Loblaw Reports Third Quarter 2017 Results(1)

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BRAMPTON, ON, Nov. 15, 2017 /CNW/ – Loblaw Companies Limited (TSX: L) (“Loblaw” or the “Company”) today announced its unaudited financial results for the third quarter ended October 7, 2017. The Company’s 2017 Third Quarter Report to Shareholders will be available in the Investors section of the Company’s website at loblaw.ca and will be filed with SEDAR and available at sedar.com.

“We delivered solid results in the third quarter in an increasingly competitive market,” said Galen G. Weston, Chairman and Chief Executive Officer, Loblaw Companies Limited.

“In an industry that is facing significant financial headwinds, we remain focused on delivering shareholder value. Our strong balance sheet and free cash flow enable us to continue to return capital to shareholders and to invest to bring innovation to Canadian consumers.”

2017 THIRD QUARTER HIGHLIGHTS
The following highlights include the impacts of the consolidation of franchises, as set out in “Other Retail Business Matters.”

  • Revenue was $14,192 million, an increase of $49 million, or 0.3%, compared to the third quarter of 2016.
  • Retail segment sales were $13,923 million, an increase of $32 million, or 0.2%, compared to the third quarter of 2016.
    • Food retail (Loblaw) same-store sales growth was 1.4%, excluding gas bar operations.
    • Drug retail (Shoppers Drug Mart) same-store sales growth was 3.3%, with pharmacy same-store sales growth of 3.9% and front store same-store sales growth of 2.8%.
  • Operating income was $1,236 million, an increase of $546 million, or 79.1%, compared to the third quarter of 2016.
  • Adjusted EBITDA(2) was $1,229 million, an increase of $86 million, or 7.5%, compared to the third quarter of 2016.
  • Net earnings available to common shareholders of the Company were $883 million, an increase of $464 million, or 110.7%, compared to the third quarter of 2016. Diluted net earnings per common share were $2.24, an increase of $1.21, or 117.5%, compared to the third quarter of 2016.
  • Adjusted net earnings available to common shareholders of the Company(2) were $549 million, an increase of $37 million, or 7.2%, compared to the third quarter of 2016. Adjusted diluted net earnings per common share(2) were $1.39, an increase of $0.13, or 10.3%, compared to the third quarter of 2016. Normalized for the disposition of gas bar operations, adjusted diluted net earnings per common share(2) increased by approximately 13.0%. Diluted net earnings per common share growth is higher than adjusted diluted net earnings per common share(2) growth primarily due to the gain on disposition of gas bar operations.
  • The Company repurchased 7.2 million common shares at a cost of $485 million.
  • The Company completed the disposition of its gas bar operations and recognized a post-tax gain of $432 million, net of related costs. The disposition negatively impacted the Company’s Retail sales growth by $368 million, Retail adjusted EBITDA(2) by approximately $20 million and diluted net earnings per common share growth by approximately $0.03 per common share. Gas bar operations were a low gross margin business compared to the Company’s overall Retail segment.
  • President’s Choice Bank (“PC Bank”), a wholly owned subsidiary of the Company, entered into an agreement to end its relationship with a major Canadian chartered bank, which represented the personal banking services offered under the President’s Choice Financial® brand. The agreement did not have a significant impact on the adjusted net earnings available to common shareholders of the Company(2) in the third quarter of 2017.

See “News Release Endnotes” at the end of this News Release.

 

