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. Financial assets are not reclassified subsequent to their
initial recognition unless the Company identifies changes in its business model in managing financial assets. The adoption of the new
classification requirements under IFRS 9 did not result in significant changes in measurement or the carrying amount of financial assets
and liabilities, with the exception of credit card receivables discussed below.
The following table summarizes the classification impacts upon adoption of IFRS 9:
Asset/Liability
Classification under IAS 39
Classification under IFRS 9
Cash and cash equivalents
Short term investments
Accounts receivable
Credit card receivables
Security deposits
Franchise loans receivable
Certain other assets(ii)
Fair value through profit and loss(i)
Fair value through profit and loss(i)
Loans and receivables
Loans and receivables
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value through profit and loss(i)
Fair value through profit and loss
Loans and receivables
Loans and receivables
Amortized cost
Amortized cost / fair value through profit and loss
Fair value through other comprehensive income
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Certain long term investments
Available-for-sale
Bank indebtedness
Other liabilities
Trade payables and other liabilities
Other liabilities
Short term debt
Long term debt
Trust Unit Liability
Other liabilities
Other liabilities
Fair value through profit and loss(iii)
Fair value through profit and loss
Certain other liabilities
Other liabilities
Derivatives
Fair value through profit and loss(iii)
Amortized cost
Fair value through profit and loss / fair value
through other comprehensive income
(i) Financial instruments designated at fair value through profit and loss.
(ii) Certain other assets include mortgages, notes and loans receivable which are classified as either amortized cost or fair value through profit and loss.
(iii) Financial instruments required to be classified at fair value through profit and loss.
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ECL model. The ECL models applied to financial
assets require judgment, assumptions and estimations on changes in credit risks, forecasts of future economic conditions and historical
information on the credit quality of the financial asset. Consideration of how changes in economic factors affect ECLs will be determined on
a probability-weighted basis. The new impairment model is applied, at each balance sheet date, to financial assets measured at amortized
cost or those measured at fair value through other comprehensive income, except for investments in equity instruments.
52 2018 Annual Report - Financial Review Loblaw Companies Limited
IFRS 9 outlines a three-stage approach to recognizing ECL which is intended to reflect the increase in credit risks of a financial instrument.
The Company applies the ECL model to assess for impairment on its financial assets at each balance sheet date. The Company, through
PC Bank, recognizes loss allowances based on ECL on credit card receivables, which are measured at amortized cost. Credit card
receivables are assessed collectively for impairment, applying the three-stage approach on assessing the impairment on credit card
receivables as described below.
• Stage 1 is comprised of all financial instruments that have not had a significant increase in credit risks since initial recognition or that
have low credit risk at the reporting date. The Company is 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 had a significant increase in credit risks 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. The
Company 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. The Company is
required to recognize impairment based on a lifetime ECL for Stage 3 financial instruments.
In each stage of the impairment model, impairment is determined based on the probability of default, loss given default, and expected
exposures at default on drawn and undrawn exposures on credit card receivables, discounted using an average portfolio yield rate. The
application of the ECL model required PC Bank to apply the following significant judgments, assumptions and estimations:
• Movement of impairment measurement between the three stages of the ECL model, based on the assessment of increase in credit
risks on credit card receivables. The assessment of changes in credit risks includes qualitative and quantitative factors of the
accounts, such as historical credit loss experience and external credit scores;
•
•
Thresholds for significant increase in credit risks based on changes in probability of default over the expected life of the instrument
relative to initial recognition; and
Forecasts of future economic conditions.
The ECL model had a significant impact on PC Bank’s impairment of credit card receivables. The Company revised certain inputs of the
ECL model since the implementation of IFRS 9 in the first quarter of 2018 and has retrospectively applied the impact of these revisions
with no impact to earnings. As a result of the refinements, the cumulative impact arising from the ECL model on the impairment of credit
card receivables as at December 31, 2017 was as follows:
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Credit card receivables
Deferred income tax assets
Income taxes payable
Deferred income tax liabilities
Retained earnings
As at
December 31, 2017
(98)
$
26
4
(4)
(72)
The Company also applied ECL models to the assessment of impairment on trade receivables and other financial assets of the Company.
The Company adopted the practical expedient to determine ECL on trade receivables using a provision matrix based on historical credit
loss experiences to estimate lifetime ECL. The ECL models applied to other financial assets also required judgment, assumptions and
estimations on changes in credit risks, forecasts of future economic conditions and historical information on the credit quality of the
financial asset. The provision matrix and ECL models applied do not have a material impact on trade receivables and other financial assets
of the Company.
Impairment losses are recorded in SG&A 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 conditions and changes in factors 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.
2018 Annual Report - Financial Review Loblaw Companies Limited 53
Management’s Discussion and Analysis
General hedging IFRS 9 requires the Company to ensure that hedge accounting relationships are aligned with the Company’s risk
management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. The
Company’s risk management strategy and hedging activities are disclosed in the notes to the consolidated financial statements.
15.2 Changes to Significant Accounting Policies
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.
The Company elected to change the measurement of investment properties from the cost model to the fair value model retrospectively with
restatement. Prior to the second quarter of 2018, the Company recognized investment properties at cost less accumulated depreciation
and any accumulated impairment losses.
Under the fair value model, investment properties are initially measured at cost and subsequently measured at fair value. Fair value is
determined based on available market evidence. If market evidence is not readily available in less active markets, the Company uses
alternative valuation methods such as discounted cash flow projections or recent transaction prices. Under the discounted cash flow
methodology, discount rates are applied to the projected annual operating cash flows, generally over a minimum term of ten years,
including a terminal value of the investment properties based on a capitalization rate applied to the estimated net operating income, a non-
GAAP measure, in the terminal year. Gains and losses on fair value are recognized in operating income in the period in which they are
incurred. Gains and losses from disposal of investment properties are determined by comparing the fair value of disposal proceeds and the
carrying amount and are recognized in operating income.
The Company applied this change in accounting policy retrospectively in the second quarter of 2018. The impacts to the Company’s
comparative consolidated balance sheets are as follows:
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Investment properties
Deferred income tax liabilities
Retained earnings
As at
December 30, 2017
41
$
5
36
$
As at
January 1, 2017
41
5
36
The change in accounting policy had no impact on net earnings for the comparative periods.
15.3 Future Accounting Standards
The future accounting standard 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 a comprehensive project
plan to guide the implementation.
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. Lessees recognize a right-of-use asset representing its control of and right to use the underlying asset and a
lease liability representing its obligation to make future lease payments. Lessor accounting remains similar to IAS 17.
Substantially all of the Company's operating leases are real estate leases for retail stores, distribution centers and corporate offices. Other
leased assets include passenger vehicles, trucks and IT equipment. The Company also has owned and leased properties which are leased
and subleased to third parties, respectively. The subleases are mainly related to non-consolidated franchisees, ancillary tenants and gas
bar land.
As a lessee, the Company will recognize right-of-use assets and lease liabilities primarily for its operating leases of real estate properties,
vehicles and equipment. The depreciation expense on right-of-use assets and interest expense on lease liabilities will replace rent
expense, previously recognized on a straight-line basis under IAS 17 over the term of a lease. No significant impacts are expected for the
Company’s existing finance leases.
As an intermediate lessor, the Company will reassess the classification of its subleases by reference to the right-of-use assets arising from
the head lease and will recognize a corresponding finance lease receivable if the reassessment concludes that the sublease is a finance
lease. No significant impacts are expected for leases where the Company is the lessor.
54 2018 Annual Report - Financial Review Loblaw Companies Limited
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 fully retrospective approach or a modified retrospective approach on transition to IFRS 16. The Company has
adopted the standard on December 30, 2018 using the modified retrospective approach. The modified retrospective approach applies the
requirements of the standard retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at
December 30, 2018, and no restatement of the comparative period. Under the modified retrospective approach, the Company chose to
measure all right-of-use assets retrospectively as if the standard had been applied since lease commencement dates.
exclude certain short-term leases from IFRS 16 lease accounting;
grandfather the definition of a lease for existing contracts at the date of initial application;
IFRS 16 permits the use of recognition exemptions and practical expedients. The Company has applied the following recognition
exemptions and practical expedients:
•
•
•
•
•
•
apply a single discount rate to a portfolio of leases with reasonably similar characteristics at the date of initial application;
exclude initial direct costs from the measurement of the right-of-use assets at the date of initial application; and
use portfolio application for leases with similar characteristics, such as vehicle and equipment leases;
use hindsight in determining lease term at the date of initial application.
While the standard was adopted on December 30, 2018, the Company continues to assess the impact of the standard on the Company’s
business processes, internal controls over financial reporting, data systems, IT, and financing and compensation arrangements. The
Company has implemented a lease management system and is in the final stages of refining and validating the inputs and key
assumptions used in its calculation of the cumulative effects of initial application to be recorded in opening retained earnings as at
December 30, 2018.
Based on the information available as at February 20, 2019, as a result of the initial application of IFRS 16 as at December 30, 2018,
Management anticipates recognizing approximately $7.5 billion to $8.0 billion of right-of-use assets and $9.0 billion to $9.5 billion of lease
liabilities, inclusive of current finance leases, on its consolidated balance sheet, and derecognizing approximately $300 million of deferred
rent obligation from its consolidated balance sheet, with the difference, net of the deferred tax impact, recorded in opening retained
earnings. Certain other balance sheet accounts will be impacted by amounts required to be reclassified on the adoption of IFRS 16. The
standard is not expected to materially impact the Company’s year-over-year net earnings in 2019 and has no impact on total cash flows.
On a go-forward basis, there will be a decrease in rent expense and an increase in depreciation and amortization and net interest expense
and other financing charges for the Company’s operating leases. In 2018, the Company recognized approximately $1.2 billion of rent
expense related to its operating leases and other arrangements that will now be accounted for as finance leases under IFRS 16.
The actual impacts of the initial application of IFRS 16 may vary from the estimates provided for the following reasons:
•
•
the Company has not finalized the assessment and testing of applicable internal controls over financial reporting; and
the new accounting policies and critical accounting estimates and judgments are subject to change until the Company issues its first
quarter report to shareholders for the 12 weeks ending March 23, 2019.
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.
The Company will remain focused on delivering Process and Efficiency improvements to offset increasing costs and to fund
continued incremental investments in its strategic growth areas of Everyday Digital Retail, Connected Healthcare and Payments &
Rewards.
In 2019, on a full-year comparative basis, excluding the impact of the spin-out of Choice Properties, we expect to:
deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive market;
•
deliver positive adjusted net earnings growth;
•
invest approximately $1.1 billion in capital expenditures, net of proceeds from property disposals; and
•
return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.
•
2018 Annual Report - Financial Review Loblaw Companies Limited 55
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; and
adjusted return on capital. 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.
The Company’s interest in Choice Properties has been presented separately as Discontinued Operations in the Company’s current and
comparative results. Unless otherwise indicated, all financial information represents the Company’s results from Continuing Operations.
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.
2018
(12 weeks)
2017(4)(5)
(12 weeks)
For the periods ended December 29, 2018 and
December 30, 2017
(millions of Canadian dollars)
Revenue
Retail
$ 10,976 $
Financial
Services
336
Eliminations
$
Total
(94) $ 11,218
Retail
$ 10,795 $
Financial
Services
274
Eliminations
$
Total
(77) $ 10,992
Cost of Merchandise Inventories Sold
7,722
Gross Profit
Adjusted Gross Profit
$ 3,254 $
$ 3,254 $
58
278
278
$
$
—
7,780
7,623
(94) $ 3,438
$ 3,172 $
(94) $ 3,438
$ 3,172 $
34
240
240
$
$
—
7,657
(77) $ 3,335
(77) $ 3,335
For the periods ended December 29, 2018 and
December 30, 2017
(millions of Canadian dollars)
Revenue
Retail
Financial
Services
$ 45,836 $ 1,082
Eliminations
$
Total
(225) $ 46,693
Retail
$ 45,867 $
Financial
Services
953
Eliminations
$
Total
(233) $ 46,587
2018
(52 weeks)
2017(4)(5)
(52 weeks)
Cost of Merchandise Inventories Sold
32,396
$ 13,440 $
141
941
— 32,537
32,814
99
— 32,913
$
(225) $ 14,156
$ 13,053 $
854
$
(233) $ 13,674
Gross Profit
Add impact of the following:
Impact of healthcare reform on
inventory balances
Adjusted Gross Profit
19
—
—
19
—
—
—
—
$ 13,459 $
941
$
(225) $ 14,175
$ 13,053 $
854
$
(233) $ 13,674
Impact of healthcare reform on inventory balances In the first quarter of 2018, the Company recorded an inventory provision for the
write-down of inventories below cost to net realizable value, related to its generic drug inventory, as a result of healthcare reform
announced in the first quarter of 2018, effective April 1, 2018.
56 2018 Annual Report - Financial Review Loblaw Companies Limited
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.
For the periods ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars)
Financial
Services Consolidated
Retail
Retail
Financial
Services Consolidated
Net earnings attributable to shareholders of the Company
$
231
$
(21)
2018
(12 weeks)
2017(4)(5)
(12 weeks)
Add (deduct) impact of the following:
Non-Controlling Interests
Net interest expense and other financing charges
Income taxes
Operating income
Add (deduct) impact of the following:
Amortization of intangible assets acquired with
Shoppers Drug Mart
Fixed asset and other related impairments, net of
recoveries
Fair value adjustment on fuel and foreign currency
contracts
Fair value adjustment on investment properties
Spin-out of Choice Properties
Certain prior period items
PC Optimum Program
Loblaw Card Program
Prior year land transfer tax recovery
Wind-down of PC Financial banking services
Restructuring and other related costs
Adjusting Items
Adjusted operating income
Depreciation and amortization
Less: Amortization of intangible assets acquired with
Shoppers Drug Mart
Adjusted EBITDA
$
$
$
$
83
8
5
2
—
—
—
—
—
$
$
(4)
214
622
353
(120)
$
855
$
19
95
100
445
408
$
37
$
120
$
— $
120
$
$
14
89
(25)
57
(10) $
67
$
121
$
— $
121
—
—
—
—
—
—
—
—
—
—
— $
37
3
—
40
$
$
83
8
5
2
—
—
—
—
—
(4)
214
659
356
$
$
53
(5)
—
—
(4)
187
107
(9)
—
171
621
611
339
$
$
(120)
(121)
895
$
829
$
—
—
—
—
—
—
—
—
(17)
—
(17)
50
3
—
53
$
$
$
53
(5)
—
—
(4)
187
107
(9)
(17)
171
604
661
342
(121)
882
2018 Annual Report - Financial Review Loblaw Companies Limited 57
Management’s Discussion and Analysis
For the periods ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars)
Financial
Services Consolidated
Retail
Financial
Services Consolidated
Retail
Net earnings attributable to shareholders of the Company
$
719
$
1,286
2018
(52 weeks)
2017(4)(5)
(52 weeks)
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
Fixed asset and other related impairments, net of
recoveries
Impact of health care reform on inventory balances
Restructuring and other related costs
Spin-out of Choice Properties
Fair value adjustment on investment properties
Loblaw Card Program
Pension annuities and buy-outs
PC Optimum Program
Certain prior period items
Prior year land transfer tax recovery
Gain on disposition of gas bar operations
Fair value adjustment on fuel and foreign currency
contracts
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
34
564
606
24
374
365
$ 1,717
$
206
$
1,923
$ 1,843
$
206
$
2,049
$
521
$
— $
521
$
524
$
— $
524
83
19
10
8
6
4
1
—
—
—
—
(3)
—
$
$
$
649
$ 2,366
1,487
(521)
—
—
—
—
—
—
—
—
—
—
—
—
(20)
(20) $
186
$
10
—
83
19
10
8
6
4
1
—
—
—
—
(3)
(20)
53
—
177
—
—
107
12
187
(4)
(9)
(501)
20
—
629
$
566
2,552
1,497
$ 2,409
1,444
$
$
(521)
(524)
—
—
—
—
—
—
—
—
—
—
—
—
(24)
(24) $
$
182
10
—
53
—
177
—
—
107
12
187
(4)
(9)
(501)
20
(24)
542
2,591
1,454
(524)
$ 3,332
$
196
$
3,528
$ 3,329
$
192
$
3,521
58 2018 Annual Report - Financial Review Loblaw Companies Limited
In addition to the items described in the Retail segment adjusted gross profit section above, adjusted EBITDA 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.
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.
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.
Spin-out of Choice Properties The Company recorded transaction and other related costs in connection with the spin-out of its interest in
Choice Properties.
Fair value adjustment to investment properties The Company elected to change the measurement of investment properties from cost
model to fair value model. Prior to the second quarter of 2018, the Company recognized investment properties at cost less accumulated
depreciation and any accumulated impairment losses. Under the fair value model, investment properties are initially measured at cost and
subsequently measured at fair value. Fair value is determined based on available market evidence. If market evidence is not readily
available in less active markets, the Company uses alternative valuation methods such as discounted cash flow projections or recent
transaction prices. Gains and losses on fair value are recognized in operating income in the period in which they are incurred. Gains and
losses from disposal of investment properties are determined by comparing the fair value of disposal proceeds and the carrying amount
and are recognized in operating income.
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 offered customers a $25 Loblaw Card, which can be used to
purchase items sold in Loblaw grocery stores across Canada. The Company recorded a charge of $107 million associated with the Loblaw
Card Program in the fourth quarter of 2017. In 2018, the Company recorded an additional charge of $4 million.
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.
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 $165 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.
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 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.
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.
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.
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 PC Financial
brand. As a result of this agreement, PC Bank received a payment of approximately $44 million, net of certain costs incurred, $20 million of
which was recognized in the first half of 2018 and $24 million which was recognized in 2017.
2018 Annual Report - Financial Review Loblaw Companies Limited 59
Management’s Discussion and Analysis
Adjusted Net Interest Expense and Other Financing Charges The following table reconciles adjusted net interest expense and other
financing charges to net interest 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 29, 2018 and December 30, 2017
(millions of Canadian dollars)
Net interest expense and other financing charges
Add (deduct) impact of the following:
Charge related to Glenhuron
Spin-out of Choice Properties
Adjusted net interest expense and other financing charges
2018
(12 weeks)
95
—
(1)
94
$
$
2017(5)
(12 weeks)
89
—
—
89
$
$
2018
(52 weeks)
564
(176)
(1)
387
$
$
2017(5)
(52 weeks)
374
—
—
374
$
$
Charge related to Glenhuron In the third quarter of 2018, the Company recorded a charge of $367 million related to the Tax Court of
Canada’s decision on Glenhuron. Of the total charge, $176 million was recorded in net interest and other financing charges and
$191 million was recorded in income taxes.
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 29, 2018 and December 30, 2017
(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)
Charge related to Glenhuron
Remeasurement of deferred tax balances
Adjusted income taxes
Effective tax rate
Adjusted income tax rate
$
$
$
$
2018
(12 weeks)
659
94
565
100
55
—
—
155
28.6%
27.4%
$
$
$
$
2017(4)(5)
(12 weeks)
661
89
572
(25)
165
—
17
157
78.1%
27.4%
$
$
$
$
2018
(52 weeks)
2,552
387
2,165
606
165
(191)
—
580
44.6%
26.8%
$
$
$
$
2017(4)(5)
(52 weeks)
2,591
374
2,217
365
214
—
17
596
21.8%
26.9%
(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.
Charge related to Glenhuron In the third quarter of 2018, the Company recorded a charge of $367 million related to the Tax Court of
Canada’s decision on Glenhuron. Of the total charge, $176 million was recorded in net interest and other financing charges and
$191 million was recorded in income taxes.
60 2018 Annual Report - Financial Review Loblaw Companies Limited
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 29, 2018 and December 30, 2017
(millions of Canadian dollars except where otherwise indicated)
Net earnings attributable to shareholders of the Company
Net earnings from Discontinued Operations
Net earnings attributable to shareholders of the Company from
Continuing Operations
Prescribed dividends on preferred shares in share capital
Net earnings available to common shareholders of the Company
from Continuing Operations
Net earnings attributable to shareholders of the Company from
Continuing Operations
Adjusting items (refer to the following table)
Adjusted net earnings attributable to shareholders of the Company
from Continuing Operations
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)
$
$
$
$
$
$
2018
(12 weeks)
224
(7)
231
(3)
228
231
160
391
(3)
388
376.1
2017(4)(5)
(12 weeks)
34
55
(21)
(3)
(24)
(21)
422
401
(3)
398
390.5
$
$
$
$
$
$
2018
(52 weeks)
766
47
719
(12)
707
719
832
1,551
(12)
1,539
379.3
$
$
$
$
$
$
2017(4)(5)
(52 weeks)
1,517
231
1,286
(12)
1,274
1,286
311
1,597
(12)
1,585
397.3
$
$
$
$
$
$
2018 Annual Report - Financial Review Loblaw Companies Limited 61
Management’s Discussion and Analysis
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.
