BRAMPTON, ON, Feb. 8 /CNW/ - Loblaw Companies Limited (TSX: L) ("Loblaw"
or the "Company") today is providing a financial update for the fourth quarter
of fiscal 2006 and the fiscal year ended December 30, 2006, based on
management's review of preliminary unaudited results for these periods. Basic
net earnings per common share for the fourth quarter, before taking into
account a charge with respect to an expected goodwill impairment, were $0.16
compared to $0.73 in 2005. For the year, basic net earnings per common share,
before taking into account a charge with respect to an expected goodwill
impairment, were $2.12 compared to $2.72 in 2005.
The Company has performed its annual goodwill impairment test analysis.
Based on this analysis, it is anticipated that the carrying value of the
$1.5 billion of goodwill associated with the acquisition of the Provigo
business in 1998 is impaired. As a result, the Company expects to record in
the fourth quarter an initial estimate of a goodwill impairment charge, which
the Company estimates to be in the range of $600 million to $900 million, in
its audited consolidated financial statements for the year ended December 30,
2006. This is a non-cash charge that is expected to be finalized and adjusted
as necessary in the first half of 2007. This expected charge will result in a
negative impact to basic net earnings per common share for the fourth quarter
and the full year of $2.19 to $3.28 per share. After the impact of this
charge, the Company expects to record a basic net loss per common share in the
range of $2.03 to $3.12 in the fourth quarter. For the year, after the impact
of this charge, the Company expects a basic net loss per common share in the
range of $0.07 to $1.16.
Adjusted basic net earnings per common share(2) for the quarter and for
the year, which will not be impacted by the expected goodwill impairment
charge, were $0.58 and $2.72, respectively, compared to $0.94 and $3.35 for
the same periods last year.
Sales
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Sales and sales growth excluding the impact of variable interest entities
("VIEs")(2) are summarized below.
2006 2005(3) 2006 2005(3)
($ millions) (12 weeks) (12 weeks) (52 weeks) (52 weeks)
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Total sales $ 6,784 $ 6,552 $ 28,640 $ 27,627
Less: Sales attributable to
the consolidation of VIEs 92 98 383 415
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Sales excluding the impact
of VIEs(2) $ 6,692 $ 6,454 $ 28,257 $ 27,212
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Total sales growth 3.5% 4.3% 3.7% 6.1%
Less: Impact on sales growth
attributable to the
consolidation of VIEs (0.2)% 1.6% (0.1)% 1.6%
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Sales growth excluding the
impact of VIEs(2) 3.7% 2.7% 3.8% 4.5%
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Sales for the fourth quarter of 2006 increased 3.5% or $232 million to
$6.8 billion from the $6.6 billion reported in the fourth quarter of 2005. For
the full year, sales of $28.6 billion were 3.7% ahead of last year. Sales
increases were realized across all regions of the country and in all areas of
food, general merchandise and drugstore. Same-store sales increased by 1.3%
for the quarter and 0.8% year-to-date. National food price inflation as
measured by "The Consumer Price Index for Food Purchased from Stores" was
approximately 1.5% for the fourth quarter of 2006. The growth in sales and
same-store sales in the fourth quarter is higher by approximately 2.0%
excluding the loss in tobacco sales, which were adversely impacted by the
announcement in the third quarter by a major supplier to commence shipping
directly to certain customers of the Company's cash & carry and wholesale club
network.
During the fourth quarter of 2006, the business focused on shelf
availability, targeted pricing investments and incremental marketing. The
Company experienced some positive sales momentum particularly when the
decrease in tobacco sales is excluded. A successful Holiday Insider's Report
contributed to this improved sales performance.
During 2006, net retail square footage increased by 1.2 million square
feet or 2.4% due to the net effect of the opening of 37 new corporate and
franchised stores and the closure of 33 stores, inclusive of stores which
underwent conversions and major expansions. During the fourth quarter of 2006,
8 new corporate and franchised stores were opened and 4 stores were closed,
resulting in a net increase of 0.3 million square feet or 0.6%.