CONSOLIDATED RESULTS OF OPERATIONS

For the periods ended October 7, 2017
and October 8, 2016
2017 2016 2017 2016
(millions of Canadian dollars except where otherwise indicated) (16 weeks) (16 weeks) $ Change % Change (40 weeks) (40 weeks) $ Change % Change
Revenue $ 14,192 $ 14,143 $ 49 0.3% $ 35,672 $ 35,255 $ 417 1.2%
Operating income 1,236 690 546 79.1% 2,354 1,643 711 43.3%
Adjusted EBITDA(2) 1,229 1,143 86 7.5% 3,079 2,896 183 6.3%
Adjusted EBITDA margin(2) 8.7% 8.1% 8.6% 8.2%
Net earnings attributable to shareholders of the Company $ 886 $ 422 $ 464 110.0% $ 1,480 $ 779 $ 701 90.0%
Net earnings available to common shareholders of the Company(i) 883 419 464 110.7% 1,471 770 701 91.0%
Adjusted net earnings available to common shareholders of the Company(2) 549 512 37 7.2% 1,358 1,262 96 7.6%
Diluted net earnings per common share ($) $ 2.24 $ 1.03 $ 1.21 117.5% $ 3.68 $ 1.88 $ 1.80 95.7%
Adjusted diluted net earnings per common share(2) ($) $ 1.39 $ 1.26 $ 0.13 10.3% $ 3.40 $ 3.08 $ 0.32 10.4%
Diluted weighted average common shares outstanding (millions) 395.0 407.0 399.2 410.0
(i)    Net earnings available to common shareholders of the Company are net earnings attributable to shareholders of the Company net of dividends declared on the Company’s Second Preferred Shares, Series B.

 

Net earnings available to common shareholders of the Company in the third quarter of 2017 were $883 million ($2.24 per common share), an increase of $464 million ($1.21 per common share) compared to the third quarter of 2016. The increase in net earnings available to common shareholders of the Company was driven by improvements in underlying operating performance of $37 million and the favourable year-over-year net impact of adjusting items totaling $427 million, as described below:

  • improvements in underlying operating performance of $37 million ($0.09 per common share), were primarily due to the following:
    • the Retail segment (excluding the impact of the consolidation of franchises), driven by an increase in adjusted gross profit(2) and lower selling, general and administrative expenses (“SG&A”), partially offset by an increase in depreciation and amortization; and
    • the Financial Services segment, primarily due to the strong credit performance of the credit card portfolio.
  • the favourable year-over-year net impact of adjusting items totaling $427 million ($1.08 per common share) was primarily due to the following:
    • the gain on disposition of gas bar operations of $432 million ($1.10 per common share); and
    • the change in fair value adjustment to the Trust Unit Liability of $13 million ($0.03 per common share); partially offset by
    • the change in fair value adjustment on fuel and foreign currency contracts of $21 million ($0.04 per common share).
  • diluted net earnings per common share also included the favourable impact of the repurchase of common shares ($0.04 per common share).

Adjusted net earnings available to common shareholders of the Company(2) in the third quarter of 2017 were $549 million ($1.39 per common share), an increase of $37 million ($0.13 per common share) compared to the third quarter of 2016, due to the improvements in underlying operating performance and the favourable impact of the repurchase of common shares, as described above.

On October 31, 2017, the Company and George Weston Limited confirmed that they were aware of an industry-wide investigation by the Competition Bureau concerning a price-fixing scheme involving certain packaged bread products. The companies are cooperating fully. Court filings made by the Competition Bureau remain sealed while searches are completed. The companies expect to be able to provide further comment after those filings are unsealed.

REPORTABLE OPERATING SEGMENTS
The Company has three reportable operating segments with all material operations carried out in Canada:

  • The Retail segment consists primarily of corporate and franchise-owned retail food and Associate-owned drug stores, and includes in-store pharmacies and other health and beauty products and apparel and other general merchandise. This segment is comprised of several operating segments that are aggregated primarily due to similarities in the nature of products and services offered for sale in the retail operations and the customer base. Prior to July 17, 2017, the Retail segment also included gas bar operations;
  • The Financial Services segment provides credit card services, loyalty programs, insurance brokerage services, personal banking services provided by a major Canadian chartered bank, deposit taking services and telecommunication services. As a result of the wind-down of PC Financial banking services, the Financial Services segment no longer offers personal banking services; and
  • The Choice Properties Real Estate Investment Trust (“Choice Properties”) segment owns, manages and develops retail and commercial properties across Canada. The Choice Properties segment information presented below reflects the accounting policies of Choice Properties, which may differ from those of the consolidated Company. Differences in policies are eliminated in Consolidation and Eliminations.