2018
(12 weeks)
2017(4)(5)
(12 weeks)
2018
(52 weeks)
2017(4)(5)
(52 weeks)
For the periods ended December 29, 2018 and
December 30, 2017
(millions of Canadian dollars/Canadian dollars)
Continuing Operations
Discontinued Operations
As reported
Continuing Operations
Add (deduct) impact of the following:
Amortization of intangible assets acquired with
Shoppers Drug Mart
Fixed asset and other related impairments, net of
recoveries
Fair value adjustment on fuel and foreign currency
contracts
Fair value adjustment on investment properties
Spin-out of Choice Properties
Charge related to Glenhuron
Loblaw Card Program
Wind-down of PC Financial banking services
Gain on disposition of gas bar operations
Prior year land transfer tax recovery
Pension annuities and buy-outs
Certain prior period items
PC Optimum Program
Remeasurement of deferred tax balances
Impact of health care reform on inventory balances
Restructuring and other related costs
Adjusting items Continuing Operations
Adjusted Continuing Operations
Discontinued Operations
Add (deduct) impact of the following:
Fair value adjustment on Trust Unit Liability(i)
CREIT acquisition and other related costs
Gain on sale of air rights
Restructuring and other related costs
Fair value adjustment on investment properties
Adjusting items Discontinued Operations
Adjusted Discontinued Operations
Adjusted Total Company
$
$
$
$
$
$
$
$
$
$
$
Net Earnings
Available to
Common
Shareholders
of the
Company
Diluted
Net
Earnings
Per
Common
Share
228 $ 0.61
(0.02)
221 $ 0.59
(7)
228 $ 0.61
89 $ 0.23
Net Earnings
Available to
Common
Shareholders
of the
Company
Diluted
Net
Earnings
Per
Common
Share
(24) $ (0.06)
55
0.14
31 $ 0.08
(24) $ (0.06)
89 $ 0.23
$
$
$
$
$
$
$
$
Net Earnings
Available to
Common
Shareholders
of the
Company
Diluted
Net
Earnings
Per
Common
Share
707 $ 1.87
47
0.12
754 $ 1.99
Net Earnings
Diluted
Available to
Net
Common
Earnings
Shareholders
Per
of the
Common
Company
Share
1,274 $ 3.21
0.58
1,505 $ 3.79
231
$
$
707 $ 1.87
$
1,274 $ 3.21
383 $ 1.01
$
384 $ 0.97
60
0.16
40
0.10
60
0.16
40
0.10
6
4
3
—
—
—
—
—
—
—
—
—
—
0.02
0.01
0.01
—
—
—
—
—
—
—
—
—
—
(2)
(0.01)
160 $ 0.42
388 $ 1.03
(7) $ (0.02)
27 $ 0.08
—
1
—
—
—
(1)
(0.02)
(6)
21 $ 0.06
14 $ 0.04
402 $ 1.07
$
$
$
$
$
$
$
(4)
—
—
—
79
(13)
—
(7)
—
(13)
137
(17)
—
131
(0.01)
—
—
—
0.20
(0.03)
—
(0.02)
—
(0.03)
0.35
(0.04)
—
0.33
422 $ 1.08
398 $ 1.02
55 $ 0.14
(12) $ (0.03)
—
—
—
—
(0.01)
(5)
—
—
(17) $ (0.04)
38 $ 0.10
436 $ 1.12
$
$
$
$
$
$
$
(2)
5
9
367
3
(15)
—
—
1
—
—
—
14
(0.01)
0.01
0.02
0.97
0.01
(0.04)
—
—
—
—
—
—
0.04
7
0.02
832 $ 2.19
1,539 $ 4.06
47 $ 0.12
33 $ 0.09
0.31
119
(0.03)
(11)
(0.03)
(11)
0.08
30
160 $ 0.42
207 $ 0.54
1,746 $ 4.60
14
—
—
—
79
(18)
(432)
(7)
9
(13)
137
(17)
—
0.04
—
—
—
0.20
(0.05)
(1.09)
(0.02)
0.02
(0.03)
0.34
(0.04)
—
135
0.34
311 $ 0.78
1,585 $ 3.99
231 $ 0.58
(10) $ (0.03)
—
—
—
—
(0.02)
(9)
—
—
(19) $ (0.05)
212 $ 0.53
1,797 $ 4.52
$
$
$
$
$
$
$
(i) Gains or losses related to the fair value adjustment to the Trust Unit Liability are not subject to tax.
62 2018 Annual Report - Financial Review Loblaw Companies Limited
In addition to the items described in the Retail segment adjusted gross profit(2) and adjusted EBITDA(2) section above, adjusted net
earnings available to common shareholders of the Company was impacted by the following:
Fair value adjustment to the Trust Unit Liability Prior to the spin-out of Choice Properties, the Company was exposed to market price
fluctuations as a result of the Units held by unitholders other than the Company. These Units were presented as a liability on the
Company’s consolidated balance sheets as they were redeemable for cash at the option of the holder, subject to certain restrictions. The
liability was 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.
CREIT acquisition and other related costs The Company recorded acquisition and other related costs in connection with Choice
Properties’ acquisition of CREIT in discontinued operations in the second quarter of 2018.
Gain on sale of air rights In the third quarter of 2018, a joint venture owned by Choice Properties completed the sale of air rights on one
of its properties. The Company recorded a gain in discontinued operations of $11 million in the third quarter related to the sale.
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 29, 2018 and December 30, 2017
(millions of Canadian dollars)
Cash flows from operating activities from Continuing Operations(i)
Cash flows from operating activities from Discontinued Operations(i)
Cash flows from operating activities Total Company
Cash flows from operating activities from Continuing Operations(i)
Less:
Capital investments
Interest paid
Free cash flow from Continuing Operations
Cash flows from operating activities from Discontinued Operations(i)
Less:
Capital investments
Interest paid
Free cash flow from Discontinued Operations
Free cash flow from Total Company
2018
(12 weeks)
310
4
314
310
414
58
(162)
4
68
31
(95)
(257)
$
$
$
$
$
$
2017(4)(5)
(12 weeks)
1,005
81
1,086
1,005
399
40
566
81
88
44
(51)
515
$
$
$
$
$
$
$
$
$
$
$
$
2018
(52 weeks)
2,249
252
2,501
2,249
1,070
509
670
252
264
292
$
$
$
$
$
(304)
$
366
2017(4)(5)
(52 weeks)
3,000
209
3,209
3,000
1,026
323
1,651
209
233
148
(172)
1,479
(i) Cash flows from operating activities from Continuing Operations include distributions received in 2018 and the payment related to the conversion of Class C LP Units in
2018 from Discontinued Operations. Cash flows from Discontinued Operations include the outflow of these items.
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.
18. Additional Information
Additional information about the Company has been filed electronically with various securities regulators in Canada through the System for
Electronic Document Analysis and Retrieval (SEDAR) and is available online at sedar.com and with OSFI as the primary regulator for the
Company’s subsidiary, PC Bank.
February 20, 2019
Toronto, Canada
2018 Annual Report - Financial Review Loblaw Companies Limited 63
Management’s Discussion and Analysis
MD&A Endnotes
For financial definitions and ratios refer to the Glossary of Terms on page 140 of the Company’s 2018 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) Comparative figures have been restated as a result of the implementation of IFRS 15, “Revenue from Contracts with Customers”. See note 2 in the Company’s 2018
To be read in conjunction with Section 1 “Forward-Looking Statements”.
Annual Report.
(5) Comparative figures have been restated to conform with current year presentation.
64 2018 Annual Report - Financial Review Loblaw Companies Limited
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
Accounts Receivable
Nature and Description of the Reporting Entity
Significant Accounting Policies
Critical Accounting Estimates and Judgments
Future Accounting Standards
Business Acquisitions
Discontinued Operations
Net Interest Expense and Other Financing Charges
Income Taxes
Basic and Diluted Net Earnings per Common Share
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Note 10. Cash and Cash Equivalents, Short Term Investments and Security Deposits
Note 11.
Note 12. Credit Card Receivables
Inventories
Note 13.
Assets Held for Sale and Disposition
Note 14.
Fixed Assets
Note 15.
Investment Properties
Note 16.
Note 17.
Intangible Assets
Note 18. Goodwill
Note 19. Other Assets
Note 20. Customer Loyalty Awards Program Liability
Provisions
Note 21.
Long Term Debt
Note 22.
Note 23. Other Liabilities
Note 24.
Note 25. Capital Management
Note 26.
Note 27.
Note 28.
Note 29.
Note 30.
Note 31.
Note 32. Contingent Liabilities
Financial Guarantees
Note 33.
Note 34. Related Party Transactions
Note 35.
Post-Employment and Other Long Term Employee Benefits
Equity-Based Compensation
Employee Costs
Leases
Financial Instruments
Financial Risk Management
Segment Information
Share Capital
Three Year Summary
Glossary of Terms
66
67
69
70
71
72
73
74
74
74
90
92
93
94
98
98
100
101
101
102
103
103
104
106
107
108
109
109
110
111
114
115
117
118
123
126
126
128
130
131
132
133
136
138
140
2018 Annual Report - Financial Review Loblaw Companies Limited 65
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 20, 2019
[signed]
Galen G. Weston
Executive Chairman
[signed]
Darren Myers
Chief Financial Officer
66 2018 Annual Report - Financial Review Loblaw Companies Limited
Independent Auditors’ Report
To the Shareholders of Loblaw Companies Limited
Opinion
the consolidated statements of earnings for the 52 week years then ended
the consolidated balance sheets as at December 29, 2018 and December 30, 2017
We have audited the consolidated financial statements of Loblaw Companies Limited (the “Entity”), which comprise:
•
•
•
•
•
•
and notes to the consolidated financial statements, including a summary of significant accounting policies
the consolidated statements of comprehensive income for the 52 week years then ended
the consolidated statements of changes in equity for the 52 week years then ended
the consolidated statements of cash flows for the 52 week years then ended
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity
as at December 29, 2018 and December 30, 2017, and its consolidated financial performance and its consolidated cash flows for the 52
week years then ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards
are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in
Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. Other information comprises:
•
•
the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon, included in a document entitled “2018 Annual
Report - Financial Review”.
•
the information, other than the financial statements and the auditors’ report thereon, included in a document likely to be entitled “2018
Annual Report”.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and
remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis and a document entitled “2018 Annual Report - Financial
Review” filed with the relevant Canadian Securities Commissions as at the date of this auditors’ report. If, based on the work we have
performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report
that fact in the auditors’ report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditors’ report thereon, included in a document likely to be entitled “2018
Annual Report” is expected to be made available to us after the date of this auditors’ report. If, based on the work we will perform on this
other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those
charged with governance.
2018 Annual Report - Financial Review Loblaw Companies Limited 67
Independent Auditors’ Report
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such
internal control as management determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either
intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our
opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report
to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are
based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Entity
to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
• Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group
Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the
group audit. We remain solely responsible for our audit opinion.
Toronto, Canada
February 20, 2019
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report is Sebastian Distefano.
68 2018 Annual Report - Financial Review Loblaw Companies Limited
Consolidated Statements of Earnings
For the years ended December 29, 2018 and December 30, 2017
(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 7)
Earnings Before Income Taxes
Income taxes (note 8)
Net Earnings from Continuing Operations
Net Earnings from Discontinued Operations (note 6)
Net Earnings
Attributable to:
Shareholders of the Company
Non-Controlling Interests
Net Earnings
Net Earnings per Common Share - Basic ($) (note 9)
Continuing Operations
Discontinued Operations
Net Earnings per Common Share - Diluted ($) (note 9)
Continuing Operations
Discontinued Operations
Weighted Average Common Shares Outstanding (millions) (note 9)
Basic
Diluted
(i) Comparative figures have been restated (notes 2 and 6).
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018
46,693
32,537
12,233
1,923
564
1,359
606
753
47
800
766
34
800
1.88
0.12
1.87
0.12
376.7
379.3
2017(i)
46,587
32,913
11,625
2,049
374
1,675
365
1,310
231
1,541
1,517
24
1,541
3.24
0.58
3.21
0.58
393.8
397.3
2018 Annual Report - Financial Review Loblaw Companies Limited 69
Consolidated Statements of Comprehensive Income
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars)
Net Earnings from Continuing Operations
Other comprehensive income (loss), net of taxes
Items that are or may be subsequently reclassified to profit or loss:
Foreign currency translation adjustment (loss) gain
Unrealized (loss) gain on cash flow hedges (note 30)
Items that will not be reclassified to profit or loss:
Net defined benefit plan actuarial gains (losses) (note 26)
Adjustment to fair value on transfer of investment properties (note 16)
Other comprehensive income (loss) from continuing operations
Comprehensive Income from Continuing Operations
Net Earnings from Discontinued Operations (note 6)
Other comprehensive income from discontinued operations
Comprehensive Income from Discontinued Operations
Total Comprehensive Income
Attributable to:
Shareholders of the Company
Non-Controlling Interests
Total Comprehensive Income
(i) Comparative figures have been restated (notes 2 and 6).
See accompanying notes to the consolidated financial statements.
2018
753
(2)
(3)
91
16
102
855
47
5
52
907
873
34
907
$
$
$
$
$
$
$
$
$
2017(i)
1,310
3
2
(19)
—
(14)
1,296
231
—
231
1,527
1,503
24
1,527
$
$
$
$
$
$
$
$
$
70 2018 Annual Report - Financial Review Loblaw Companies Limited
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
Adjustment to
fair value on
transfer of
investment
properties
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests
Total
Equity
Balance at December 30, 2017
$7,445 $ 221 $7,666 $5,280 $
110 $
36 $
2 $
Impact of adopting IFRS 9 (note 2)
—
—
—
(72)
—
—
—
Restated balance as at December 31, 2017 $7,445 $ 221 $7,666 $5,208 $
110 $
36 $
2 $
Net earnings
$ — $ — $ — $ 766 $
— $ — $ — $
Other comprehensive income (loss)
—
—
—
91
—
(2)
2
— $
—
— $
— $
16
38 $
40 $13,134
—
38 $
— $
16
—
(72)
40 $13,062
34 $
—
800
107
907
Total Comprehensive Income (Loss)
$ — $ — $ — $ 857 $
— $
(2) $
2 $
16 $
16 $
34 $
Common shares purchased and cancelled
(note 24)
(381)
— (381)
(886)
Net effect of equity-based compensation
(notes 24 and 27)
Shares purchased and held in trust (note 24)
Shares released from trust (note 27)
Discontinued operations (note 6)
Dividends declared per common share –
$1.155 (note 24)
Dividends declared per preferred share –
$1.325 (note 24)
Tax impact on conversion of Class C LP Units
(note 6)
Net distribution to non-controlling interests
98
(12)
12
—
—
—
—
—
—
—
—
—
—
—
—
—
98
(12)
12
(11)
(24)
25
— (144)
— (433)
—
—
—
(12)
—
—
—
(3)
—
—
8
—
—
(8)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5)
—
—
—
—
— (1,267)
—
—
—
84
(36)
37
(9)
(150)
—
—
—
(6)
(433)
(12)
(8)
(6)
Balance at December 29, 2018
$7,162 $ 221 $7,383 $4,580 $
107 $
34 $
(1) $
$ (283) $ — $ (283) $ (628) $
(3) $
(2) $
(3) $
16 $
16 $
11 $
49 $
19 $
(884)
59 $12,178
(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
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests
Cash Flow
Hedges
Total
Equity
Balance at December 31, 2016
$ 7,692 $ 221 $ 7,913 $ 4,944 $
112 $
33 $
— $
33 $
26 $13,028
Impact of adopting IFRS 15 (note 2)
Impact of change in accounting policy (note 2)
—
—
—
—
—
—
31
36
—
—
—
—
Restated balance as at January 1, 2017
$ 7,692 $ 221 $ 7,913 $ 5,011 $
112 $
33 $
Net earnings(i)
$ — $ — $ — $ 1,517 $
— $ — $
Other comprehensive income (loss)
—
—
—
(19)
—
3
Total Comprehensive Income (Loss)
$ — $ — $ — $ 1,498 $
— $
3 $
Common shares purchased and cancelled (note 24)
(301)
Net effect of equity-based compensation
(notes 24 and 27)
Shares purchased and held in trust (note 24)
Shares released from trust (note 27)
Dividends declared per common share – $1.070
(note 24)
Dividends declared per preferred share – $1.325
(note 24)
Net distribution to non-controlling interests
48
(13)
19
—
—
—
—
—
—
—
—
—
—
(301)
(790)
48
(13)
19
—
—
—
—
(35)
29
(421)
(12)
—
—
(2)
—
—
—
—
—
—
—
—
—
—
—
—
$ (247) $ — $ (247) $ 269 $
(2) $
3 $
Balance at December 30, 2017
$ 7,445 $ 221 $ 7,666 $ 5,280 $
110 $
36 $
—
—
— $
— $
2
2 $
—
—
—
—
—
—
—
2 $
2 $
(i) Comparative figures have been restated (notes 2 and 6).
See accompanying notes to the consolidated financial statements.
—
—
33 $
— $
—
—
31
36
26 $13,095
24 $ 1,541
5
—
(14)
5 $
24 $ 1,527
— (1,091)
—
—
—
—
—
—
—
—
—
—
—
—
(10)
46
(48)
48
(421)
(12)
(10)
39
5 $
14 $
38 $
40 $13,134
2018 Annual Report - Financial Review Loblaw Companies Limited 71
Consolidated Balance Sheets
(millions of Canadian dollars)
Assets
Current Assets
Cash and cash equivalents (note 10)
Short term investments (note 10)
Security deposits (note 10)
Accounts receivable (note 11)
Credit card receivables (note 12)
Inventories (note 13)
Prepaid expenses and other assets
Assets held for sale (note 14)
Total Current Assets
Fixed Assets (note 15)
Equity Accounted Joint Ventures
Investment Properties (note 16)
Intangible Assets (note 17)
Goodwill (note 18)
Deferred Income Tax Assets (note 8)
Franchise Loans Receivable (note 30)
Other Assets (note 19)
Total Assets
Liabilities
Current Liabilities
Bank indebtedness (note 33)
Trade payables and other liabilities
Loyalty liability (note 20)
Provisions (note 21)
Income taxes payable
Short term debt (note 12)
Long term debt due within one year (note 22)
Associate interest
Total Current Liabilities
Provisions (note 21)
Long Term Debt (note 22)
Trust Unit Liability
Deferred Income Tax Liabilities (note 8)
Other Liabilities (note 23)
Total Liabilities
Equity
Share Capital (note 24)
Retained Earnings
Contributed Surplus (note 27)
Accumulated Other Comprehensive Income
Total Equity Attributable to Shareholders of the Company
Non-Controlling Interests
Total Equity
Total Liabilities and Equity
(i) Certain comparative figures have been restated (note 2).
Contingent Liabilities (note 32).
See accompanying notes to the consolidated financial statements.
72 2018 Annual Report - Financial Review Loblaw Companies Limited
As at
December 29, 2018
As at
December 30, 2017(i)
$
$
$
$
$
$
$
$
$
$
1,065
94
800
1,198
3,329
4,803
304
44
11,637
5,931
—
234
7,798
3,942
144
78
389
30,153
56
5,302
228
165
131
915
1,647
260
8,704
152
6,379
—
1,947
793
17,975
7,383
4,580
107
49
12,119
59
12,178
30,153
$
$
$
$
$
$
$
$
$
$
1,798
546
—
1,188
3,100
4,438
224
33
11,327
10,669
19
276
8,251
3,922
134
166
383
35,147
110
5,233
349
283
128
640
1,635
263
8,641
169
9,542
972
1,989
700
22,013
7,666
5,280
110
38
13,094
40
13,134
35,147
Consolidated Statements of Cash Flows
For the years ended December 29, 2018 and December 30, 2017
(millions of Canadian dollars)
Operating Activities
Net earnings
Add (Deduct):
Income taxes (notes 6 and 8)
Net interest expense and other financing charges (notes 6 and 7)
Adjustment to fair value of investment properties
Depreciation and amortization
Asset impairments, net of recoveries
Gain on disposition of gas bar operations
Change in provisions (notes 6 and 21)
PC Optimum program (note 20)
Change in non-cash working capital
Change in credit card receivables (note 12)
Income taxes paid
Interest received
Other
Cash Flows from Operating Activities
Investing Activities
Fixed asset purchases
Intangible asset additions (note 17)
Acquisition of CREIT, net of cash acquired (note 6)
Cash assumed on initial consolidation of franchises (note 5)
Cash disposed of related to Discontinued Operations (note 6)
Change in short term investments (note 10)
Change in security deposits (note 10)
Proceeds from disposal of assets
Proceeds from disposition of gas bar operations
Other
Cash Flows used in Investing Activities
Financing Activities
Change in bank indebtedness
Change in short term debt (note 12)
Long Term Debt (note 22)
Issued
Retired
Interest paid
Dividends paid on common and preferred shares
Common Share Capital
Issued (note 27)
Purchased and held in trust (note 24)
Purchased and cancelled (note 24)
Other
Cash Flows from (used in) Financing Activities
Effect of foreign currency exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and Cash Equivalents, End of Period
(i) Certain comparative figures have been restated (note 2).
See accompanying notes to the consolidated financial statements.
2018
2017(i)
$
800
$
1,541
664
880
43
1,592
103
—
(176)
—
3,906
(619)
(327)
(511)
31
21
2,501
(1,010)
(324)
(1,619)
18
(52)
452
(800)
122
—
(83)
(3,296)
(54)
275
4,880
(2,715)
(801)
(440)
78
(36)
(1,082)
(37)
68
(6)
(733)
1,798
1,065
$
$
$
$
$
$
$
$
$
449
525
—
1,568
97
(501)
233
165
4,077
132
(174)
(866)
17
23
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
$
$
$
$
$
$
$
$
$
2018 Annual Report - Financial Review Loblaw Companies Limited 73
Notes to the Consolidated Financial Statements
For the years ended December 29, 2018 and December 30, 2017 (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. Loblaw Companies Limited provides Canadians with grocery, pharmacy, health and beauty, apparel, general merchandise,
financial services, and wireless mobile products and services. Its registered office is located at 22 St. Clair Avenue East, Toronto, Canada
M4T 2S7. Loblaw Companies Limited and its subsidiaries are together referred to, in these consolidated financial statements, as the
“Company” or “Loblaw”.
The Company’s controlling shareholder is George Weston Limited (“Weston”), which owns approximately 50.4% of the Company’s
outstanding common shares. The Company’s ultimate parent is Wittington Investments, Limited (“Wittington”). The remaining common
shares are widely held.
On November 1, 2018, the Company and Weston completed a reorganization under which Weston received the Company’s approximate
61.6% effective interest in Choice Properties Real Estate Investment Trust (“Choice Properties”) (“the reorganization” or “the spin-out”), as
described in Note 6, “Discontinued Operations”. The Company no longer retains its interest in Choice Properties and ceased to consolidate
its equity interest in Choice Properties from the consolidated financial statements. Prior to November 1, 2018, Loblaw Companies Limited
was the majority unitholder of Choice Properties.
As at December 29, 2018, the Company has two reportable operating segments: Retail and Financial Services (see note 35).
Note 2. Significant Accounting Policies
Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS” or “GAAP”) as issued by the International Accounting Standards Board (“IASB”) and using the accounting
policies described herein.
These consolidated financial statements were authorized for issuance by the Company’s Board of Directors (“Board”) on
February 20, 2019.
Basis of Preparation The consolidated financial statements were prepared on a historical cost basis except for the following items that
were measured at fair value:
•
•
defined benefit pension plan assets with the obligations related to these pension plans measured at their discounted present value as
described in note 26;
investment properties as described in note 16;
•
•
liabilities for cash-settled equity-based compensation arrangements as described in note 27; and
certain financial instruments as described in note 30.
The significant accounting policies set out below have been applied consistently in the preparation of the consolidated financial statements
for all periods presented.
The consolidated financial statements are presented in Canadian dollars.
Fiscal Year The fiscal year of the Company ends on the Saturday closest to December 31. Under an accounting convention common in
the retail industry, the Company follows a 52-week reporting cycle, which periodically necessitates a fiscal year of 53 weeks. The years
ended December 29, 2018 and December 30, 2017 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.
74 2018 Annual Report - Financial Review Loblaw Companies Limited
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.
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.
Prior to the reorganization, Choice Properties’ Trust Units (“Units”) held by unitholders other than the Company were 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.
Discontinued Operations A discontinued operation is a component of the Company’s business, the operations and cash flows of which
can be clearly distinguished from the rest of the Company and which: represents a separate major line of business or geographical area of
operations; is part of a single coordinated plan to dispose of a separate major line of business or geographic areas of operations; or is a
subsidiary acquired exclusively with a view to resale.
Classification as discontinued operations occurs at the earlier of disposal or when the operation meets the criteria to be classified as held
for sale or distribution.
When an operation is classified as a discontinued operation, the comparative statements of earnings and comprehensive income are re-
presented as if the operation has been discontinued from the start of the comparative year. The Company’s discontinued operations are
excluded from the results of continuing operations and are presented as a single amount net of tax as net earnings from discontinued
operations in the consolidated statements of earnings. The Company has made the accounting policy choice to present details of cash
flows from discontinued operations in the notes to the financial statements.
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 control of the goods or services has been transferred. Revenue is
measured at the amount of consideration to which the Company expects to be entitled to, including variable consideration to the extent that
it is highly probable that a significant reversal will not occur.
Retail segment revenue includes the 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 amount of consideration to which the Company expects to be entitled to, net of estimated returns, sales incentives and franchise fee
reductions. The Company recognizes revenue made through corporate stores, consolidated franchise stores and Associates at the time
the point of sale is made or when service is delivered to the customers. The Company recognizes revenue made through non-consolidated
franchise stores and independent wholesale customers at the time of delivery of inventory and when administrative and management
services are rendered.
On the initial sale of franchising arrangements, the Company offered products and services as part of an arrangement with multiple
performance obligations. Prior to the implementation of the Franchise Agreement implemented in 2015, the initial sale to non-consolidated
franchise stores were recorded using a relative fair value approach.
Customer loyalty awards are accounted for as a separate performance obligation of the sales transaction in which they are granted. The
Company defers revenue at the time the award is earned by members based on the relative fair value of the award. The relative fair value
is determined by allocating consideration between the fair value of the loyalty awards earned by loyalty program members, net of
breakage, and the goods and services on which the awards were earned, based on their relative stand-alone selling price.
2018 Annual Report - Financial Review Loblaw Companies Limited 75
Notes to the Consolidated Financial Statements
For certain sale of goods in which the Company earns commissions, including but not limited to lottery and third party gift cards, the
Company records net revenue as an agent on the basis that the Company does not control pricing or bear inventory risk.
Financial Services segment revenue includes interest income on credit card loans, credit card service fees, commissions, and other
revenue related to financial services. Interest income is recognized using the effective interest method. Credit card service fees are
recognized when services are rendered. Commission revenue is recorded on a net basis. Other revenue is recognized periodically or
according to contractual provisions.
Choice Properties revenue, included as part of Discontinued Operations, 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 prior to the reorganization. The rental revenue is recognized on a straight-line basis over the terms of the respective
leases. Property tax and operating cost recoveries are recognized in the period that recoverable costs are chargeable to tenants.
Percentage participation rents are recognized when tenants’ specified sales targets have been met as set out in the lease agreements.
Income Taxes Current and deferred taxes are recognized in the consolidated statement of earnings, except for current and deferred taxes
related to a business combination, or amounts charged directly to equity or other comprehensive income, which are recognized in the
consolidated balance sheet.
Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
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 and repayment of debt.
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.
76 2018 Annual Report - Financial Review Loblaw Companies Limited
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. For credit-impaired credit card receivables, a credit-adjusted effective interest rate is
calculated using estimated future cash flows including expected credit losses.
The Company implemented IFRS 9, “Financial Instruments” (“IFRS 9”), replacing International Accounting Standard 39, “Financial
Instruments: Recognition and Measurement” (“IAS 39”), 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. Therefore, the comparative information has not been restated and
continues to be reported under IAS 39.
Prior to December 31, 2017, under IAS 39, 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.
As at December 31, 2017 and thereafter, under IFRS 9, the Company applies the “expected credit loss” (“ECL”) model to assess for
impairment on its credit card receivables at each balance sheet date. Credit card receivables are assessed collectively for impairment by
applying the three-stage approach. Refer to the Impairment of Financial Assets policy for details of each stage. The application of the ECL
model required PC Bank to apply significant judgments, assumptions and estimations (see note 3 “Impairment of Credit Card
Receivables”).
Impairment losses are recorded in selling, general and administrative expenses (“SG&A”) in the consolidated statement of earnings with
the carrying amount of the credit card receivables 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 conditions and changes in
factors 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 credit card receivables 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.
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.
2018 Annual Report - Financial Review Loblaw Companies Limited 77
Notes to the Consolidated Financial Statements
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 goods or services delivered to the vendor or for direct reimbursement of
selling costs incurred to promote goods. The consideration is then recognized as a reduction of the cost incurred in the consolidated
statement of earnings.
Fixed Assets Fixed assets are recognized and subsequently measured at cost less accumulated depreciation and any accumulated
impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset, including costs incurred to
prepare the asset for its intended use and capitalized borrowing costs. The commencement date for capitalization of costs occurs when the
Company first incurs expenditures for the qualifying assets and undertakes the required activities to prepare the assets for their intended
use.
Borrowing costs directly attributable to the acquisition, construction or production of fixed assets that necessarily take a substantial period
of time to prepare for their intended use and a proportionate share of general borrowings, are capitalized to the cost of those fixed assets,
based on a quarterly weighted average cost of borrowing. All other borrowing costs are expensed as incurred and recognized in net
interest expense and other financing charges.
The cost of replacing a fixed asset component is recognized in the carrying amount if it is probable that the future economic benefits
embodied within the component will flow to the Company and the cost can be measured reliably. The carrying amount of the replaced
component is derecognized. The cost of repairs and maintenance of fixed assets is expensed as incurred and recognized in operating
income.
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.
78 2018 Annual Report - Financial Review Loblaw Companies Limited
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.
Leases At inception of an arrangement, the Company determines whether the arrangement is or contains a lease. A contract contains a
lease if the fulfillment of the arrangement depends upon a specific asset and if the arrangement conveys a right to control the use of the
underlying asset. The right to control the use of the underlying asset was met when any of the following conditions are present:
•
the Company had the ability or right to operate the asset or direct others to operate the asset while obtaining or controlling more than
an insignificant amount of the output of the asset;
•
•
the Company had the ability or right to control physical access to the asset while obtaining or controlling more than an insignificant
amount of the output of the asset; and
facts and circumstances indicated that it is remote that one or more parties other than the purchaser will take more than an
insignificant amount of the output or other utility that will be produced or generated by the asset during the term of the arrangement,
and the price that the purchaser will pay for the output is neither contractually fixed per unit of output nor equal to the current market
price per unit of output as of the time of delivery of the output.
As a lessee, the Company classified leases that substantially transferred all the risk and rewards as a finance lease. Finance lease assets
and liabilities are recognized at the lower of the fair value of the leased asset or the present value of the minimum lease payments,
discounted at the interest rate implicit in the lease, or if that rate cannot be readily determined, the Company's incremental borrowing rate.
Operating leases are not recognized on the balance sheets. Operating lease payments are recognized in SG&A on a straight-line basis
over the lease term.
As a lessor, the Company recognizes rental income from operating leases on a straight-line basis over the lease term.
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 measured using the fair value model. Under the fair value model, investment properties are initially
measured at cost and subsequently measured at fair value. Fair value is determined based on available market evidence. If market
evidence is not readily available in less active markets, the Company uses alternative valuation methods such as discounted cash flow
projections or recent transaction prices. Under the discounted cash flow methodology, discount rates are applied to the projected annual
operating cash flows, generally over a minimum term of ten years, including a terminal value of the investment properties based on a
capitalization rate applied to the estimated net operating income, a non-GAAP measure, in the terminal year. Gains and losses on fair
value are recognized in operating income in the period in which they are incurred. Gains and losses from disposal of investment properties
are determined by comparing the fair value of disposal proceeds and the carrying amount and are recognized in operating income.
2018 Annual Report - Financial Review Loblaw Companies Limited 79
Notes to the Consolidated Financial Statements
When a property changes from own use to investment property, the property is remeasured to fair value. Any gain arising from the
remeasurement is recognized in profit or loss to the extent that it reverses a previous impairment loss on that property, with any remaining
gain recognized in the Company’s other comprehensive income. Any loss on remeasurement is recognized in profit or loss. However, to
the extent a previous gain on remeasurement is included in the revaluation surplus for that property, the loss is first recognized in the
Company’s other comprehensive income to reduce the revaluation surplus within equity. Upon sale of an investment property that was
previously classified as property, plant and equipment, amounts included in the revaluation reserve is transferred to retained earnings.
Joint Arrangements The Company, through Choice Properties, and prior to the reorganization, owns investments under joint
arrangements. Joint arrangements are arrangements of which two or more parties have joint control. Joint control is the contractual sharing
of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties
sharing control. Joint arrangements are classified as either joint operations or joint ventures depending on Choice Properties’ rights and
obligations in the arrangement based on factors such as the structure, legal form and contractual terms of the arrangement.
Joint Ventures A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the joint arrangement.
Choice Properties’ investment in a joint venture is recorded using the equity method and is initially recognized in the consolidated balance
sheet at cost and adjusted thereafter to recognize Choice Properties’ share of the profit or loss and other comprehensive income of the
joint venture. The Company’s share of the joint venture’s profit or loss is recognized in the Company’s operating income.
The financial statements of the equity-accounted investment are prepared for the same reporting period as Choice Properties. Where
necessary, adjustments are made to bring the accounting policies in line with those of the Company’s.
A joint venture is considered to be impaired if there is objective evidence of impairment, as a result of one or more events that occurred
after initial recognition of the joint venture, and that event has a negative impact on the future cash flows of the joint venture that can be
reliably estimated.
Joint Operations A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and
obligations for the liabilities relating to the arrangement. The financial statements of the joint operations are prepared for the same
reporting period as Choice Properties. Where necessary, adjustments are made to bring the accounting policies in line with those of the
Company’s. The Company recognizes its proportionate share of assets, liabilities, revenues and expenses of the joint operations.
Goodwill Goodwill arising in a business combination is recognized as an asset at the date that control is acquired. Goodwill is
subsequently measured at cost less accumulated impairment losses. Goodwill is not amortized but is tested for impairment on an annual
basis or more frequently if there are indicators that goodwill may be impaired as described in the Impairment of Non-Financial Assets
policy.
Intangible Assets Intangible assets with finite lives are measured at cost less accumulated amortization and any accumulated impairment
losses. These intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from three to 18 years, and
are tested for impairment as described in the Impairment of Non-Financial Assets policy. Useful lives, residual values and amortization
methods for intangible assets with finite useful lives are reviewed at least annually. Amortization expense for intangible assets is
recognized in 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 and investment properties, 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.
80 2018 Annual Report - Financial Review Loblaw Companies Limited
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. Upon initial recognition, financial instruments, including derivatives
and embedded derivatives in certain contracts, are measured at fair value plus or minus transaction costs that are directly attributable to
the acquisition or issue of financial instruments that are not classified as fair value through profit or loss.
Classification and Measurement The classification and measurement approach for financial assets reflect the business model in which
assets are managed and their cash flow characteristics. Financial assets are classified and measured based on these categories:
amortized cost, fair value through other comprehensive income (“FVOCI”), or fair value through profit and loss (“FVTPL”). Derivatives
embedded in contracts where the host is a financial asset in the scope of the standard are not separated, but the hybrid financial
instrument as a whole is assessed for classification.
A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as FVTPL:
•
•
The financial asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding.
A financial asset is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL:
•
The financial asset is held within a business model in which assets are managed to achieve a particular objective by both collecting
contractual cash flows and selling financial assets; and
•
The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding.
A financial asset shall be measured at FVTPL unless it is measured at amortized cost or at FVOCI.
Financial assets are not reclassified subsequent to their initial recognition unless the Company identifies changes in its business model in
managing financial assets.
Financial liabilities are classified and measured based on two categories: amortized cost or FVTPL.
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. The amortized cost of a
financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal payments,
plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and
the maturity amount, minus any reduction for impairment.
2018 Annual Report - Financial Review Loblaw Companies Limited 81
Notes to the Consolidated Financial Statements
The following table summarizes the classification and measurement of the Company’s financial assets and liabilities:
Asset/Liability
Cash and cash equivalents
Short term investments
Accounts receivable
Credit card receivables
Security deposits
Franchise loans receivable
Certain other assets
Classification / Measurement
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value through profit and loss
Amortized cost
Amortized cost / fair value through profit and loss
Certain long term investments
Fair value through other comprehensive income
Bank indebtedness
Trade payables and other liabilities
Short term debt
Long term debt
Trust Unit Liability
Certain other liabilities
Derivatives
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value through profit and loss
Amortized cost
Fair value through profit and loss / fair value through other comprehensive income
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. Embedded derivatives are separated from the host contract and accounted for separately
on the consolidated balance sheet at fair value if the host contract is not a financial asset. 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. The Company ensures that the hedge accounting relationships are aligned with the Company’s
risk management objectives and strategy and applies a more qualitative and forward-looking approach to assessing hedge effectiveness.
The Company’s risk management strategy and hedging activities are disclosed in Note 30 “Financial Instruments” and Note 31 “Financial
Risk Management”.
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.
82 2018 Annual Report - Financial Review Loblaw Companies Limited
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.
Derecognition 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 The Company implemented IFRS 9 replacing IAS 39 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. Therefore, the comparative
information has not been restated and continues to be reported under IAS 39.
Prior to December 31, 2017, under IAS 39, 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.
2018 Annual Report - Financial Review Loblaw Companies Limited 83
Notes to the Consolidated Financial Statements
As at December 31, 2017 and thereafter, under IFRS 9, a forward-looking ECL model is applied, at each balance sheet date, to financial
assets measured at amortized cost or those measured at fair value through other comprehensive income, except for investments in equity
instruments.
IFRS 9 outlines a three-stage approach to recognizing ECL which is intended to reflect the increase in credit risks of a financial instrument:
• Stage 1 is comprised of all financial instruments that have not had a significant increase in credit risks since initial recognition or that
have low credit risk at the reporting date. The Company is 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 had a significant increase in credit risks 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. The
Company 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. The Company is
required to recognize impairment based on a lifetime ECL for Stage 3 financial instruments.
The ECL models applied to financial assets require judgment, assumptions and estimations on changes in credit risks, forecasts of future
economic conditions and historical information on the credit quality of the financial asset. Consideration of how changes in economic
factors affect ECLs will be determined on a probability-weighted basis.
Impairment losses are recorded in SG&A 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 conditions and changes in factors occurring after the
impairment was initially recognized, the previously recognized impairment loss is reversed through the consolidated statement of earnings.
The impairment reversal is limited to the lesser of the decrease in impairment or the extent that the carrying amount of the financial asset
at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been
recognized, after the reversal.
Foreign Currency Translation The functional currency of the Company is the Canadian dollar.
The assets and liabilities of foreign operations that have a functional currency different from that of the Company, including goodwill and
fair value adjustments arising on acquisition, are translated into Canadian dollars at the foreign currency exchange rate in effect at the
balance sheet date. The resulting foreign currency exchange gains or losses are recognized in the foreign currency translation adjustment
as part of other comprehensive income. When such foreign operation is disposed of, the related foreign currency translation reserve is
recognized in net earnings as part of the gain or loss on disposal. On the partial disposal of such foreign operation, the relevant proportion
is reclassified to net earnings.
Assets and liabilities denominated in a foreign currency held in foreign operations that have the same functional currency as the Company
are translated into Canadian dollars at the foreign currency exchange rate in effect at the balance sheet date. The resulting foreign
currency exchange gains or losses are recognized in operating income.
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.
84 2018 Annual Report - Financial Review Loblaw Companies Limited
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.
2018 Annual Report - Financial Review Loblaw Companies Limited 85
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.
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.
86 2018 Annual Report - Financial Review Loblaw Companies Limited
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.
Unit-Based Compensation Prior to the reorganization, Unit-Settled Restricted Units (“URUs”) were accounted for as cash-settled awards.
URUs entitle certain employees to receive the value of the URU award in Units at the end of the applicable vesting period, which is
generally three to five years in length. The URUs are subject to vesting conditions and disposition restrictions. The fair value of each URU
granted is measured based on the market value of a Unit at the balance sheet date, less a discount to account for the disposition
restrictions.
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
On December 31, 2017, the Company implemented IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) and IFRS 9,
“Financial Instruments” (“IFRS 9”), in accordance with IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors”. The
impacts on implementation of IFRS 15 and IFRS 9 on the Company’s consolidated financial statements are described below.
IFRS 15 In 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”, replacing IAS 18, “Revenue” (“IAS 18”), 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 is effective for annual periods beginning on or after January 1, 2018.
The Company adopted the standard on December 31, 2017 and applied 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 applied the practical expedient in which contracts
that began and were completed within the same annual reporting period before December 30, 2017 or were completed on or before
January 1, 2017 do not require restatement. Refer to the Revenue Recognition policy for significant accounting policies under IFRS 15.