Retail Segment

For the periods ended October 7, 2017
and October 8, 2016
2017 2016 2017 2016
(millions of Canadian dollars except where otherwise indicated) (16 weeks) (16 weeks) $ Change % Change (40 weeks) (40 weeks) $ Change % Change
Sales $ 13,923 $ 13,891 $ 32 0.2% $ 34,916 $ 34,539 $ 377 1.1%
Operating income 1,168 642 526 81.9% 2,192 1,510 682 45.2%
Adjusted gross profit(2) 3,874 3,714 160 4.3% 9,725 9,317 408 4.4%
Adjusted gross profit %(2) 27.8% 26.7% 27.9% 27.0%
Adjusted EBITDA(2) $ 1,159 $ 1,087 $ 72 6.6% $ 2,900 $ 2,742 $ 158 5.8%
Adjusted EBITDA margin(2) 8.3% 7.8% 8.3% 7.9%
Depreciation and amortization $ 467 $ 456 $ 11 2.4% $ 1,172 $ 1,157 $ 15 1.3%
For the periods ended October 7, 2017
and October 8, 2016
2017 2016 2017 2016
(millions of Canadian dollars except where otherwise indicated) (16 weeks) (16 weeks) (40 weeks) (40 weeks)
 

Sales   

Same-store
sales
Sales    Same-store
sales
Sales    Same-store
sales
 

Sales   

Same-store
sales
Food retail $ 10,172 1.4% $ 10,278 0.8% $ 25,509 0.6% $ 25,386 1.1%
Drug retail 3,751 3.3% 3,613 2.8% 9,407 2.7% 9,153 4.2%
Pharmacy 1,820 3.9% 1,732 1.6% 4,540 2.8% 4,369 3.0%
Front Store                                        1,931 2.8% 1,881 3.9% 4,867 2.7% 4,784 5.3%

 

Sales, operating income, adjusted gross profit(2), adjusted gross profit percentage(2), adjusted EBITDA(2) and adjusted EBITDA margin(2) included the impacts of the consolidation of franchises, as set out in “Other Retail Business Matters” for the periods ended as indicated.

Sales Retail segment sales in the third quarter of 2017 were $13,923 million, an increase of $32 million, or 0.2%, compared to the third quarter of 2016. Excluding the consolidation of franchises, Retail segment sales decreased by $71 million, or 0.5%, primarily driven by the following factors:

  • The impact of the disposition of gas bar operations of $368 million; partially offset by
  • Food retail same-store sales growth was 1.4% (2016 – 1.4%) for the quarter, after excluding gas bar operations. Including gas bar operations, Food retail same-store sales growth was 1.4% (2016 – 0.8%).
  • The Company’s Food retail average quarterly internal food price index was marginally higher than (2016 – lower than) the average quarterly national food price inflation of 0.3% (2016 – 0.2%), as measured by The Consumer Price Index for Food Purchased from Stores (“CPI”). CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in the Company’s stores.
  • Drug retail same-store sales growth was 3.3% (2016 – 2.8%) and was comprised of pharmacy same-store sales growth of 3.9% (2016 – 1.6%) and front store same-store sales growth of 2.8% (2016 – 3.9%).
  • 27 food and drug stores were opened and 13 food and drug stores were closed in the last 12 months, resulting in a net increase in Retail square footage of 0.4 million square feet, or 0.6%.

Operating Income Operating income in the third quarter of 2017 was $1,168 million, an increase of $526 million compared to the third quarter of 2016. The increase in operating income was driven by improvements in underlying operating performance of $58 million and the favourable year-over-year net impact of adjusting items totaling $468 million, as described below:

  • the improvements in underlying operating performance of $58 million were driven by an increase in adjusted gross profit(2) and lower SG&A, partially offset by an increase in depreciation and amortization. The improvements in underlying operating performance also included the positive contribution from the consolidation of franchises; and
  • the favourable year-over-year net impact of adjusting items totaling $468 million was primarily due to the following:
    • the gain on disposition of gas bar operations of $501 million; partially offset by
    • the change in fair value adjustment on fuel and foreign currency contracts of $29 million.