The implementation of IFRS 15 did not have a significant impact on the Company’s Retail, Financial Services or Choice Properties
segment revenue streams, including its franchise arrangements with non-consolidated stores. IFRS 15 impacted the allocation of revenue
that is deferred in relation to the Company’s customer loyalty award programs. Under IAS 18 and related interpretations, revenue was
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 was allocated to the loyalty awards and deferred until the points were ultimately redeemed. The residual
consideration was allocated to the goods and services sold and recognized as revenue. Under IFRS 15, consideration is 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 and recorded as deferred revenue will be, on
average, lower than the amounts allocated under the residual value method. The majority of the Company’s loyalty liability, which is a
contract liability, is expected to be redeemed and recognized as revenue within one year of issuance.
In addition, in the fourth quarter of 2017, the Company recorded a charge before income taxes of $189 million under IAS 18 and related
interpretations, related to the revaluation of the existing loyalty liability for outstanding points to reflect a higher anticipated redemption rate
under the new PC Optimum program. Under IFRS 15, using the relative fair value approach, this revaluation of the loyalty liability
decreased by $24 million, resulting in a charge before income taxes of $165 million.
2018 Annual Report - Financial Review Loblaw Companies Limited 87
Notes to the Consolidated Financial Statements
The impact of the above changes on retained earnings as at January 1, 2017 and December 30, 2017 is as follows:
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Loyalty liability
Income taxes payable
Deferred income tax liabilities
Retained earnings
The impact of this change on 52 weeks ended December 30, 2017 is as follows:
Consolidated Statements of Earnings
Increase (Decrease)
(millions of Canadian dollars)
Revenue
SG&A
Income taxes
$
As at
January 1, 2017
(43)
12
—
31
As at
December 30, 2017
(64)
$
11
7
46
$
December 30, 2017
(52 weeks)
(3)
(24)
6
The implementation of IFRS 15 had an impact on basic and diluted net earnings per share of $0.04 for 52 weeks ended December 30,
2017.
IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments”, replacing IAS 39, “Financial Instruments: Recognition and
Measurement”, 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 is effective for annual periods beginning on or after January 1,
2018. The Company implemented 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. The Company also applied related amendments to IFRS 7, “Financial Instruments: Disclosures”. Refer to the Financial
Instruments and Derivative Instruments policy for significant accounting policies under IFRS 9.
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. Financial assets are not reclassified subsequent to their
initial recognition unless the Company identifies changes in its business model in managing financial assets. The adoption of the new
classification requirements under IFRS 9 did not result in significant changes in measurement or the carrying amount of financial assets
and liabilities, with the exception of credit card receivables discussed below.
88 2018 Annual Report - Financial Review Loblaw Companies Limited
The following table summarizes the classification impacts upon adoption of IFRS 9:
Asset/Liability
Classification under IAS 39
Classification under IFRS 9
Fair value through profit and loss(i)
Fair value through profit and loss
Cash and cash equivalents
Fair value through profit and loss(i)
Short term investments
Accounts receivable
Credit card receivables
Security deposits
Franchise loans receivable
Certain other assets(ii)
Fair value through profit and loss(i)
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Certain long term investments
Available-for-sale
Bank indebtedness
Other liabilities
Trade payables and other liabilities
Other liabilities
Short term debt
Long term debt
Trust Unit Liability
Certain other liabilities
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost / fair value through profit and loss
Fair value through other comprehensive income
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value through profit and loss(iii)
Other liabilities
Fair value through profit and loss
Amortized cost
Derivatives
Fair value through profit and loss(iii)
Fair value through profit and loss / fair value
through other comprehensive income
(i) Financial instruments designated at fair value through profit and loss.
(ii) Certain other assets include mortgages, notes and loans receivable which are classified as either amortized cost or fair value through profit and loss.
(iii) Financial instruments required to be classified at fair value through profit and loss.
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ECL model. The new impairment model is applied,
at each balance sheet date, to financial assets measured at amortized cost or those measured at fair value through other comprehensive
income, except for investments in equity instruments.
IFRS 9 outlines a three-stage approach to recognizing ECL which is intended to reflect the increase in credit risks of a financial instrument.
Refer to the Impairment of Financial Assets policy for details of each stage.
The ECL model had a significant impact on PC Bank’s impairment of credit card receivables. The Company revised certain inputs of the
ECL model since the implementation of IFRS 9 in the first quarter of 2018 and has retrospectively applied the impact of these revisions
with no impact to earnings. As a result of the refinements, the cumulative impact arising from the ECL model on the impairment of credit
card receivables as at December 31, 2017 was as follows:
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Credit card receivables
Deferred income tax assets
Income taxes payable
Deferred income tax liabilities
Retained earnings
As at
December 31, 2017
(98)
$
26
4
(4)
(72)
The Company also applied ECL models to the assessment of impairment on trade receivables and other financial assets of the Company.
The Company adopted the practical expedient to determine ECL on trade receivables using a provision matrix based on historical credit
loss experiences to estimate lifetime ECL. The ECL models applied to other financial assets also required judgment, assumptions and
estimations on changes in credit risks, forecasts of future economic conditions and historical information on the credit quality of the
financial asset. The provision matrix and ECL models applied do not have a material impact on trade receivables and other financial assets
of the Company.
2018 Annual Report - Financial Review Loblaw Companies Limited 89
Notes to the Consolidated Financial Statements
General hedging IFRS 9 requires the Company to ensure that hedge accounting relationships are aligned with the Company’s risk
management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. The
Company’s risk management strategy and hedging activities are disclosed in Note 30 “Financial Instruments” and Note 31 “Financial Risk
Management”.
Changes to Significant Accounting Policies
Certain significant accounting policies are changed or added to reflect impacts to the presentation and measurement of the Company’s
annual consolidated financial statements.
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.
The Company elected to change the measurement of investment properties from the cost model to the fair value model retrospectively with
restatement. Refer to the Investment Properties policy for the fair value policy. Prior to the second quarter of 2018, the Company
recognized investment properties at cost less accumulated depreciation and any accumulated impairment losses.
The Company applied this change in accounting policy retrospectively in the second quarter of 2018. The impacts to the Company’s
comparative consolidated balance sheets are as follows:
Consolidated Balance Sheets
Increase (Decrease)
(millions of Canadian dollars)
Investment properties
Deferred income tax liabilities
Retained earnings
As at
December 30, 2017
41
$
5
36
$
As at
January 1, 2017
41
5
36
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.
90 2018 Annual Report - Financial Review Loblaw Companies Limited
Impairment of Non-Financial Assets (Goodwill, Intangible Assets and Fixed Assets)
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 assessing the recoverability of these loans and certain other financial assets requires
management to make estimates of a long term nature regarding discount rates, projected revenues and margins, as applicable. These
estimates are derived from past experience, actual operating results and budgets.
Customer Loyalty Awards Programs
Key Sources of Estimation The Company defers revenue at the time the award is earned by members based on the relative fair value of
the award. The relative fair value is determined by allocating consideration between the fair value of the loyalty awards earned by loyalty
program members, net of breakage, and the goods and services on which the awards were earned, based on their relative stand-alone
selling price. The estimated fair value per point for the PC Optimum program is determined based on the program reward schedule and is
$1 for every 1,000 points earned. The breakage rate of the program is an estimate of the amount of points that will never be redeemed.
The rate is reviewed on an ongoing basis and is estimated utilizing historical redemption activity and anticipated earn and redeem
behaviour of members.
Impairment of Credit Card Receivables
Judgments Made in Relation to Accounting Policies Applied In each stage of the impairment model, impairment is determined based
on the probability of default, loss given default, and expected exposures at default on drawn and undrawn exposures on credit card
receivables, discounted using an average portfolio yield rate. The application of the ECL model requires management to apply the
following significant judgments, assumptions and estimations:
• Movement of impairment measurement between the three stages of the ECL model, based on the assessment of increase in credit
risks on credit card receivables. The assessment of changes in credit risks includes qualitative and quantitative factors of the
accounts, such as historical credit loss experience and external credit scores;
•
•
Thresholds for significant increase in credit risks based on changes in probability of default over the expected life of the instrument
relative to initial recognition; and
Forecasts of future economic conditions.
Fair Value of Investment Properties
Key Sources of Estimation The fair value of investment properties is dependent on available comparable transactions, future cash flows
over the holding period, and discount rates and capitalization rates applicable to those assets. The review of anticipated cash flow involves
assumptions relating to occupancy, market rental rates, net operating expenses, and residual value. In addition to reviewing anticipated
cash flows, management assesses changes in the business climate and other factors, which may affect the ultimate value of the property.
These assumptions may not ultimately be achieved.
2018 Annual Report - Financial Review Loblaw Companies Limited 91
Notes to the Consolidated Financial Statements
Income and Other Taxes
Judgments Made in Relation to Accounting Policies Applied The calculation of current and deferred income taxes requires
management to make certain judgments regarding the tax rules in jurisdictions where the Company performs activities. Application of
judgments is required regarding 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 and legal claims. 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.
Note 4. Future Accounting Standards
The future accounting standard 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 a comprehensive project
plan to guide the implementation.
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. Lessees recognize a right-of-use asset representing its control of and right to use the underlying asset and a
lease liability representing its obligation to make future lease payments. Lessor accounting remains similar to IAS 17.
Substantially all of the Company's operating leases are real estate leases for retail stores, distribution centers and corporate offices. Other
leased assets include passenger vehicles, trucks and IT equipment. The Company also has owned and leased properties which are leased
and subleased to third parties, respectively. The subleases are mainly related to non-consolidated franchisees, ancillary tenants and gas
bar land.
As a lessee, the Company will recognize right-of-use assets and lease liabilities primarily for its operating leases of real estate properties,
vehicles and equipment. The depreciation expense on right-of-use assets and interest expense on lease liabilities will replace rent
expense, previously recognized on a straight-line basis under IAS 17 over the term of a lease. No significant impacts are expected for the
Company’s existing finance leases.
As an intermediate lessor, the Company will reassess the classification of its subleases by reference to the right-of-use assets arising from
the head lease and will recognize a corresponding finance lease receivable if the reassessment concludes that the sublease is a finance
lease. No significant impacts are expected for leases where the Company is the lessor.
92 2018 Annual Report - Financial Review Loblaw Companies Limited
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 fully retrospective approach or a modified retrospective approach on transition to IFRS 16. The Company has
adopted the standard on December 30, 2018 using the modified retrospective approach. The modified retrospective approach applies the
requirements of the standard retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at
December 30, 2018, and no restatement of the comparative period. Under the modified retrospective approach, the Company chose to
measure all right-of-use assets retrospectively as if the standard had been applied since lease commencement dates.
exclude certain short-term leases from IFRS 16 lease accounting;
grandfather the definition of a lease for existing contracts at the date of initial application;
IFRS 16 permits the use of recognition exemptions and practical expedients. The Company has applied the following recognition
exemptions and practical expedients:
•
•
•
•
•
•
apply a single discount rate to a portfolio of leases with reasonably similar characteristics at the date of initial application;
exclude initial direct costs from the measurement of the right-of-use assets at the date of initial application; and
use portfolio application for leases with similar characteristics, such as vehicle and equipment leases;
use hindsight in determining lease term at the date of initial application.
While the standard was adopted on December 30, 2018, the Company continues to assess the impact of the standard on the Company’s
business processes, internal controls over financial reporting, data systems, IT, and financing and compensation arrangements. The
Company has implemented a lease management system and is in the final stages of refining and validating the inputs and key
assumptions used in its calculation of the cumulative effects of initial application to be recorded in opening retained earnings as at
December 30, 2018.
Based on the information available as at February 20, 2019, as a result of the initial application of IFRS 16 as at December 30, 2018,
Management anticipates recognizing approximately $7.5 billion to $8.0 billion of right-of-use assets and $9.0 billion to $9.5 billion of lease
liabilities, inclusive of current finance leases, on its consolidated balance sheet, and derecognizing approximately $300 million of deferred
rent obligation from its consolidated balance sheet, with the difference, net of the deferred tax impact, recorded in opening retained
earnings. Certain other balance sheet accounts will be impacted by amounts required to be reclassified on the adoption of IFRS 16.
The actual impacts of the initial application of IFRS 16 may vary from the estimates provided for the following reasons:
•
•
the Company has not finalized the assessment and testing of applicable internal controls over financial reporting; and
the new accounting policies and critical accounting estimates and judgments are subject to change until the Company issues its first
quarter report to shareholders for the 12 weeks ending March 23, 2019.
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
2018
18
66
78
(36)
(114)
(12)
—
$
$
2017
26
73
81
(43)
(132)
(5)
—
$
$
(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.
2018 Annual Report - Financial Review Loblaw Companies Limited 93
Notes to the Consolidated Financial Statements
Note 6. Discontinued Operations
During the fourth quarter of 2018, the Company and its parent Weston completed a reorganization under which the Company distributed its
approximate 61.6% effective interest in Choice Properties to Weston on a tax-free basis to the Company and its Canadian shareholders. In
connection with the reorganization, the common shareholders of the Company, other than Weston and its subsidiaries, received 0.135 of a
common share of Weston for each common share of the Company held, which was equivalent to the market value of their pro rata interest
in Choice Properties as at the announcement date of the spin-out, and Weston received the Company’s approximate 61.6% effective
interest in Choice Properties.
Following the reorganization, the Company no longer retained its interest in Choice Properties and ceased to consolidate its equity interest
in Choice Properties in its consolidated financial statements. As a result, for the annual periods ended December 29, 2018 and December
30, 2017, the Choice Properties segment, net of eliminations, has been presented as Discontinued Operations. The operations of Choice
Properties were not previously classified as discontinued operations or as assets held for sale. The classification as Discontinued
Operations occurred at October 31, 2018, which is the date of the reorganization. Accordingly, the comparative consolidated statement of
earnings and comprehensive income were re-presented separately between Continuing and Discontinued Operations. Unless otherwise
specified, all other notes to the consolidated financial statements include amounts from both Continuing and Discontinued Operations.
The transaction has no impact on the ongoing operating relationship between the Company and Choice Properties and the Strategic
Alliance Agreement and leases, remain in place. The Company continues to be Choice Properties' largest tenant (see note 34).
All transactions between the Retail and the Choice Properties segments prior to the reorganization were fully eliminated in the consolidated
financial statements. The Company has presented the results of Continuing Operations to reflect the on-going presentation of transactions
between the Retail segment and Choice Properties, including rent paid and lease surrender payments to Choice Properties, gains related
to the sale leaseback of properties to Choice Properties and site intensification payments received from Choice Properties. The elimination
of intercompany transactions prior to the spin-out have been reflected in Discontinued Operations.
The results of Discontinued Operations presented in the consolidated statements of earnings is as follows:
(millions of Canadian dollars)
Revenue(i)
Selling, General and Administrative Expenses
Operating Income
Net interest expense and other financing charges(ii)
Earnings before Income Taxes
Income taxes
Earnings from Discontinued Operations
October 31, 2018
933
$
$
$
$
512
421
316
105
58
47
$
$
$
$
2017
830
364
466
151
315
84
231
(i) Revenue includes $445 million (2017 – $533 million) of rental revenue, $164 million (2017 – $185 million) of cost recovery, and $10 million (2017 – $6 million) of lease
surrender, recognized by Choice Properties generated from the Company. Costs recoveries related to Common Area Maintenance and properties are presented as an
expense in SG&A.
(ii) Net interest expense and other financing charges primarily includes interest expense on long term debt, distributions to external unit holders of $113 million (2017 – $54
million) and a loss of $33 million (2017 – gain of $10 million) related to the fair value adjustment to the Trust Unit Liability.
94 2018 Annual Report - Financial Review Loblaw Companies Limited
The assets and liabilities disposed of in connection with Discontinued Operations are as follows:
(millions of Canadian dollars)
Cash and cash equivalents and short term investments
Accounts receivable
Prepaid expenses and other assets
Fixed assets
Equity accounted joint ventures
Investment properties
Intangible assets
Goodwill
Deferred income tax assets
Other assets
(millions of Canadian dollars)
Trade payables and other liabilities
Income taxes payable
Long term debt
Trust unit liability
Deferred income tax liabilities
Other liabilities
October 31, 2018
52
$
66
90
4,770
740
4,819
30
342
3
330
$
11,242
October 31, 2018
370
$
19
7,222
3,071
414
6
$
11,102
In addition to the assets and liabilities disposed of, the Company recognized an onerous contract liability of $10 million.
The assets and liabilities disposed of in connection with discontinued operations include the assets and liabilities of Canadian Real Estate
Investment Trust (“CREIT”) which were acquired by Choice Properties on May 4, 2018.
The Company’s 2017 balance sheet included total assets and total liabilities of approximately $4.8 billion and $4.5 billion, respectively
related to Choice Properties. Included in total assets were $4,645 million of fixed assets and included in liabilities was $3,411 million of
long term debt and $972 million related to the Trust Unit Liability.
Choice Properties’ Acquisition of CREIT
On May 4, 2018, Choice Properties acquired all the assets and assumed all the liabilities, including outstanding debt, of CREIT for total
consideration of $3,708 million. The consideration was comprised of $1,652 million of cash and the issuance of 182,836,481 new Trust
Units.
Also, concurrent with the closing of the acquisition, the Company, Choice Properties’ controlling unitholder, converted all of its outstanding
Class C LP Units with the face value of $925 million into Class B LP Units of Choice Properties Limited Partnership. Choice Properties
issued to the Company 70,881,226 Class B LP Units upon the conversion and the shortfall in value of approximately $99 million was paid
in cash. In connection with this conversion, the Company recognized capital gains income tax expense of $8 million in contributed surplus.
2018 Annual Report - Financial Review Loblaw Companies Limited 95
Notes to the Consolidated Financial Statements
The purchase equation is based on management’s best estimate of fair value. The actual amount allocated to certain identifiable net
assets could vary as the purchase equation is finalized. The purchase price allocation at the acquisition date is as follows:
(millions of Canadian dollars)
Net Assets Acquired:
Cash and cash equivalents
Accounts receivable and other assets
Mortgages, loans and notes receivable(i)
Equity accounted joint ventures
Investment properties
Intangible assets
Goodwill
Trade payables and other liabilities
Long term debt
Deferred income tax liabilities
Total Net Assets Acquired
(i)
Included in Other Assets on consolidated balance sheets.
As at
May 4, 2018
32
50
196
683
4,730
30
342
(172)
(1,841)
(342)
3,708
$
$
The assets and liabilities disposed of also include the goodwill associated with the acquisition of CREIT, of $342 million, which was
generated on consolidation of Choice Properties and is attributable to deferred income tax liabilities recorded on temporary differences
arising between the fair value of the investment properties acquired and their respective income tax bases for the Company’s effective
ownership interest in Choice Properties.
The net change in cash flows related to Discontinued Operations is as follows:
(millions of Canadian dollars)
Cash flows from operations
Cash flows from (used in) investing
Cash flows from (used in) financing
Cash flows from discontinued operations
2018(i)
581
(1,884)
1,678
375
$
$
$
$
2017
501
(255)
46
292
(i) Reflects the cash flows of Discontinued Operations up to the date of the reorganization, November 1, 2018.
96 2018 Annual Report - Financial Review Loblaw Companies Limited
Significant long term debt transactions of Choice Properties are described below:
Debentures The following table summarizes the debentures of Choice Properties issued or assumed in 2018. There were no debentures
issued in 2017.
(millions of Canadian dollars except where otherwise indicated)
Interest Rate
Maturity Date
Principal
Amount 2018
Choice Properties senior unsecured debentures
– Series I(i)
– Series J(i)
– Series K(ii)
– Series L(ii)
– Series A-C(iii)
– Series B-C(iii)
– Series C-C(iii)
– Series D-C(iii)
Total Debentures issued
3.01%
3.55%
3.56%
4.18%
3.68%
4.32%
2.56%
2.95%
March 21, 2022
$
January 10, 2025
September 9, 2024
March 8, 2028
July 24, 2018
January 15, 2021
November 30, 2019
January 18, 2023
300
350
550
750
125
100
100
125
$
2,400
(i) Offerings were made under the Choice Properties’ Short Form Base Shelf Prospectus filed in 2018. 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.
(ii) The net proceeds from the issuance of Series K and L were held in escrow as a part of the financing for the acquisition of CREIT. During the second quarter of 2018, the
Company completed the acquisition of CREIT and the proceeds were released from escrow.
(iii) Assumed by the Company in connection with the acquisition of CREIT.
The following table summarizes the debentures repaid in 2018 and 2017:
(millions of Canadian dollars except where otherwise indicated)
Choice Properties senior unsecured debentures – Series A-C
Choice Properties senior unsecured debentures – Series A
Choice Properties senior unsecured debentures – Series 6
Total Debentures, Unsecured Term Loan Facilities, and Medium Term
Notes repaid
Interest
Rate
Maturity Date
3.68% July 24, 2018
3.55% July 5, 2018(i)
3.00% April 20, 2017(ii)
Principal
Amount 2018
125
$
Principal
Amount 2017
—
$
400
—
$
525
$
—
200
200
(i) Choice Properties Series A unsecured debentures were redeemed on February 12, 2018.
(ii) Choice Properties Series 6 unsecured debentures were redeemed on January 23, 2017.
Committed Credit Facilities The components of Choice Properties committed lines of credit were as follows:
(millions of Canadian dollars)
Choice Properties Committed Bi-lateral Credit Facility(i)
Maturity Date
December 21, 2018
Choice Properties Committed Syndicated Credit Facility(i)
July 5, 2022
Choice Properties Committed Syndicated Credit Facility(ii) May 4, 2023
Total Committed Lines of Credit
$
$
— $
—
1,500
1,500
$
As at October 31, 2018
Available
Credit
Drawn
—
As at December 30, 2017
Available
Credit
250
$
Drawn
250
$
—
375
375
500
—
$
750
$
311
—
561
(i)
In the first half of 2018, Choice Properties repaid and cancelled the $250 million Committed Bi-lateral Credit Facility and the $500 million Committed Syndicated Credit
Facility.
(ii) During the second quarter of 2018, Choice properties entered into a new syndicated $1,500 million senior unsecured committed revolving credit facility maturing
May 4, 2023. The credit facility bears interest at variable rates of either: Prime plus 0.45% or Bankers’ Acceptance rate plus 1.45%. The pricing of this credit facility is
contingent on Choice Properties credit ratings from Dominion Bond Rating Service and Standard & Poor’s remaining at “BBB”.
2018 Annual Report - Financial Review Loblaw Companies Limited 97
Notes to the Consolidated Financial Statements
Choice Properties has certain key financial covenants in its Debentures and the Choice Properties Credit Facilities, which include debt
service ratios and leverage ratios, as defined in the respective agreements. These ratios are measured by Choice Properties on an on-
going basis to ensure compliance with the agreements. Throughout the year and up to the date of the completion of reorganization on
November 1, 2018, Choice Properties was in compliance with each of the key financial covenants under these agreements.
Note 7. Net Interest Expense and Other Financing Charges
The components of net interest expense and other financing charges from Continuing Operations were as follows:
(millions of Canadian dollars)
Interest expense and other financing charges:
Long term debt
Borrowings related to credit card receivables
Post-employment and other long term employee benefits (note 26)
Independent funding trusts
Bank indebtedness
Capitalized interest
Interest income:
Accretion income
Short term interest income
Charge related to Glenhuron Bank Limited (note 8)
Net interest expense and other financing charges from Continuing Operations
Note 8. Income Taxes
The components of income taxes from Continuing Operations were as follows:
(millions of Canadian dollars)
Current income taxes:
Current period
Charge related to Glenhuron Bank Limited
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 from Continuing Operations
2018
333
$
41
11
19
8
(1)
411
(5)
(18)
(23)
176
564
2018
493
191
(86)
598
(83)
—
91
8
606
$
$
$
$
$
$
$
$
$
$
2017
336
30
9
16
6
—
397
(10)
(13)
(23)
—
374
2017
573
—
7
580
(194)
(15)
(6)
(215)
365
$
$
$
$
$
$
$
$
$
$
$
98 2018 Annual Report - Financial Review Loblaw Companies Limited
On September 7, 2018, the Tax Court of Canada (“Tax Court”) released its decision relating to Glenhuron Bank Limited (“Glenhuron”), a
wholly-owned Barbadian subsidiary of the Company that was wound up in 2013. The Tax Court ruled that certain income earned by
Glenhuron should be taxed in Canada based on a technical interpretation of the applicable legislation.
On October 4, 2018, the Company filed a Notice of Appeal with the Federal Court of Appeal. Although the Company believes in the merits
of its position, it recorded a charge during the third quarter of 2018 of $367 million, of which $176 million was recorded in interest and
$191 million was recorded in income taxes. The Company believes that this provision will be sufficient to cover its ultimate liability if the
appeal is unsuccessful.
In the third quarter of 2018, the Company made a cash payment of $235 million to fund the tax and interest owing in light of the decision of
the Tax Court.
In the first quarter of 2018, voting control of the Company was acquired by a related group, which included Weston and Wittington, which
resulted in certain adjustments in respect to prior periods for tax purposes during the first quarter of 2018.
Income tax (recoveries) expense recognized in Other Comprehensive Income was as follows:
(millions of Canadian dollars)
Net defined benefit plan actuarial (losses) gains (note 26)
Adjustment to fair value on transfer of investment properties
Total income tax (recoveries) expense recognized in Other Comprehensive Income
$
$
2018
33
5
38
2017
(7)
—
(7)
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
Charge related to Glenhuron
Non-deductible and non-taxable items
Impact of income tax rate changes on deferred income tax balances
Adjustments in respect of prior periods
Effective income tax rate applicable to earnings before income taxes
2018
26.6 %
(0.9)%
14.0 %
4.1 %
— %
0.8 %
44.6 %
2017
26.7 %
— %
— %
(4.5)%
(0.9)%
0.5 %
21.8 %
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
2018
17
153
170
$
$
2017
27
142
169
$
$
The income tax losses expire in the years 2028 to 2038. 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.
2018 Annual Report - Financial Review Loblaw Companies Limited 99
Notes to the Consolidated Financial Statements
Recognized deferred tax assets and liabilities Deferred tax assets and liabilities were attributable to the following:
(millions of Canadian dollars)
Trade payables and other liabilities
Other liabilities
Fixed assets
Goodwill and intangible assets
Other assets
Non-capital loss carryforwards (expiring 2033 to 2038)
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
Note 9. Basic and Diluted Net Earnings per Common Share
(millions of Canadian dollars except where otherwise indicated)
Net earnings attributable to shareholders of the Company
Discontinued Operations (note 6)
Net earnings from continuing operations attributable to shareholders of the Company
Dividends on Preferred Shares in Equity (note 24)
Net earnings from continuing operations available to common shareholders
Weighted average common shares outstanding (in millions) (note 24)
Dilutive effect of equity-based compensation (in millions)
Dilutive effect of certain other liabilities (in millions)
Diluted weighted average common shares outstanding (in millions)
Net earnings per common share - Basic ($)
Continuing Operations
Discontinued Operations
Net earning per common share - Diluted ($)
Continuing Operations
Discontinued Operations
As at
December 29, 2018
53
$
As at
December 30, 2017
57
$
355
(554)
(1,786)
49
41
—
39
(1,803)
144
(1,947)
(1,803)
$
$
$
$
$
$
2018
766
(47)
719
(12)
707
376.7
1.8
0.8
379.3
1.88
0.12
1.87
0.12
$
$
$
$
$
$
$
$
$
$
$
$
$
$
370
(512)
(1,908)
53
29
21
35
(1,855)
134
(1,989)
(1,855)
2017
1,517
(231)
1,286
(12)
1,274
393.8
2.9
0.6
397.3
3.24
0.58
3.21
0.58
In 2018, 4,541,548 (2017 – 2,559,716) potentially dilutive instruments were excluded from the computation of diluted net earnings per
common share from continuing operations as they were anti-dilutive.
100 2018 Annual Report - Financial Review Loblaw Companies Limited
Note 10. Cash and Cash Equivalents, Short Term Investments and Security Deposits
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
Security Deposits
As at
December 29, 2018
539
$
As at
December 30, 2017
516
$
323
117
86
$
1,065
$
232
649
401
1,798
As at
December 29, 2018
26
$
As at
December 30, 2017
40
$
50
17
1
94
$
295
209
2
546
$
Security deposits relate to funds held by the Company for repayment of the $800 million debenture, which was subsequently repaid on
December 31, 2018 (note 22).
Note 11. Accounts Receivable
The following is an aging of the Company’s accounts receivable:
(millions of Canadian dollars)
Accounts receivable
As at
December 29, 2018
As at
December 30, 2017
0-90
days
$ 1,077 $
91-180
days
> 180
days
53 $
68 $
Total
1,198
0-90
days
$ 1,091 $
91-180
days
> 180
days
42 $
55 $
Total
1,188
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
2018
(52)
22
(30)
$
$
2017
(71)
19
(52)
$
$
Credit risk associated with accounts receivable is discussed in note 31.
2018 Annual Report - Financial Review Loblaw Companies Limited 101
Notes to the Consolidated Financial Statements
Note 12. 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 22)
Securitized to Other Independent Securitization Trusts
Total securitized to independent securitization trusts
As at
December 29, 2018
3,496
$
As at
December 30, 2017
3,147
$
$
$
$
(167)
3,329
750
915
1,665
$
$
$
(47)
3,100
900
640
1,540
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 Credit Card Trust® (“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 33).
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 2018, with their respective maturity dates extended to 2020 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 29, 2018 were
$110 million (December 30, 2017 – $160 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 29, 2018 and throughout
2018.
The following is an aging of the Company’s gross credit card receivables:
(millions of Canadian dollars)
Gross credit card receivables
As at
December 29, 2018
As at
December 30, 2017
Current
3,280
$
1-90 days
past due
187
$
> 90 days
past due
29
$
Total
3,496
Current
2,951
$
$
1-90 days
past due
169
$
> 90 days
past due
27
$
Total
3,147
$
102 2018 Annual Report - Financial Review Loblaw Companies Limited
The following is a continuity of the Company’s allowance for credit card receivables:
Balance, beginning of the year per IAS 39
IFRS 9 Adjustment(i)
Balance, beginning of the year per IFRS 9
Increase / (Decrease) during the period:
Transfers(ii)
To Stage 1
To Stage 2
To Stage 3
New loans originated(iii)
Net remeasurements(iv)
Write-offs
Recoveries
Balance, end of year
Stage 1
Stage 2
— $
—
51 $
— $
—
71 $
$
$
26
(4)
(1)
9
(19)
—
—
(26)
6
(14)
14
29
—
—
As at December 29, 2018
Total
Stage 3
47
— $
—
23 $
—
(2)
15
3
80
(120)
26
98
145
—
—
—
26
90
(120)
26
167
$
62 $
80 $
25 $
(i) Allowance at the beginning of 2018 includes the impact of the implementation of IFRS 9 (note 2).
(ii) Transfers reflect allowance movements between stages for loans that were recognized as of the beginning of the year.
(iii) New loans originated reflect the stage of loan, and the related loan balance, as of the end of the year.
(iv) New remeasurement of loss allowance includes impact from changes in loan balances and credit quality during the year.
Credit card receivables are assessed collectively for impairment by applying the three-stage approach (see note 2).
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 13. Inventories
For inventories recorded as at December 29, 2018, the Company recorded an inventory provision of $37 million (December 30, 2017 –
$39 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 2018 and 2017.
Note 14. 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 2018 the Company recorded a nominal loss (2017 –
$1 million gain) from the sale of these assets. Impairment charges of $3 million were recognized on these properties during 2018 (2017 –
$2 million).
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.
2018 Annual Report - Financial Review Loblaw Companies Limited 103
Notes to the Consolidated Financial Statements
Note 15. Fixed Assets
The following are continuities of the cost and the accumulated depreciation of fixed assets for the years ended December 29, 2018 and
December 30, 2017:
2018
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
$
1,975
$
8,151
$
7,090
$
2,054
$
936
$
Additions(i)
Business acquisitions (note 5)
Disposals
Discontinued Operations (note 6)
Net transfer to assets held for sale
Net transfer to investment
properties (note 16)
Transfer from assets under
construction
Balance, end of year
Accumulated depreciation
Balance, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Discontinued Operations (note 6)
Net transfer to assets held for sale
Net transfer to investment
properties (note 16)
Balance, end of year
Carrying amount as at:
December 29, 2018
$
$
$
$
22
—
(27)
(1,732)
(15)
(43)
50
230
2
—
—
(1)
(1)
(1)
—
—
$
$
66
—
(53)
(5,009)
(15)
(23)
210
3,327
3,159
196
78
(24)
(18)
(2,072)
(1)
(6)
(1) $
1,312
231
$
2,015
$
$
$
$
(i) Additions include $31 million of asset retirement obligations.
289
78
(66)
(6)
—
—
250
7,635
5,333
419
26
(3)
(45)
(4)
—
—
5,726
1,909
$
$
$
$
117
—
(14)
(12)
—
(3)
18
2,160
1,062
$
$
153
19
(11)
(20)
(3)
—
(3)
1,197
963
$
$
20
—
(6)
—
—
—
—
950
491
45
3
—
—
—
—
—
539
411
$
$
$
$
518
506
—
—
(92)
—
—
(528)
$ 20,724
1,020
78
(166)
(6,851)
(30)
(69)
—
404
$ 14,706
8
—
(5)
—
—
(1)
—
—
2
402
$ 10,055
813
121
(39)
(84)
(2,081)
(1)
(9)
$
$
8,775
5,931
104 2018 Annual Report - Financial Review Loblaw Companies Limited
2017
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
$
1,912
$
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 16)
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 16)
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)
—
1,062
992
$
$
$
$
15
—
—
—
2
—
936
409
64
18
—
—
—
—
491
445
$
$
$
$
530
557
—
—
—
—
(569)
$ 19,866
965
82
(52)
(145)
8
—
518
$ 20,724
8
—
—
—
—
—
—
8
$
9,307
802
75
(12)
(48)
(72)
3
$ 10,055
510
$ 10,669
Assets Held under Finance Leases The Company leases various land and buildings, and equipment and fixtures under a number of
finance lease arrangements. As at December 29, 2018, the net carrying amount of leased land and buildings was $385 million
(December 30, 2017 – $424 million), and the net carrying amount of leased equipment and fixtures was $17 million (December 30, 2017 –
$21 million).
Assets under Construction The cost of additions to properties under construction for the year ended December 29, 2018 was
$506 million (December 30, 2017 – $557 million). Included in this amount are capitalized borrowing costs of $4 million (2017 – $2 million),
with a weighted average capitalization rate of 4.0% (2017 – 3.5%).
Security and Assets Pledged As at December 29, 2018, no fixed assets were encumbered by mortgages. As at December 30, 2017,
fixed assets with a carrying amount of $187 million were encumbered by mortgages of $81 million.
Fixed Asset Commitments As at December 29, 2018, the Company had entered into commitments of $233 million (December 30, 2017 –
$143 million) for the construction, expansion and renovation of buildings and the purchase of real property.
2018 Annual Report - Financial Review Loblaw Companies Limited 105
Notes to the Consolidated Financial Statements
Impairment Losses and Reversals For the year ended December 29, 2018, the Company recorded $114 million (2017 – $60 million) of
impairment losses on fixed assets in respect of 42 CGUs (2017 – 21 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 5% (2017 – 29%) of impaired CGUs had
carrying values which were $9 million (2017 – $11 million) greater than their fair value less costs to sell. The remaining 95% (2017 – 71%)
of impaired CGUs had carrying values which were $105 million (2017 – $48 million) greater than their value in use.
For the year ended December 29, 2018, the Company recorded $39 million (2017 – $12 million) of impairment reversals on fixed assets in
respect of 25 CGUs (2017 – seven CGUs) in the retail operating segment. Impairment reversals are recorded where the recoverable
amount of the retail location exceeds its carrying amount. No (2017 – 57%) CGUs with impairment reversals had fair value less costs to
sell greater than their carrying values (2017 – $6 million). All (2017 – 43%) of CGUs with impairment reversals had value in use which were
$39 million (2017 – $5 million) greater than carrying values.
When determining the value in use of a retail location, the Company develops a discounted cash flow model for each CGU. The duration of
the cash flow projections for individual CGUs varies based on the remaining useful life of the significant assets within the CGU. Sales
forecasts for cash flows are based on actual operating results, operating budgets, and long term growth rates that were consistent with
industry averages, all of which are consistent with strategic plans presented to the Company’s Board. The estimate of the value in use of
the relevant CGUs was determined using a pre-tax discount rate of 8.0% to 8.5% at December 29, 2018 (December 30, 2017 – 8.0% to
8.5%).
Additional impairment losses of $7 million (2017 – $5 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 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.
Note 16. Investment Properties
The following are continuities of investment properties for the years ended December 29, 2018 and December 30, 2017:
(millions of Canadian dollars)
Balance, beginning of year
Adjustment to fair value of investment properties
Additions
Business acquisitions (note 6)
Disposals
Discontinued Operations (note 6)
Impairment losses
Net transfer from (to) fixed assets(ii) (note 15)
Net transfer (to) from assets held for sale
Other
Balance, end of year
$
2018
276
(47)
41
4,730
(23)
(4,819)
(6)
81
(5)
6
2017(i)
261
$
(2)
32
—
(7)
—
(1)
(5)
1
(3)
$
234
$
276
(i) Certain comparative figures have been restated (note 2).
(ii)
Includes fair value gain of $21 million related to transfer of fixed assets to investment properties.
During 2018, the Company recognized in operating income $2 million (2017 – $2 million) of rental income and incurred direct operating
costs of $1 million (2017 – $2 million) related to its investment properties. In addition, the Company recognized direct operating costs of
$3 million (2017 – $2 million) related to its investment properties for which no rental income was earned.
The valuations of investment properties using the income approach include assumptions as to market rental rates for properties of similar
size and condition located within the same geographical areas, recoverable operating costs for leases with tenants, non-recoverable
operating costs, vacancy periods, tenant inducements and capitalization rates for the purposes of determining the estimated net proceeds
from the sale of the property. At December 29, 2018, the pre-tax discount rates used in the valuations for investment properties ranged
from 8.25% to 8.75% (December 30, 2017 – 7.50% to 9.50%) and the terminal capitalization rates ranged from 6.25% to 9.00%
(December 30, 2017 – 6.75% to 8.75%).
106 2018 Annual Report - Financial Review Loblaw Companies Limited
Note 17. Intangible Assets
The following are continuities of the cost and the accumulated amortization of intangible assets for the years ended December 29, 2018
and December 30, 2017:
(millions of Canadian dollars)
Cost
Definite Life
Internally
Generated
Intangible
Assets
Indefinite Life
Intangible
Assets
Balance, beginning of year
$
3,485
$
2018
Other Definite
Life Intangible
Assets
Software
Total
$
2,434
$
6,011
$
11,950
20
—
—
—
—
20
20
—
—
—
20
312
—
(5)
—
2,741
1,574
264
(4)
11
1,845
$
$
$
8
25
(2)
—
6,042
2,105
524
(1)
1
2,629
3,413
$
$
$
$
324
55
(7)
(30)
12,292
3,699
788
(5)
12
4,494
7,798
$
$
$
$
4
30
—
(30)
3,489
$
— $
—
—
—
— $
3,489
$
— $
896
2017
Indefinite Life
Intangible
Assets
Definite Life
Internally
Generated
Intangible
Assets
3,475
$
10
—
3,485
$
— $
—
—
— $
20
—
—
20
20
—
—
20
$
$
$
$
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
Additions
Business acquisitions
Disposals
Discontinued Operations (note 6)
Balance, end of year
Accumulated amortization
Balance, beginning of year
Amortization
Disposal
Impairment losses
Balance, end of year
Carrying amount as at:
December 29, 2018
(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
$
$
$
$
$
$
$
$
$
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.
2018 Annual Report - Financial Review Loblaw Companies Limited 107
Notes to the Consolidated Financial Statements
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 18).
Software Software is comprised of software purchases and development costs. There were no capitalized borrowing costs included in
2018 (2017 – nil). In 2017, 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 customer loyalty awards program.
Other Definite Life Intangible Assets Other definite life intangible assets primarily consist of prescription files, the customer loyalty
awards program and customer relationships.
Note 18. Goodwill
The following is a continuity of the cost and the accumulated impairment of goodwill for the years ended December 29, 2018 and
December 30, 2017:
(millions of Canadian dollars)
Cost
Balance, beginning of year
Business acquisitions(i)
Discontinued Operations (note 6)
Balance, end of year
Accumulated amortization and impairment losses
Balance, beginning of year
Impairment losses
Balance, end of year
Carrying amount as at the end of the year
(i)
Includes goodwill of $342 million associated with the acquisition of CREIT (note 6).
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
2018
4,916
362
(342)
4,936
994
—
994
3,942
$
$
$
$
$
2017
4,889
27
—
4,916
994
—
994
3,922
$
$
$
$
$
As at
December 29, 2018
2,972
$
As at
December 30, 2017
2,952
$
375
459
129
7
375
459
129
7
$
3,942
$
3,922
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% to 9.3% (December 30, 2017 – 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 comparable public traded companies.
Cash flow projections have been discounted using a rate derived from the Company’s after-tax weighted average cost of capital. At
December 29, 2018, the after-tax discount rate used in the recoverable amount calculations was 7.0% to 9.3% (December 30, 2017 –
7.0%). The pre-tax discount rate was 9.5% to 12.7% (December 30, 2017 – 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 30, 2017 – 2.0%). The
budgeted EBITDA growth was based on the Company’s three year strategic plan approved by the Board.