Adjusted Gross Profit (2)Adjusted gross profit(2) in the third quarter of 2017 was $3,874 million, an increase of $160 million compared to the third quarter of 2016. Adjusted gross profit percentage(2) of 27.8% increased by 110 basis points compared to the third quarter of 2016. Excluding the consolidation of franchises, adjusted gross profit(2) increased by $48 million. Adjusted gross profit percentage(2), excluding the consolidation of franchises, was 26.6%, an increase of 50 basis points compared to the third quarter of 2016. The increase in adjusted gross profit percentage(2) was primarily due to the favourable impact from the disposition of gas bar operations of approximately 50 basis points, as improvements in Drug retail margins were offset by a decrease in Food retail margins.

Adjusted EBITDA(2) Adjusted EBITDA(2) in the third quarter of 2017 was $1,159 million, an increase of $72 million, compared to the third quarter of 2016 and included the favourable impact of the consolidation of franchises of $20 million as well as the unfavourable impact of the disposition of gas bar operations of approximately $20 million. The increase in adjusted EBITDA(2) of $72 million was driven by an increase in adjusted gross profit(2) as described above, partially offset by an increase in SG&A of $88 million. SG&A as a percentage of sales was 19.5%, an increase of 60 basis points compared to the third quarter of 2016. Excluding the consolidation of franchises, SG&A decreased $4 million. SG&A as a percentage of sales, excluding the consolidation of franchises, was 18.3%, an increase of 10 basis points compared to the third quarter of 2016 mainly driven by:

  • the unfavourable impact from the disposition of gas bar operations of approximately 50 basis points; partially offset by
  • lower store support costs; and
  • the favourable impact of foreign exchange.

Depreciation and Amortization Depreciation and amortization in the third quarter of 2017 was $467 million, an increase of $11 million compared to the third quarter of 2016 primarily driven by the consolidation of franchises and an increase in information technology (“IT”) assets. Included in depreciation and amortization is the amortization of intangible assets related to the acquisition of Shoppers Drug Mart Corporation of $161 million (2016 – $164 million).

Other Retail Business Matters

Gas Bar Network On July 17, 2017, the Company sold its gas bar operations, for proceeds of approximately $540 million, to Brookfield Business Partners L.P. (“Brookfield”).The Company has recorded a pre-tax gain on sale of $501 million (post-tax gain of $432 million), net of related costs, in the third quarter of 2017. As a result of the transaction, Brookfield has become a strategic partner to the Company and will continue to offer the Company’s PC Plus loyalty program at the gas bars. In addition, the gas bars operate at certain properties that are either owned by the Company or leased by the Company from Choice Properties or third-party landlords. As a result of the transaction Brookfield leases or sub-leases these properties from the Company. In 2016, the gas bar operations sold approximately 1,700 million litres of gas and contributed approximately $1,500 million to sales. After taking into account the earnings associated with the gas bar operations and the ongoing commitment of the Company to fund certain loyalty program costs, the expected annual impact will be a reduction in adjusted EBITDA(2) of approximately $80 million, based on 2016 information. The Company expects to use the proceeds from the sale for general corporate activities.

Consolidation of Franchises The Company has more than 500 franchise food retail stores in its network. As at the end of the third quarter of 2017, 273 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 October 7, 2017 and October 8, 2016 2017 2016 2017 2016
(millions of Canadian dollars unless where otherwise indicated) (16 weeks) (16 weeks) (40 weeks) (40 weeks)
Number of Consolidated Franchise stores, beginning of period 241 132 200 85
Add: Net number of Consolidated Franchise stores in the period 32 33 73 80
Number of Consolidated Franchise stores, end of period 273 165 273 165
Sales $ 228 $ 125 $ 524 $ 264
Adjusted gross profit(2) 232 120 531 254
Adjusted EBITDA(2) 20 39 (7)
Depreciation and amortization 13 7 32 15
Operating income (loss) 7 (7) 7 (22)
Net income (loss) attributable to Non-Controlling Interests 8 (7) 10 (21)

 

Operating income (loss) included in the table above does not significantly impact net earnings available to common shareholders of the Company as the related income (loss) is largely attributable to Non-Controlling Interests. 

Subsequent Events

Restructuring and other related costs Subsequent to the end of the third quarter of 2017, the Company eliminated approximately 500 corporate and store-support positions and finalized a plan that will result in the closure of 22 unprofitable retail locations across a range of banners and formats. The Company expects to record charges of approximately $135 million, the majority of which are expected in the fourth quarter of 2017, and to realize approximately $85 million in annualized savings. The Company also expects that the closures will be substantially complete by the end of the first quarter of 2018.