108 2018 Annual Report - Financial Review Loblaw Companies Limited
Note 19. Other Assets
The components of other assets were as follows:
(millions of Canadian dollars)
Sundry investments and other receivables
Accrued benefit plan asset (note 26)
Mortgages, loans and notes receivable
Other
Total Other Assets
Current portion of mortgages, loans and notes receivable(i)
Other Assets
As at
December 29, 2018
31
$
As at
December 30, 2017
56
$
225
—
133
389
—
389
$
$
147
29
177
409
26
383
$
$
(i) Current portion of mortgages, loans and notes receivable are included in prepaid expenses and other assets in the consolidated balance sheets.
Note 20. Customer Loyalty Awards Program Liability
The carrying amount of the liability associated with the Company’s customer loyalty awards programs (“loyalty liability”) was as follows:
(millions of Canadian dollars)
Loyalty liability
As at
December 29, 2018
228
$
As at
December 30, 2017
349
$
The majority of the Company’s loyalty liability, which is a contract liability, is expected to be redeemed and recognized as revenue within
one year of issuance.
In 2018, the Company launched the PC Optimum program, which combined the Shoppers Optimum and PC Plus rewards programs into
one program. As a result, the Company recorded a charge of $165 million in 2017, related to the revaluation of the existing
Shoppers Optimum liability for outstanding points to reflect a higher anticipated redemption rate under the new program.
2018 Annual Report - Financial Review Loblaw Companies Limited 109
Notes to the Consolidated Financial Statements
Note 21. 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 29, 2018 and December 30, 2017:
(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
$
$
2018
452
114
(217)
(32)
317
$
$
2017
219
354
(93)
(28)
452
As at
December 29, 2018
As at
December 30, 2017
$
$
165
152
317
$
$
283
169
452
Competition Bureau Investigation In 2017, the Company and Weston announced actions taken to address their involvement in an
industry wide price-fixing arrangement. In connection with the arrangement, the Company offered customers a $25 Loblaw Card, which
can be used to purchase items sold in Loblaw grocery stores across Canada. The Company recorded a charge of $107 million associated
with the Loblaw Card Program in 2017. In 2018, the Company recorded an additional charge of $4 million. 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 (see note 32).
Restructuring and other related costs In 2017, the Company eliminated approximately 500 corporate and store-support positions and
finalized a plan that resulted in the closure of 22 unprofitable retail locations across a range of banners and formats. The Company
recorded a charge of $123 million associated with this restructuring in the fourth quarter of 2017, which included $109 million for severance
and lease related costs, $7 million for asset impairments and $7 million related to other costs.
In addition, in 2017 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.
110 2018 Annual Report - Financial Review Loblaw Companies Limited
Note 22. Long Term Debt
The components of long term debt were as follows:
(millions of Canadian dollars)
Unsecured Term Loan Facility
0.13% + Prime, or 1.13% + Bankers’ Acceptance, due 2019
0.45% + Prime, or 1.45% + Bankers’ Acceptance, due 2019
Debentures
Loblaw Companies Limited Notes
3.75%, due 2019
5.22%, due 2020
4.86%, due 2023
3.92%, due 2024
6.65%, due 2027
6.45%, due 2028
4.49%, 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 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 15)
Guaranteed Investment Certificates
0.85% – 3.78%, due 2019 – 2023
Independent Securitization Trust
2.91%, due 2018
2.23%, due 2020
2.71%, due 2022
3.10%, due 2023
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 29, 2018
As at
December 30, 2017
$
$
$
—
—
800
350
800
400
100
200
400
175
151
(4)
200
200
200
200
200
300
200
150
55
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,141
—
250
250
250
536
535
—
(13)
8,026
1,647
6,379
$
$
$
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
400
250
250
—
551
568
561
(21)
11,177
1,635
9,542
2018 Annual Report - Financial Review Loblaw Companies Limited 111
Notes to the Consolidated Financial Statements
Significant long term debt transactions are described below.
Debentures The following table summarizes the debentures issued in 2018.
(millions of Canadian dollars except where otherwise indicated)
Loblaw Companies Limited Notes(i)
Loblaw Companies Limited Notes(ii)
Total Debentures issued
Interest Rate
3.92%
Maturity Date
June 10, 2024
4.49%
December 11, 2028
(i) On December 10, 2018, the Company issued debentures of $400 million bearing interest at a rate of 3.92%, maturing June 10, 2024.
(ii) On December 10, 2018, the Company issued debentures of $400 million bearing interest at a rate of 4.49%, maturing December 11, 2028.
The following table summarizes the debentures and term loans repaid in 2018:
(millions of Canadian dollars except where otherwise indicated)
Shoppers Drug Mart Notes
Loblaw Companies Limited Term Loan(i)
Loblaw Companies Limited Term Loan(ii)
Total Debentures and Term Loans repaid
Interest Rate
2.36%
Variable
Variable
Maturity Date
May 24, 2018
March 28, 2019
March 29, 2019
Principal
Amount 2018
400
$
400
800
$
Principal
Amount 2018
275
$
48
250
$
573
(i) Loblaw unsecured term loan facility bearing interest at variable rates of either Prime plus 0.45% or Bankers’ Acceptance rate plus 1.45% were redeemed on
August 29, 2018.
(ii) Loblaw unsecured term loan facility bearing interest at variable rates of either Prime plus 0.13% or Bankers’ Acceptance rate plus 1.13% were redeemed on
August 29, 2018.
There were no debentures issued or repaid in 2017.
Subsequent to the end of 2018, the Company redeemed, at par, the $800 million debenture bearing interest at 3.75% with an original
maturity date of March 12, 2019 (note 10). As a result of this repayment the Company has recorded an early repayment premium charge of
$3 million in net interest expense and other financial charges.
During the second quarter of 2018, the Company repaid the remaining mortgage balance of $72 million at maturity.
Guaranteed Investment Certificates The following table summarizes PC Bank’s Guaranteed Investment Certificates (“GICs”) activity,
before commissions, in 2018 and 2017:
(millions of Canadian dollars)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
2018
852
495
(206)
1,141
$
$
$
$
2017
928
76
(152)
852
Independent Securitization Trust The notes issued by Eagle are debentures, which are collateralized by PC Bank’s credit card
receivables (see note 12). The Company has arranged letters of credit for the benefit of the Eagle notes issued prior to 2015 and
outstanding as at December 29, 2018 (see note 33).
In 2018, Eagle issued $250 million of senior and subordinated term notes with a maturity date of July 17, 2023 at a weighted average
interest rate of 3.10%. In connection with this issuance, $250 million of bond forward agreements were settled, resulting in a realized fair
value loss of $1 million, in Other Comprehensive Income, and a net effective interest rate of 3.15% on the Eagle notes issued.
In the fourth quarter of 2018, $400 million 2.91% of senior and subordinated term notes issued by Eagle matured and were repaid.
112 2018 Annual Report - Financial Review Loblaw Companies Limited
Independent Funding Trusts As at December 29, 2018, the independent funding trusts had drawn $536 million (December 30, 2017 –
$551 million) from the revolving committed credit facility that is the source of funding to the independent funding trusts.
Committed Credit Facilities The Company has a $1.0 billion committed credit facility with a maturity date of June 10, 2021. These
facilities contain certain financial covenants (see note 25). As at December 29, 2018 and December 30, 2017, there were no amounts
drawn under the committed credit facility.
Long Term Debt due Within One Year The following table summarizes long term debt due within one year:
(millions of Canadian dollars)
Loblaw Companies Limited Notes
Choice Properties Notes
Shoppers Drug Mart Notes
Guaranteed Investment Certificates
Independent Securitization Trust
Independent Funding Trust
Finance Lease Obligations
Long term debt secured by mortgage
Choice Properties Credit Facility
Long term debt due within one year
As at
December 29, 2018
800
$
As at
December 30, 2017
—
$
—
—
274
—
536
37
—
—
$
1,647
$
400
275
193
400
—
44
73
250
1,635
Schedule of Repayments The schedule of repayments of long term debt, based on maturity, is as follows:
(millions of Canadian dollars)
2019
2020
2021
2022
2023
Thereafter
Total Long Term Debt (excludes transaction costs)
$
See note 30 for the fair value of long term debt.
As at
December 29, 2018
1,647
$
1,127
269
360
1,153
3,483
8,039
2018 Annual Report - Financial Review Loblaw Companies Limited 113
Notes to the Consolidated Financial Statements
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
Business acquisitions (note 6)
Long Term Debt issuances(i)(ii)
Long Term Debt repayments(ii)(iii)
Discontinued Operations (note 6)
Total cash flow from Long Term Debt Financing Activities
Finance Lease additions, net of disposals
Other non-cash changes
Total non-cash Long Term Debt activities
Total Long Term Debt, end of period
2018
11,177
1,841
4,880
(2,715)
(7,222)
(3,216)
14
51
65
8,026
$
$
$
$
$
$
$
2017
10,870
—
686
(450)
—
236
16
55
71
11,177
$
$
$
$
$
$
Includes net issuances from the Independent Funding Trust, which are revolving debt instruments.
Includes net issuances or repayments from the Choice Properties’ credit facilities depending on the activity in the period.
(i)
(ii)
(ii) Includes repayments on Finance Lease Obligations of $83 million (2017 – $94 million).
Note 23. Other Liabilities
The components of other liabilities were as follows:
(millions of Canadian dollars)
Net defined benefit plan obligation (note 26)
Other long term employee benefit obligation
Deferred lease obligation
Fair value of acquired leases
Equity-based compensation liability (note 27)
Other
Other liabilities
As at
December 29, 2018
294
$
As at
December 30, 2017
325
$
109
315
54
2
19
$
793
$
108
140
65
4
58
700
114 2018 Annual Report - Financial Review Loblaw Companies Limited
Note 24. Share Capital
First Preferred Shares (authorized – 1.0 million shares) There were no First Preferred Shares outstanding as at December 29, 2018
and December 30, 2017.
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)
Issued and outstanding, beginning of period
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 27)
Shares held in trust, end of period
Issued and outstanding, net of shares held in trust, end of period
Weighted average outstanding, net of shares held in trust (note 9)
December 29, 2018
(52 weeks)
December 30, 2017
(52 weeks)
Number of
Common
Shares
386,293,941
2,081,235
(16,584,209)
371,790,967
(780,938)
(582,500)
628,711
(734,727)
371,056,240
376,747,429
$
$
$
$
$
Common
Share
Capital
7,460
98
(381)
7,177
(15)
(12)
12
(15)
Number of
Common
Shares
400,829,870
1,019,610
(15,555,539)
386,293,941
(1,105,620)
(686,000)
1,010,682
(780,938)
7,162
385,513,003
393,764,159
Common
Share
Capital
7,713
48
(301)
7,460
(21)
(13)
19
(15)
7,445
$
$
$
$
$
(i) Common shares purchased and cancelled as at December 29, 2018 does not include the shares repurchased from the automatic share purchase plan. Common shares
purchased and cancelled as at December 30, 2017 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.
2018 Annual Report - Financial Review Loblaw Companies Limited 115
Notes to the Consolidated Financial Statements
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 2018 and 2017,
the Board raised the quarterly dividend by $0.025 to $0.295 and by $0.01 to $0.27 per common share, respectively.
The following table summarizes the Company’s cash dividends declared for the periods as indicated:
Dividends declared per share ($):
Common Share
Second Preferred Share, Series B
2018(i)
1.155
1.325
$
$
2017
1.070
1.325
$
$
(i) The fourth quarter dividends for 2018 of $0.295 per share declared on common shares were payable on December 30, 2018 and subsequently paid on
December 31, 2018. The fourth quarter dividends for 2018 of $0.33125 per share declared on Second Preferred Shares, Series B were payable and paid on
December 31, 2018.
(millions of Canadian dollars)
Dividends declared:
Common Share
Second Preferred Share, Series B (note 9)
Total dividends declared
2018
433
12
445
$
$
2017
421
12
433
$
$
Subsequent to the end of the year, the Board declared a quarterly dividend of $0.295 per common share, payable on April 1, 2019 to
shareholders of record on March 15, 2019 and a dividend on the Second Preferred Shares, Series B of $0.33125 per share payable on
March 31, 2019 to shareholders of record on March 15, 2019.
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)
2018
2017
Common shares repurchased under the NCIB for cancellation (number of shares)
16,584,209
15,533,527
Cash consideration paid
Premium charged to Retained Earnings(i)
Reduction in Common Share Capital(ii)
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
$
$
1,082
$
886
381
1,091
790
301
582,500
686,000
$
36
24
12
48
35
13
(i)
Includes $126 million related to the automatic share purchase plan, as described below.
(ii) Includes $59 million related to the automatic share purchase plan, as described below.
In the second quarter of 2018, the Company renewed its NCIB to purchase on the TSX or through alternative trading systems up to
18,952,573 of the Company’s common shares, representing approximately 5% of outstanding common shares. In accordance with the
rules 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 29, 2018, the Company has purchased 8,477,182 common shares under its current NCIB.
In the fourth quarter of 2018, the Company entered into an automatic share purchase plan (“ASPP”) with a broker in order to facilitate the
repurchase 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. As at December 29, 2018, an obligation to
repurchase shares of approximately $185 million was recognized under the ASPP in trade payable and other liabilities. Subsequent to the
end of the year, the Company has completed this ASPP and repurchased 2,927,733 shares.
116 2018 Annual Report - Financial Review Loblaw Companies Limited
Note 25. Capital Management
In order to manage its capital structure, the Company, among other activities, may adjust the amount of dividends paid to shareholders,
purchase shares for cancellation pursuant to its NCIB, issue new shares or issue or repay long term debt with the objective of:
•
• maintaining financial capacity and flexibility through access to capital to support future development of the business;
• minimizing the after-tax cost of its capital while taking into consideration current and future industry, market and economic risks and
ensuring sufficient liquidity is available to support its financial obligations and to execute its operating and strategic plans;
conditions;
•
•
•
utilizing short term funding sources to manage its working capital requirements and long term funding sources to manage the long
term capital investments of the business;
returning an appropriate amount of capital to shareholders; and
targeting an appropriate leverage and capital structure for the Company and each of its reportable operating segments.
The Company has policies in place which govern debt financing plans and risk management strategies for liquidity, interest rates and
foreign exchange. These policies outline measures and targets for managing capital, including a range for leverage consistent with the
desired credit rating. Management and the Audit Committee regularly review the Company’s compliance with, and performance against,
these policies. In addition, management regularly reviews these policies to ensure they remain consistent with the risk tolerance
acceptable to the Company.
The following table summarizes the Company’s total capital under management:
(millions of Canadian dollars)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Certain other liabilities
Total debt
Equity attributable to shareholders of the Company
Total capital under management
As at
December 29, 2018
56
$
As at
December 30, 2017
110
$
915
1,647
6,379
48
9,045
12,119
21,164
$
$
640
1,635
9,542
41
11,968
13,094
25,062
$
$
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.
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 debentures 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 29, 2018 and throughout the year, the Company was in compliance with each of the covenants
under these agreements.
The Company is subject to externally imposed capital requirements from the Office of the Superintendent of Financial Institutions (“OSFI”),
the primary regulator of PC Bank. PC Bank’s capital management objectives are to maintain a consistently strong capital position while
considering 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 2018 and throughout the year, PC Bank has met all applicable regulatory requirements.
2018 Annual Report - Financial Review Loblaw Companies Limited 117
Notes to the Consolidated Financial Statements
Note 26. Post-Employment and Other Long Term Employee Benefits
The Company sponsors a number of pension plans, including registered defined benefit pension plans, registered defined contribution
pension plans and supplemental unfunded arrangements providing pension benefits in excess of statutory limits. Certain obligations of the
Company under these supplemental pension arrangements are secured by a standby letter of credit issued by a major Canadian chartered
bank.
The Company’s Pension Committee 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 2019 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:
2018
Defined
Benefit
Pension
Plans
(1,471) $
(134)
(1,605) $
1,694
89
(10)
79
$
$
Other
Defined
Benefit
Plans
—
(148)
(148)
—
(148)
—
(148)
225
$
(146) $
—
(148)
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)
$
$
$
$
$
$
(millions of Canadian dollars)
Present value of funded obligations
Present value of unfunded obligations
Total present value of defined benefit obligation
Fair value of plan assets
Total funded status of surpluses (obligations)
Assets not recognized due to asset ceiling
Total net defined benefit plan surpluses (obligations)
Recorded on the consolidated balance sheets as follows:
Other Assets (note 19)
Other Liabilities (note 23)
$
$
$
$
$
$
118 2018 Annual Report - Financial Review Loblaw Companies Limited
The following are the continuities of the fair value of plan assets and the present value of the defined benefit plan obligations:
Defined
Benefit
Pension
Plans
2018
Other
Defined
Benefit
Plans
Defined
Benefit
Pension
Plans
2017
Other
Defined
Benefit
Plans
Total
Total
$
1,916
$
— $
1,916
$
1,947
$
— $
1,947
43
4
(62)
66
(41)
(228)
(4)
—
—
—
—
—
—
—
43
4
(62)
66
(41)
(228)
(4)
55
3
(75)
77
142
(229)
(4)
—
—
—
—
—
—
—
55
3
(75)
77
142
(229)
(4)
$
1,694
$
— $
1,694
$
1,916
$
— $
1,916
$
1,925
$
154
$
2,079
$
1,904
$
171
$
2,075
58
69
(72)
2
(150)
(227)
5
5
(8)
—
(8)
—
63
74
(80)
2
(158)
(227)
57
77
(82)
3
183
(217)
6
6
(6)
—
(23)
—
63
83
(88)
3
160
(217)
$
1,605
$
148
$
1,753
$
1,925
$
154
$
2,079
(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 (loss) gains in other comprehensive income
Settlements(i)
Other
Fair value, end of year
Changes in the present value of the defined benefit
plan obligations
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Employee contributions
Actuarial (gains) losses in other comprehensive
(loss) income
Settlements(i)
Balance, end of year
(i) Settlements relate to annuity purchases and pension buy-outs.
In 2018 and 2017, the Company completed several annuity purchases 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 $228 million (2017 – $229 million) from the impacted plans’ assets to settle $227 million (2017 – $217 million) of
pension obligations and recorded settlement charges of $1 million (2017 – $12 million) in SG&A. The settlement charges resulted from the
difference between the amount paid for the annuity purchases and pension buy-outs and the value of the Company’s defined benefit plan
obligations related to these annuity purchases and buy-outs at the time of the settlement.
Subsequent to the year ended 2018, the Company completed several annuity purchases and paid $187 million from the impacted plans’
assets to settle $177 million on pension obligations and management expects to record settlement charges of $10 million in SG&A.
For 2018, the actual return on plan assets was $25 million (2017 – $219 million).
The net defined benefit obligation can be allocated to the plans’ participants as follows:
• Active plan participants 57% (2017 – 55%);
• Deferred plan participants 9% (2017 – 10%); and
• Retirees 34% (2017 – 35%).
During 2019, the Company expects to contribute approximately $74 million (2018 – contributed $44 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.
2018 Annual Report - Financial Review Loblaw Companies Limited 119
Notes to the Consolidated Financial Statements
The net cost recognized in earnings before income taxes for the Company’s defined benefit pension plans and other defined benefit plans
was as follows:
(millions of Canadian dollars)
Current service cost
Interest cost on net defined benefit plan obligations
Settlement charges(i)
Other
Defined
Benefit
Pension
Plans
58
$
2018
Other
Defined
Benefit
Plans
5
$
3
1
4
Total
63
$
8
1
4
5
—
—
10
Defined
Benefit
Pension
Plans
57
$
—
12
4
73
2017
Other
Defined
Benefit
Plans
6
6
—
—
12
$
$
Total
63
6
12
4
85
$
$
Net post-employment defined benefit cost
$
66
$
$
76
$
(i) Relates to annuity purchases and pension buy-outs.
The actuarial (gains) losses recognized in other comprehensive income (loss) net of taxes for defined benefit plans were as follows:
(millions of Canadian dollars)
Return on plan assets, excluding amounts included in
net interest expense and other financing charges
$
Experience adjustments
Actuarial (gains) losses from change in financial
assumptions
Change in liability arising from asset ceiling
Total net actuarial (gains) losses recognized in other
comprehensive income (loss) before income taxes
Income tax expenses (recoveries) on actuarial (gains)
losses (note 8)
Actuarial (gains) losses net of income tax
(recoveries) expenses
Defined
Benefit
Pension
Plans
2018
Other
Defined
Benefit
Plans
41
4
(154)
(7)
$
— $
2
(10)
—
Total
41
6
(164)
(7)
Defined
Benefit
Pension
Plans
2017
Other
Defined
Benefit
Plans
Total
$
(142) $
— $
(142)
19
164
8
(28)
5
—
$
(116) $
(8) $
(124)
$
49
$
(23) $
31
2
33
(13)
6
$
(85) $
(6) $
(91)
$
36
$
(17) $
The cumulative actuarial (gains) losses before income taxes recognized in equity for the Company’s defined benefit plans were as follows:
(millions of Canadian dollars)
Cumulative amount, beginning of year
Net actuarial (gains) losses recognized in the year
before income taxes
Cumulative amount, end of year
$
$
2018
Other
Defined
Benefit
Plans
$
(79) $
Defined
Benefit
Pension
Plans
19
(116)
(8)
Total
(60)
(124)
(97) $
(87) $
(184)
$
$
120 2018 Annual Report - Financial Review Loblaw Companies Limited
Defined
Benefit
Pension
Plans
2017
Other
Defined
Benefit
Plans
(30) $
(56) $
(23)
49
19
$
(79) $
(60)
(9)
169
8
26
(7)
19
Total
(86)
26
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
2018
2017
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
$
$
$
$
$
49
446
495
439
155
277
10
881
121
197
1,694
3%
26%
29%
26%
9%
16%
1%
52%
7%
12%
100%
$
$
$
$
$
79
713
792
439
131
404
10
984
117
23
1,916
4%
37%
41%
23%
7%
21%
1%
52%
6%
1%
100%
(i) Both government and corporate securities may be included within the same fixed income pooled fund.