PC Optimum Program Subsequent to the end of the third quarter of 2017, the Company announced the creation of a new loyalty program starting February 1, 2018. The newly created PC Optimum program brings together the Shoppers Optimum and PC Plus programs. The Company expects to incur a one-time charge in the range of approximately $150 million to $200 million in relation to the revaluation of the existing liability for outstanding points to reflect a higher anticipated redemption rate under the new program. The Company also expects to record an impairment charge of approximately $20 million relating to certain IT assets that support the existing loyalty programs.

Financial Services Segment

For the periods ended October 7, 2017 and October 8, 2016 2017 2016 2017 2016
(millions of Canadian dollars except where otherwise indicated) (16 weeks) (16 weeks) $ Change % Change (40 weeks) (40 weeks) $ Change % Change
Revenue $ 240 $ 229 $ 11 4.8% $ 675 $ 650 $ 25 3.8%
Earnings before income taxes 43 28 15 53.6% 94 85 9 10.6%

 

As at As at
(millions of Canadian dollars except where otherwise indicated) October 7, 2017 October 8, 2016 $ Change % Change
Average quarterly net credit card receivables $ 2,860 $ 2,730 $ 130 4.8%
Credit card receivables 2,918 2,769 149 5.4%
Allowance for credit card receivables 46 53 (7) (13.2)%
Annualized yield on average quarterly gross credit card receivables 13.3% 13.6%
Annualized credit loss rate on average quarterly gross credit card receivables 3.8% 4.5%

 

Earnings Before Income Taxes Earnings before income taxes in the third quarter of 2017 were $43 million, an increase of $15 million compared to the third quarter of 2016, primarily driven by:

  • recognition of income of $7 million, net of certain costs incurred, relating to PC Bank’s agreement to end its business relationship with a major Canadian chartered bank, which represented the personal banking services offered under the President’s Choice Financial brand;
  • lower credit losses due to the strong credit performance of the portfolio; and
  • an increase in revenue attributable to growth in the credit card portfolio and The Mobile Shop; partially offset by
  • higher operating costs and costs associated with the Financial Services’ loyalty program.

Credit Card Receivables As at October 7, 2017, credit card receivables were $2,918 million, an increase of $149 million compared to October 8, 2016. This increase was primarily driven by growth in the active customer base as a result of continued investments in customer acquisition, marketing and product initiatives. As at October 7, 2017, the allowance for credit card receivables was $46 million, a decrease of $7 million compared to October 8, 2016 due to the strong credit performance of the portfolio.

Other Financial Services Business Matters

Wind-down of PC Financial banking services In the third quarter of 2017, PC Bank entered into an agreement to end its business relationship with a major Canadian chartered bank, which represented the personal banking services offered under the President’s Choice Financial brand. As a result of this agreement, PC Bank will receive a payment of approximately $43 million, net of certain costs incurred, $7 million of which was recognized in the third quarter of 2017. The remaining amounts will be recognized between the fourth quarter of 2017 and the second quarter of 2018.

PC Bank will continue to operate the PC Mastercard program and customers will continue to earn PC Points. PC Bank remains committed to providing payment products to its customers and continues to strengthen its credit card services and loyalty programs.

Choice Properties Segment

For the periods ended October 7, 2017 and October 8, 2016 2017 2016 2017 2016
(millions of Canadian dollars except where otherwise indicated) (16 weeks) (16 weeks) $ Change % Change (40 weeks) (40 weeks) $ Change % Change
Revenue $ 207 $ 196 $ 11 5.6% $ 619 $ 586 $ 33 5.6%
Net interest expense and other financing charges(i) (76) (28) (48) (171.4)% 235 911 (676) (74.2)%
Net income (loss)(ii) 303 213 90 42.3% 369 (479) 848 177.0%
Funds from operations(2) 109 102 7 6.9% 326 307 19 6.2%
(i)    Net interest expense and other financing charges includes a fair value adjustment on Class B Limited Partnership units.
(ii)    Choice Properties …

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