As at December 29, 2018 and December 30, 2017, 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.
2018 Annual Report - Financial Review Loblaw Companies Limited 121
Notes to the Consolidated Financial Statements
Principal Actuarial Assumptions The principal actuarial assumptions used in calculating the Company’s defined benefit plan obligations
and net defined benefit plan cost for the year were as follows (expressed as weighted averages):
Defined Benefit Plan Obligations
Discount rate
Rate of compensation increase
Mortality table(i)
Net Defined Benefit Plan Cost
Discount rate
Rate of compensation increase
Mortality table(i)
2018
2017
Defined Benefit
Pension Plans
Other Defined
Benefit Plans
Defined Benefit
Pension Plans
Other Defined
Benefit Plans
4.00%
3.00%
CPM-RPP2014 Pub/
Priv Generational
4.00%
n/a
CPM-RPP2014 Pub/
Priv Generational
3.50%
3.00%
CPM-RPP2014 Pub/
Priv Generational
3.50%
n/a
CPM-RPP2014 Pub/
Priv Generational
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
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 29, 2018 is 17.8 years (December 30, 2017 – 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 2019 and thereafter.
Sensitivity of Key Actuarial Assumptions The following table outlines the key assumptions for 2018 (expressed as weighted averages)
and the sensitivity of a 1% change in each of these assumptions on the defined benefit plan obligations and the net defined benefit plan
cost.
The sensitivity analysis provided in the table is hypothetical and should be used with caution. The sensitivities of each key assumption
have been calculated independently of any changes in other key assumptions. Actual experience may result in changes in a number of key
assumptions simultaneously. Changes in one factor may result in changes in another, which could amplify or reduce the impact of such
assumptions.
Increase (Decrease)
(millions of Canadian dollars except where otherwise indicated)
Discount rate
Impact of:
1% increase
1% decrease
Expected growth rate of health care costs
Impact of:
1% increase
1% decrease
Defined Benefit Pension Plans
Other Defined Benefit Plans
Defined Benefit
Plan
Obligations
4.00%
Net Defined
Benefit
Plan Cost(i)
3.50%
Defined Benefit
Plan
Obligations
4.00%
Net Defined
Benefit
Plan Cost(i)
3.50%
$
$
(268)
323
$
$
n/a
n/a
(28)
27
n/a
n/a
$
$
$
$
(18)
22
4.50%
16
(13)
$
$
$
$
—
—
4.50%
1
(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.
122 2018 Annual Report - Financial Review Loblaw Companies Limited
Multi-Employer Pension Plans
During 2018, the Company recognized an expense of $66 million (2017 – $66 million) in operating income, which represents the
contributions made in connection with MEPPs. During 2019, 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 (2017 – 54,000) employees as members. Included in the 2018 expense described above are
contributions of $65 million (2017 – $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 28)
Net interest expense and other financing charges (note 7)
Net post-employment and other long term employee benefit costs
2018
76
25
66
167
28
195
184
11
195
$
$
$
$
$
2017
85
22
66
173
28
201
192
9
201
$
$
$
$
$
Includes settlement charges of $1 million (2017 – $12 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 (2017 – $3 million) of net interest expense and other financing charges.
Note 27. Equity-Based Compensation
The Company’s equity-based compensation expense, which includes Loblaw Stock Option, RSU, PSU, DSU and EDSU plans was
$49 million during 2018 (2017 – $53 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 23)
Contributed surplus
As at
December 29, 2018
—
$
2
107
As at
December 30, 2017
$
11
4
110
During 2018, the Company cancelled stock options and granted new stock options at an adjusted share price to “make-whole” stock option
holders for the decline in the Company’s share price as a result of the spin-out of the Company’s equity interest in Choice Properties. In
addition, the Company issued additional RSUs, PSUs, DSUs, and EDSUs to “make-whole” unit holders as a result of the spin-out. These
"make-whole" arrangements were not considered modifications to the Company's equity-based compensation plans and as a result had no
impact on the Company's financial statements.
2018 Annual Report - Financial Review Loblaw Companies Limited 123
Notes to the Consolidated Financial Statements
The following are details related to the equity-based compensation plans of the Company:
Stock Option Plan The Company maintains a stock option plan for certain employees. Under this plan, the Company may grant options
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
2018
2017
Options
(number of shares)
7,487,774
Weighted
Average Exercise
Price / Share
53.77
$
Options
(number of shares)
7,322,358
Weighted
Average Exercise
Price / Share
48.93
$
9,672,806
$
(2,081,235) $
(7,569,714) $
7,509,631
3,033,156
$
$
53.26
38.87
59.36
51.60
45.14
1,584,407
$
(1,019,610) $
(399,381) $
7,487,774
3,847,491
$
$
70.02
39.98
64.74
53.77
43.57
During 2018, the Company cancelled all 6,725,773 stock options and granted 8,013,333 stock options at an adjusted share price to “make-
whole” stock option holders for the decline in the Company’s share price as a result of the spin-out of the Company’s equity interest in
Choice Properties.
Range of Exercise Prices
$27.37 – $54.30
$54.31 – $57.83
$57.84 – $65.46
2018 Outstanding Options
2018 Exercisable Options
Weighted
Average
Remaining
Contractual
Life (years)
2.1
6.1
4.7
Number of
Options
Outstanding
2,968,083
1,954,149
2,587,399
7,509,631
Weighted
Average
Exercise
Price/Share
42.74
55.79
58.59
51.60
$
$
$
$
Number of
Exercisable
Options
2,253,523
Weighted
Average
Exercise
Price/Share
40.56
$
28,111
751,522
3,033,156
$
$
$
57.06
58.42
45.14
During 2018, the Company issued common shares on the exercise of stock options with a weighted average market share price of $65.45
(2017 – $70.98). The Company received cash consideration of $78 million (2017 – $41 million) related to the exercise of these options.
The fair value of stock options granted during 2018 was $15 million (2017 – $15 million). The assumptions used to measure the fair value
of options granted during 2018 and 2017 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
2018
1.8%
2017
1.5%
15.2% – 21.0%
16.0% – 18.2%
1.9% – 2.3%
0.9% – 1.7%
3.9 – 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 29, 2018 was 9.0% (December 30, 2017 – 10.0%).
124 2018 Annual Report - Financial Review Loblaw Companies Limited
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
2018
824,705
528,614
7,954
(277,698)
(59,300)
1,024,275
2017
858,106
337,846
4,418
(323,894)
(51,771)
824,705
The fair value of RSUs granted during 2018 was $24 million (2017 – $24 million).
During 2018, as a result of the spin-out of Choice Properties the Company granted additional 164,322 RSUs to “make-whole” RSU
unitholders for the decline in the Company’s share price as a result of the spin-out of the Company’s equity interest in Choice Properties.
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
2018
631,528
434,692
5,409
(355,618)
(41,066)
674,945
2017
965,863
404,150
3,152
(687,007)
(54,630)
631,528
The fair value of PSUs granted during 2018 was $15 million (2017 – $16 million).
During 2018, as a result of Choice Properties spin-out the Company granted additional 114,778 PSUs to “make-whole” PSU unitholders for
the decline in the Company’s share price as a result of the spin-out of the Company’s equity interest in Choice Properties.
Settlement of Awards from Shares Held in Trust During 2018, the Company settled RSUs and PSUs totaling 633,316 (2017 –
1,010,901), of which 628,711 (2017 – 1,010,682) were settled through the trusts established for settlement of each of the RSU and PSU
plans (see note 24). The settlements resulted in a $12 million (2017 – $19 million) increase to share capital and a net increase of
$25 million (2017 – $29 million) to retained earnings.
Director Deferred Share Unit Plan The following is a summary of the Company’s DSU plan activity:
(Number of awards)
DSUs outstanding, beginning of year
Granted
Reinvested
Settled
DSUs outstanding, end of year
2018
220,672
78,860
2,917
(6,120)
296,329
2017
188,202
29,289
3,181
—
220,672
The fair value of DSUs granted during 2018 was $2 million (2017 – $2 million).
During 2018, as a result of the spin-out of Choice Properties the Company granted additional 47,027 DSUs to “make-whole” DSU
unitholders for the decline in the Company’s share price as a result of the spin-out of the Company’s equity interest in Choice Properties.
2018 Annual Report - Financial Review Loblaw Companies Limited 125
Notes to the Consolidated Financial Statements
Executive Deferred Share Unit Plan The following is a summary of the Company’s EDSU plan activity:
(Number of awards)
EDSUs outstanding, beginning of year
Granted
Reinvested
Settled
EDSUs outstanding, end of year
2018
47,294
11,402
578
(13,801)
45,473
2017
35,559
16,558
686
(5,509)
47,294
The fair value of EDSUs granted during 2018 was nominal (2017 – $1 million).
During 2018, as a result of the spin-out of Choice Properties the Company granted additional 7,868 EDSUs to “make-whole” EDSU
unitholders for the decline in the Company’s share price as a result of the spin-out of the Company’s equity interest in Choice Properties.
Note 28. Employee Costs
Included in operating income are the following employee costs:
(millions of Canadian dollars)
Wages, salaries and other short term employment benefits
Post-employment benefits (note 26)
Other long term employee benefits (note 26)
Equity-based compensation
Capitalized to fixed assets
Total employee costs
Note 29. Leases
$
2018
5,748
159
25
47
(54)
2017
5,385
167
25
51
(46)
5,925
$
5,582
$
$
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 29, 2018
December 30, 2017(i)
As at
As at
(millions of Canadian dollars)
2019
2020
2021
2022
2023
Thereafter
Operating lease payments
$ 1,229
$ 1,195
$ 1,140
$ 1,073
Sub-lease income
(67)
(42)
(34)
(31)
Net operating lease payments
$ 1,162
$ 1,153
$ 1,106
$ 1,042
$
$
978
(29)
949
$
$
4,372
(93)
4,279
$
$
Total
9,987
(296)
9,691
$
$
Total
4,698
(273)
4,425
(i) Comparative figures have not been restated to conform with current year presentation and thus exclude lease commitments with Choice Properties.
During 2018, the Company recorded $1,234 million (2017 – $1,214 million) as an expense included in the statement of earnings in respect
of operating leases. In addition, contingent rent recognized as an expense in respect of operating leases totaled $2 million (2017 –
$1 million) and sub-lease income earned totaled $60 million (2017 – $107 million), which is recognized in operating income. Contingent
rent recognized as income in respect of sub-leased operating leases in 2018 was $3 million (2017 – $3 million).
126 2018 Annual Report - Financial Review Loblaw Companies Limited
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)
2019
2020
2021
2022
2023
Thereafter
Net operating lease income
$
6
$
6
$
6
$
6
$
5
$
12
$
Total
41
$
Total
680
Payments to be received by year
December 29, 2018
December 30, 2017(i)
As at
As at
(i) Comparative figure has not been restated to conform with current year presentation.
As at December 29, 2018, the Company leased certain owned land and buildings with a cost of $340 million (December 30, 2017 –
$2,974 million) and related accumulated depreciation of $65 million (December 30, 2017 – $796 million). For the year ended December 29,
2018, rental income was $198 million (2017 – $76 million) and contingent rent was $1 million (2017 – $2 million), both of which were
recognized in operating income.
Finance Leases – As Lessee Future minimum lease payments relating to the Company’s finance leases are as follows:
Payments due by year
December 29, 2018
December 30, 2017
As at
As at
(millions of Canadian dollars)
2019
2020
2021
2022
2023
Thereafter
Finance lease payments
Less future finance charges
Present value of minimum
lease payments
$
$
77
$
71
$
65
$
64
$
62
$
(39)
(33)
(31)
(29)
(27)
594
(239)
38
$
38
$
34
$
35
$
35
$
355
$
$
Total
933
(398)
535
$
$
Total
914
(346)
568
During 2018, contingent rent recognized by the Company as an expense in respect of finance leases was $2 million (2017 – $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)
2019
2020
2021
2022
2023
Thereafter
Sub-lease income
$
5
$
4
$
2
$
2
$
2
$
16
$
Total
31
$
Total
59
Payments to be received by year
December 29, 2018
December 30, 2017
As at
As at
During 2018, the sub-lease income earned under finance leases was $5 million (2017 – $15 million).
2018 Annual Report - Financial Review Loblaw Companies Limited 127
Notes to the Consolidated Financial Statements
Note 30. Financial Instruments
The following table presents the fair value hierarchy of financial assets and financial liabilities, excluding those classified as amortized cost
that are short term in nature. The carrying values of the Company’s financial instruments approximate their fair values except for long term
debt.
The Company measures financial assets and financial liabilities under fair value hierarchy (see note 2).
(millions of Canadian dollars)
Financial assets
Amortized cost:
Franchise loans receivable
Certain other assets(i)
Fair value through other comprehensive income:
Certain long term investments(i)
Derivatives included in prepaid expenses and other assets
Fair value through profit and loss:
Derivatives included in prepaid expenses and other assets
Financial liabilities
Amortized cost:
Long term debt
Certain other liabilities(i)
Fair value through other comprehensive income:
Derivatives included in trade payables and other liabilities
Fair value through profit and loss:
Trust Unit Liability
Derivatives included in trade payables and other liabilities
As at
December 29, 2018
As at
December 30, 2017
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
$ — $
— $
—
50
—
2
—
—
—
—
11
—
—
1
11
8,653
—
5
—
—
78
16
—
—
—
—
13
—
—
3
$
78
16
50
1
13
8,653
13
5
—
14
$ — $ — $
166
$
166
—
20
—
6
3
—
—
—
23
—
—
2
26
20
—
8
— 12,103
— 12,103
—
—
972
—
—
1
—
10
18
—
—
—
18
1
972
10
(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 2018, the Company recognized a gain of $6 million (2017 – loss of $6 million) in operating income on financial instruments
designated as amortized cost. In addition, during 2018, a net loss of $3 million (2017 – net loss of $9 million) was recorded in earnings
before income taxes related to financial instruments required to be classified as fair value through profit or loss.
Franchise Loans Receivable and Franchise Investments The value of Loblaw franchise loans receivable of $78 million (December 30,
2017 – $166 million) was recorded in the consolidated balance sheet. In 2018, the Company recorded a gain of $3 million (2017 –
$8 million gain) in operating income related to these loans receivable.
The value of Loblaw franchise investments of $14 million (December 30, 2017 – $20 million) was recorded in other assets. During 2018,
the Company recorded a gain of $2 million (2017 – $2 million gain) 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 2018, a loss of $5 million (2017 – gain of $4 million) was recorded in operating income related to these derivatives. In addition, a
corresponding liability of $3 million was included in trade payables and other liabilities as at December 29, 2018 (December 30, 2017 –
$2 million asset included in prepaid expenses and other assets). As at December 29, 2018, a 1% increase (decrease) in foreign currency
exchange rates would result in a $1 million gain (loss) in fair value.
128 2018 Annual Report - Financial Review Loblaw Companies Limited
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 29, 2018, the fair value of available for sale investments of $50 million (December 30, 2017 – $20 million) was included in
other assets. During 2018, PC Bank recorded a nominal unrealized fair value gain (2017 – 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
Foreign Exchange Forwards
Bond Forwards(i)
Interest Rate Swaps
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 29, 2018
Net Asset/
(Liability)
Fair value
Gain/(loss)
recorded in
OCI
Gain/(loss)
recorded in
operating
income
$
$
$
$
$
$
1
(4)
(1)
$
2
(5)
(1)
(4) $
(4) $
11
$
(11)
— $
(4) $
— $
—
— $
(4) $
—
1
—
1
21
(20)
1
2
(i) As a result of the issuance of Eagle notes, bond forward agreements with a notional value of $250 million were settled in 2018, resulting in a realized fair value loss of
$1 million recorded in OCI (see note 22).
(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
Net Asset/
(Liability)
Fair value
Gain/(loss)
recorded in
OCI
Gain/(loss)
recorded in
operating
income
$
$
$
$
$
(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) Bond forward agreements with a notional value of $200 million were settled in 2017, resulting in realized fair value gain of $6 million recorded in OCI.
2018 Annual Report - Financial Review Loblaw Companies Limited 129
Notes to the Consolidated Financial Statements
Note 31. Financial Risk Management
As a result of holding and issuing financial instruments, the Company is exposed to liquidity, 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 29, 2018:
2019
2020
2021
2022
2023
Thereafter
Total(i)
Derivative Financial Liabilities
Foreign exchange forward contracts
$
336
$
— $
— $
— $
— $
— $
336
Non-Derivative Financial Liabilities
Bank Indebtedness
Short term debt(ii)
56
915
—
—
Long term debt including interest payments(iii)
2,002
1,447
Other liabilities
2
3
—
—
562
3
—
—
645
—
—
—
1,414
—
—
—
56
915
5,436
11,506
—
8
$
3,311
$
1,450
$
565
$
645
$
1,414
$
5,436
$ 12,821
(i) 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 12).
(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 29, 2018.
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.
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.
130 2018 Annual Report - Financial Review Loblaw Companies Limited
Interest Rates 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. An increase in interest rates could adversely affect the operations or financial performance of
the Company. The Company manages interest rate risk by monitoring the respective mix of fixed and floating rate debt and by taking action
as necessary to maintain an appropriate balance considering current market conditions, with the objective of maintaining the majority of its
debt at fixed interest rates. The Company estimates that a 1% increase (decrease) in short term interest rates, with all other variables held
constant, would result in an increase (decrease) of $3 million to net interest expense and other financing charges.
Currency Exchange Rates The Company is exposed to foreign currency exchange rate variability, primarily on its USD denominated
purchases in trade payables and other liabilities. A depreciating Canadian dollar relative to the USD will have a negative impact on year-
over-year changes in reported operating income and net earnings, while an appreciating Canadian dollar relative to the USD will have the
opposite impact. The Company is also exposed to fluctuations in the prices of USD denominated purchases as a result of changes in USD
exchange rates. To manage a portion of this exposure, the Company uses derivative instruments in the form of futures contracts and
forward contracts to minimize cost volatility related to foreign exchange.
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 29, 2018,
a 10% decrease in relevant energy prices, with all other variables held constant, would result in a loss of $5 million on earnings before
income taxes.
Note 32. Contingent Liabilities
In the ordinary course of business, the Company is involved in and potentially subject to, legal actions and proceedings. In addition, the
Company is subject to tax audits from various tax authorities on an ongoing basis. As a result, from time to time, tax authorities may
disagree with the positions and conclusions taken by the Company in its tax filings or legislation could be amended or interpretations of
current legislation could change, any of which events could lead to reassessments.
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 accruals or provisions related to such matters 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 (“Superior Court”) 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. In July 2017, the Superior Court dismissed the action and the plaintiffs
appealed. The decision of the Ontario Court of Appeal, released December 20, 2018, upheld the Superior Court’s dismissal of the action.
Costs awarded in respect of the original motion was reduced by 30%. The Company anticipates that the plaintiff’s will seek leave to appeal
to the Supreme Court of Canada.
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 Superior Court certified as a class proceeding portions of the action. The Superior
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.
2018 Annual Report - Financial Review Loblaw Companies Limited 131
Notes to the Consolidated Financial Statements
In 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 2018 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 at the earlier of when a reliable estimate of liability can be determined or the matter is ultimately
resolved.
As part of its response to this issue, the Company announced the Loblaw Card Program pursuant to which the Company offered 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 associated with the Loblaw Card Program in 2017. In 2018, the Company recorded an
additional charge of $4 million. 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.
In August 2018, the Province of British Columbia filed a class action against numerous opioid manufacturers and distributors, including the
Company and its subsidiaries, Shoppers Drug Mart Inc. and Sanis Health Inc. The claim contains allegations of breach of the Competition
Act, fraudulent misrepresentation and deceit and negligence, and seeks damages (unquantified) for the expenses incurred by the province
in paying for opioid prescriptions and other healthcare costs related to opioid addiction and abuse in British Columbia. 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.
Indemnification Provisions The Company from time to time enters into agreements in the normal course of its business, such as service
and outsourcing arrangements, lease agreements in connection with business or asset acquisitions or dispositions, and other types of
commercial agreements. These agreements by their nature may provide for indemnification of counterparties. These indemnification
provisions may be in connection with breaches of representations and warranties or in respect of future claims for certain liabilities,
including liabilities related to tax and environmental matters. The terms of these indemnification provisions vary in duration and may extend
for an unlimited period of time. In addition, the terms of these indemnification provisions vary in amount and certain indemnification
provisions do not provide for a maximum potential indemnification amount. Indemnity amounts are dependent on the outcome of future
contingent events, the nature and likelihood of which cannot be determined at this time. As a result, the Company is unable to reasonably
estimate its total maximum potential liability in respect of indemnification provisions. Historically, the Company has not made any significant
payments in connection with these indemnification provisions.
Note 33. Financial Guarantees
The Company established letters of credit used in connection with certain obligations mainly related to real estate transactions, benefit
programs, purchase orders and guarantees with a gross potential liability of approximately $317 million as at December 29, 2018
(December 30, 2017 – $342 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 29, 2018, the Company’s maximum obligation in respect of such guarantees was $580 million (December 30, 2017 –
$580 million) with an aggregate amount of $466 million (December 30, 2017 – $509 million) in available lines of credit allocated to the
Associates by the various banks. As at December 29, 2018, Associates had drawn an aggregate amount of $56 million (December 30,
2017 – $110 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.
132 2018 Annual Report - Financial Review Loblaw Companies Limited
Independent Funding Trusts The full balance relating to the debt of the independent funding trusts has been consolidated on the balance
sheet of the Company (see note 22). As at December 29, 2018 the Company has agreed to provide a credit enhancement of $64 million
(December 30, 2017 – $64 million) in the form of a standby letter of credit for the benefit of the independent funding trusts representing not
less than 10% (2017 – 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 $12 million (December 30, 2017 – $15 million). Additionally, the Company has guaranteed lease obligations of
a third party distributor in the amount of $3 million (December 30, 2017 – $3 million).
Glenhuron Bank Limited Surety Bond In connection with the Canada Revenue Agency’s reassessment of the Company on certain
income earned by Glenhuron (see note 8), the Company arranged for a surety bond to the Ministry of Finance in order to appeal the
reassessments. As a result of the decision of the Tax Court of Canada and incremental payments, the amount of the surety bond has been
reduced to $46 million (2017 – $149 million).
Cash Collateralization As at December 29, 2018, the Company had agreements to cash collateralize certain of its uncommitted credit
facilities up to an amount of $103 million (December 30, 2017 – $102 million), of which $2 million (December 30, 2017 – $3 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 29, 2018, the guarantee on
behalf of PC Bank to MasterCard® was USD $190 million (December 30, 2017 – USD $190 million).
The Company had in place an irrevocable standby letter of credit from a major Canadian chartered bank on behalf of one of its wholly-
owned subsidiaries in the amount of $11 million (December 30, 2017 – $76 million).
Letters of credit for the benefit of independent securitization trusts with respect to the securitization programs of PC Bank have been
issued by major financial institutions. These standby letters of credit can be drawn upon in the event of a major decline in the income flow
from or in the value of the securitized credit card receivables. The Company has agreed to reimburse the issuing banks for any amount
drawn on the standby letters of credit. The aggregate gross potential liability under these arrangements for the Other Independent
Securitization Trusts was $89 million (December 30, 2017 – $62 million), which represented approximately 10% (2017 – 10%) of the
securitized credit card receivables amount (see note 12).
Note 34. Related Party Transactions
The Company’s controlling shareholder is Weston, which owns, directly and indirectly, 187,815,136 of the Company’s common shares,
representing approximately 50.4% 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 81,465,025 of Weston’s common shares,
representing approximately 53.1% of Weston’s outstanding common shares. Mr. Weston also beneficially owns 5,096,189 of the
Company’s common shares, representing approximately 1.4% of the Company’s outstanding common shares.
In the fourth quarter of 2018, the Company and its parent Weston completed a reorganization under which the Company distributed its
approximate 61.6% effective interest in Choice Properties to Weston on a tax-free basis to the Company and its Canadian shareholders. In
connection with the reorganization, the common shareholders of the Company, other than Weston and its subsidiaries, received 0.135 of a
common share of Weston for each common share of the Company held, which was equivalent to the market value of their pro rata interest
in Choice Properties as at the announcement date of the spin-out, and Weston received the Company’s approximate 61.6% effective
interest in Choice Properties (see note 6).
Following the reorganization, the Company no longer retains its interest in Choice Properties and has ceased to consolidate its equity
interest in Choice Properties from its consolidated financial statements. The transaction has no impact on the ongoing operating
relationship between the Company and Choice Properties and all current agreements and arrangements, including The Strategic Alliance
Agreement and leases, remain in place. The Company continues to be Choice Properties’ largest tenant, representing approximately 68%
of Choice Properties’ annual base rent revenue and 59% of its gross leasable area as at December 29, 2018 (December 30, 2017 – 88%
and 88% respectively).
The Company’s policy is to conduct all transactions and settle all balances with related parties on market terms and conditions. The
Company has reflected all transactions with Choice Properties below from the earliest period presented. Prior to November 1, 2018, these
transactions were eliminated on consolidation.
2018 Annual Report - Financial Review Loblaw Companies Limited 133
Notes to the Consolidated Financial Statements
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
Transactions with Weston
Cost sharing agreements with Parent(ii)
Net administrative services provided by Parent(iii)
Lease of office space from a subsidiary of Wittington
Lease of office space to a subsidiary of Wittington
Transactions with Choice Properties
Rental expenses paid to Choice Properties(iv)
Property management and other administration fees paid to Choice Properties
Lease surrender payments
Service agreement fees received from Choice Properties
Net other income received from Choice Properties(v)
Gain on sale of properties to Choice Properties(vi)
$
$
$
Transaction Value
$
$
$
2018
649
2
30
42
19
4
—
742
1
10
(2)
(6)
(6)
2017
652
2
28
35
23
4
2
718
1
6
(3)
(4)
(7)
(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 29, 2018 was $3 million (December 30, 2017 – $6 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) Rental expenses paid to Choice Properties include base rent of $543 million (2017 – $533 million) and operating expenses of $199 million (2017 – $185 million).
(v) Net other income received from Choice Properties include site intensification payments received from Choice Properties of $6 million (2017 – $6 million). Included in
certain investment properties sold to Choice Properties is excess land with development potential. Choice Properties will compensate the Company, over time, with
intensification payments, as Choice Properties pursues development, intensification or redevelopment of such excess lands. The payments the Company receives are
calculated in accordance with a payment grid, set out in the Strategic Alliance Agreement, that takes into account the region, market ranking and type of use for the
property). The Company did not make any development capital payments to Choice Properties during the year ended December 29, 2018 (2017 – $2 million).
(vi) Prior to the spin-out, the Company disposed of one investment property to Choice Properties for a sale price of $2 million and a loss on sale of $2 million was recognized
and eliminated on consolidation. Since November 1, 2018, the Company disposed three investment properties to Choice Properties for an aggregate purchase price of
$55 million and recognized a gain of $8 million. These properties were leased back by the Company and were classified as operating leases.
The net balances due to (from) related parties are comprised as follows:
(millions of Canadian dollars)
Weston(i)
Choice Properties(ii)
As at
December 29, 2018
As at
December 30, 2017
$
$
36
2
48
(22)
(i) Balances relate to trade payables and other liabilities due to Weston, net of receivables from Weston.
(ii) Balances relate to distribution and other receivables, net of note and other payables.
134 2018 Annual Report - Financial Review Loblaw Companies Limited
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
$
$
2018
6
10
16
$
$
2017
6
9
15
Other Transactions and Agreements with Choice Properties
Strategic Alliance Agreement The Strategic Alliance Agreement established on the IPO of Choice creates a series of rights and obligations
between Choice Properties and the Company, intended to establish a preferential and mutually beneficial business and operating relationship.
The Agreement expires on July 5, 2023, ten years from the IPO.
Services Agreement The Company provides Choice Properties with administrative and other support services.
Property Management Agreement Choice Properties provides the Company with property management services for properties with third-
party tenancies on a fee for service basis for an initial two-year term with automatic one-year renewals.
Sublease Administration Agreement On July 17, 2017, in connection with the Company’s sale of substantially all of its gas bar operations,
Choice Properties agreed to provide the Company with certain administrative services in respect of the subleases to Brookfield on a fee for
service basis for an initial five-year term with automatic one-year renewals.
Letters of Credit As at December 29, 2018, letters of credit totaling $3 million were posted by the Company with the province of Ontario and
City of Toronto on behalf of Choice Properties related to deferral of land transfer tax on properties acquired from the Company
(December 30, 2017 – $5 million).
Distributions on Choice Properties LP Units Prior to the spin-out and the acquisition of CREIT by Choice Properties, the Company held
all the Exchangeable Units and Class C LP Units issued by Choice Properties. For the year ended December 29, 2018, the Company received
distributions totaling $238 million (2017 – $278 million) on the Units held.
Trust Unit Distributions For the year ended December 29, 2018, the Company received distributions of $13 million (2017 – $16 million) on
the Units held.
Acquisitions During 2017, the Company acquired certain gas bar capital assets with a fair value of $35 million from Choice Properties, for
cash, in order to facilitate the sale of substantially all of the Company’s gas bar operations to Brookfield. The gas bar capital assets were
leased to the Company as part of the respective tenant leases between the Choice Properties and the Company. The tenant leases between
Choice Properties and the Company related to these investment properties remained substantially unchanged.
Commitments The following is a summary of the Company’s commitments to Choice Properties as of December 29, 2018:
(millions of Canadian dollars)
Operating lease payments
2019
535
$
2020
541
$
2021
549
$
2022
555
$
2023
534
Thereafter
2,516
$
$
$
Total
5,230
Payments due by year
As at
December 29, 2018
2018 Annual Report - Financial Review Loblaw Companies Limited 135
Notes to the Consolidated Financial Statements
Note 35. Segment Information
The Company has two 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, apparel and other general merchandise and supports 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. The Retail segment is Choice Properties’ largest
tenant and all transactions, including but not limited to rental payments, with Choice Properties are included in segment results. Prior
to July 17, 2017, the Retail segment also included gas bar operations; and
•
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.
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.
Post spin-out of Choice Properties, the chief operating decision maker evaluates Retail segment performance on a Continuing Operations
basis. The Company has restated the financial results of the Retail segment on a Continuing Operations basis, to include amounts paid
between the Company and Choice Properties in the current and comparative period. The Company’s current and comparative period
Retail segment results include rent paid to Choice Properties, gains related to the sale leaseback of properties to Choice Properties and
site intensification payments received from Choice Properties. In addition, the Retail segment no longer includes depreciation and
amortization on properties owned by Choice Properties previously treated as own use fixed assets.
Information for each reportable operating segment is included below:
(millions of Canadian dollars)
Revenue(ii)
Operating Income
Retail
Financial
Services
$ 45,836
$ 1,082
$ 1,717
Net interest expense and other financing charges
495
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)
Adjusted Operating Income
$ 1,222
$ 1,717
1,487
649
(521)
$ 3,332
966
$ 2,366
December 29, 2018
(52 weeks)
December 30, 2017(3)(4)
(52 weeks)
Eliminations(i)
Total
Retail
Financial
Services
Eliminations(i)
Total
$
$
$
$
$
$
(225) $ 46,693
$ 45,867
— $ 1,923
$ 1,843
—
564
318
— $ 1,359
$ 1,525
— $ 1,923
$ 1,843
—
—
—
1,497
629
1,444
566
(521)
(524)
— $ 3,528
$ 3,329
—
976
920
— $ 2,552
$ 2,409
$
$
$
$
$
$
953
206
56
150
206
10
(24)
—
192
10
182
$
$
$
$
$
$
(233) $ 46,587
— $ 2,049
—
374
— $ 1,675
— $ 2,049
—
—
—
1,454
542
(524)
— $ 3,521
—
930
— $ 2,591
$
$
$
$
$
206
69
137
206
10
(20)
—
196
10
186
Eliminations includes the reclassification of revenue related to PC MasterCard® loyalty awards in the Financial Services segment.
Included in Financial Services revenue is $426 million (2017 – $393 million) of interest income.
(i)
(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 $521 million (2017 – $524 million) of amortization of intangible assets acquired with
Shoppers Drug Mart.
136 2018 Annual Report - Financial Review Loblaw Companies Limited
The Company’s revenue, by type of goods or services, is reconciled to the Company’s segment revenue:
(millions of Canadian dollars)
Food retail
Drug retail
Pharmacy
Front Store
Retail Total
Financial Services
Eliminations(i)
Total
2018
(52 weeks)
32,969
6,030
6,837
12,867
45,836
1,082
(225)
46,693
$
$
$
$
$
2017(5)
(52 weeks)
33,288
5,959
6,620
12,579
45,867
953
(233)
46,587
$
$
$
$
$
(i) Eliminations includes the reclassification of revenue related to PC MasterCard® loyalty awards in the Financial Services segment.
(millions of Canadian dollars)
Total Assets
Retail
Financial Services
Choice Properties(i)
Consolidation and Eliminations(i)
Total
As at
December 29, 2018
As at
December 30, 2017
$
$
$
25,796
4,357
—
—
30,153
$
30,233
3,837
9,924
(8,847)
35,147
(i) Choice Properties and Consolidation and Eliminations are presented consistent with prior year segment reporting and include amounts related to properties treated as
own use prior to the spin-out.
(millions of Canadian dollars)
Additions to Fixed Assets and Intangible Assets
Retail
Financial Services
Discontinued Operations
Total
2018
1,013
57
264
1,334
$
$
2017
985
41
233
1,259
$
$
2018 Annual Report - Financial Review Loblaw Companies Limited 137
Three Year Summary(1)
The Company’s interest in Choice Properties has been presented separately as Discontinued Operations in the Company’s current and
comparative results. Unless otherwise indicated, all financial information represents the Company’s results from Continuing Operations.
For the years ended December 29, 2018 and December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
Consolidated Results of Operations
2018
2017(3)(4)
2016(4)
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)
Net earnings
Continuing Operations
Discontinued Operations
Net earnings attributable to shareholders of the Company from continuing
operations
Net earnings available to common shareholders of the Company
Continuing Operations
Discontinued Operations
Adjusted net earnings available to common shareholders of the Company(2)
Continuing Operations
Discontinued Operations
Consolidated Per Common Share ($)
Diluted net earnings
Continuing Operations
Discontinued Operations
Adjusted diluted net earnings(2)
Continuing Operations
Discontinued Operations
Dividends
Dividends declared per common share ($)
Consolidated Financial Position and Cash Flows
Cash and cash equivalents and short term investments(i)
Cash flows from operating activities(i)
Capital investments(i)
Free cash flow(2)(i)
Financial Measures
Retail debt to retail adjusted EBITDA(2)(ii)
Adjusted return on equity(2)(ii)
Adjusted return on capital(2)(ii)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
46,693
0.2%
1,923
3,528
7.6%
564
387
800
753
47
719
754
707
47
1,746
1,539
207
1.99
1.87
0.12
4.60
4.06
0.54
1.155
1,159
2,501
1,334
670
1.9x
12.6%
9.8%
$
$
$
$
$
$
$
$
$
$
$
46,587
0.6%
2,049
3,521
7.6%
374
374
1,541
1,310
231
1,286
1,505
1,274
231
1,797
1,585
212
3.79
3.21
0.58
4.52
3.99
0.53
1.070
2,344
3,209
1,259
1,651
1.9x
12.6%
9.8%
46,295
2.0%
1,675
3,333
7.2%
380
380
990
918
72
911
971
899
72
1,655
1,471
184
2.37
2.20
0.17
4.05
3.60
0.45
1.030
1,555
3,519
1,224
1,821
1.7x
12.9%
8.8%
138 2018 Annual Report - Financial Review Loblaw Companies Limited
Three Year Summary(1)
For the years ended December 29, 2018 and December 30, 2017 and December 31, 2016
(millions of Canadian dollars except where otherwise indicated)
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
(i)
(ii)
Comparative figures are inclusive of Discontinued Operations.
2016 comparative figures are inclusive of Discontinued Operations.
2018
2017(3)(4)
2016(4)
$
$
$
$
$
45,836
1,717
13,459
29.4%
3,332
7.3%
1,487
1.1%
2.4%
1.2%
3.5%
70.4
550
535
1,337
1,082
137
3,073
3,329
167
13.1%
3.1%
$
$
$
$
$
$
45,867
$
$
$
$
1,843
13,053
28.5%
3,329
7.3%
1,444
0.6%
3.0%
3.1%
2.9%
70.3
559
534
1,334
953
150
2,908
3,100
47
13.2%
3.7%
45,384
1,500
12,262
27.0%
3,145
6.9%
1,422
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%
Financial Results and Financial Summary Endnotes
For financial definitions and ratios refer to the Glossary of Terms on page 140 of the Company’s 2018 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.
(3) Comparative figures have been restated as a result of the implementation of IFRS 15, “Revenue from Contracts with Customers”. See note 2 in the Company’s 2018
Annual Report.
(4) Comparative figures have been restated to conform with current year presentation.
2018 Annual Report - Financial Review Loblaw Companies Limited 139
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
Net earnings available to common shareholders divided by the weighted average number of common shares of the Company
outstanding during the period.
Capital under management
Capital Investments
Control brand
Conversion
Diluted net earnings per common share
Diluted weighted average common shares outstanding
Free Cash Flow
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the
Company
Operating income
Renovation
Retail debt to retail adjusted EBITDA
Retail segment adjusted gross profit
Retail segment adjusted gross profit percentage
Retail segment gross profit
Same-store sales
Total equity attributable to common shareholders of the
Company
Total debt plus total equity attributable to shareholders of the Company.
Fixed asset purchases and intangible asset additions.
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).
Net earnings less non-controlling interests.
Net earnings attributable to shareholders of the Company less preferred dividends.
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 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.
Total retail square footage
Total retail square footage includes corporate, franchised stores and associate-owned drug stores.
Weighted average common shares outstanding
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.
140 2018 Annual Report - Financial Review Loblaw Companies Limited
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 2018, W. Galen Weston, directly and indirectly, including
through his controlling interest in Weston, owns approximately 50.4% of
the Company’s common shares.
Registrar and Transfer Agent
Computershare Investor Services Inc.
100 University Avenue
Toronto, Canada M5J 2Y1
At year-end 2018, there were 372,877,667 common shares issued and
outstanding.
The average daily trading volume of the Company’s common shares for
2018 was 560,168.
Toll free: 1-800-564-6253 (Canada and U.S.)
Fax (416) 263-9394
Toll free fax: 1-888-453-0330
International direct dial: (514) 982-7555
Preferred Shares
At year-end 2018, there were 9,000,000 second preferred shares, Series
B issued and outstanding.
The average daily trading volume of the Company’s second preferred
shares, Series B for 2018 was 4,816.
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.
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 General Meeting
The 2019 Annual Meeting of Shareholders of Loblaw Companies Limited
will be held on Thursday, May 2, 2019 at 11:00 a.m. (EDT), at the Toronto
Centre for the Arts - Lyric Theatre, 5040 Yonge St., Toronto, Ontario,
Canada, M2N 6R8.
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 2019 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
2019 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.
LOBLAW.CA
SHOPPERSDRUGMART.CA
PHARMAPRIX.CA
PCFINANCIAL.CA
JOEFRESH.COM
PRESIDENTSCHOICE.CA
PCEXPRESS.CA
BEAUTYBOUTIQUE.CA
WELLWISE.CA
Environmental Savings Summary
By using 1,308 kg. of paper manufactured
with 30% post-consumer recycled fibre for
the Annual Report and 2,169 kg. of paper
manufactured with 100% post-consumer
recycled waste fibre for the 2018 Annual
Report, Loblaw Companies Limited reduced
its environmental footprint by:
l
a
t
n
e
n
i
t
n
o
c
s
n
a
r
T
C
T
:
g
n
i
t
n
i
r
P
m
o
c
.
s
l
l
i
m
n
a
y
r
b
.
w
w
w
.
d
t
L
s
l
l
i
M
n
a
y
r
B
:
n
g
i
s
e
D
d
n
a
t
p
e
c
n
o
C
9,888 KG
27.9 million BTUs
Wood Use:
Total Energy:
Greenhouse Gases: 13,472 KG of CO2 equivalent
Wastewater Flow: 24,227 Litres
Solid Waste:
104 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
PCFINANCIAL.CA
JOEFRESH.COM
PRESIDENTSCHOICE.CA
PCEXPRESS.CA
BEAUTYBOUTIQUE.CA
WELLWISE.CA
focused
2018 ANNUAL REPORT