Operating Income Before Expected Goodwill Impairment Charge
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Operating income for the fourth quarter before the expected goodwill
impairment charge decreased $289 million, or 73.4% from last year, to
$105 million. Operating margin before the expected goodwill charge declined to
1.5% from 6.0% in the comparable period of 2005 due to the effects of the
items described below. After the effect of the expected goodwill impairment
charge, operating loss for the fourth quarter is expected to be in the range
of $495 million to $795 million and operating margin is expected to be in the
range of -7.3% to -11.7%.
Adjusted operating income(2) in the fourth quarter of 2006 was
$286 million compared to $441 million in 2005, resulting in adjusted operating
margins(2) of 4.3% and 6.8% respectively.
In addition to the expected goodwill impairment charge, items which were
excluded in arriving at adjusted operating income and margin(2) are set out
below:
2006 2005 2006 2005
($ millions) (12 weeks) (12 weeks) (52 weeks) (52 weeks)
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Operating income before
expected goodwill
impairment charge $ 105 $ 394 $ 1,089 $ 1,401
Add (deduct) impact of the
following:
Ontario collective
labour agreement 84 - 84 -
Inventory liquidation 68 - 68 -
Restructuring and
other charges 35 6 44 86
Net effect of stock-based
compensation and the
associated equity forwards (6) 27 37 43
Departure entitlement charge - - 12 -
Goods and Services Tax and
provincial sales taxes - - - 40
Direct costs associated
with supply chain
disruptions - 10 - 30
VIEs - 4 (8) -
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Adjusted operating income(2) $ 286 $ 441 $ 1,326 $ 1,600
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A number of factors negatively influenced operating income before the
expected goodwill impairment charge for the fourth quarter of 2006, including:
- Higher inventory shrink of approximately $35 million and higher store
labour costs of approximately $20 million;
- An investment of approximately 0.5% in food pricing, resulting in an
impact of approximately $30 million;
- Higher general merchandise mark-downs in the range of $15 million to
$20 million to clear inventory through retail stores;
- A fixed asset impairment charge of $24 million due in part to a
decision to suspend plans for a number of sites scheduled for future
development; and
- Incremental supply chain costs and information technology investments
of approximately $15 million.
During the fourth quarter of 2006, the Company and members of certain
Ontario locals of the United Food and Commercial Workers Union ratified a new
four-year collective agreement. The new agreement enables the Company to
convert 44 stores in Ontario to The Real Canadian Superstore banner or food
stores with equivalent labour economics, and the flexibility to invest in
additional store labour where appropriate. As a result of securing this
agreement, the Company recorded a one-time charge of $84 million in the fourth
quarter. The Company expects this agreement to generate economic benefits and
to provide increased operating efficiencies, on a store by store basis, in a
critical era of intensifying competition.
The Company continues to manage inventory levels down to more desirable
levels in store backrooms, outside storage as well as distribution centres.
Some success was realized in the fourth quarter from the focused clearance
pricing of certain categories as well as the initiation of the previously
disclosed liquidation process for selected general merchandise inventory. In
connection with this liquidation process, a charge of $68 million was recorded
in the fourth quarter reflecting the expected inventory value through
liquidation as well as the associated costs of facilitating the disposition.
Total costs associated with the general merchandise liquidation are expected
to be at the low end of the previously disclosed range of $100 million to
$120 million.
As part of a review of its store operations, management approved plans in
the fourth quarter of 2006 to close 19 under performing stores in Quebec,
mainly within the Provigo banner, 8 stores in the Atlantic region, and 24 cash
& carry and wholesale club outlets. These closures are expected to result in
total costs of $54 million. Of these costs, $35 million was recorded in the
fourth quarter of 2006.
Adjusted EBITDA and EBITDA margin(2) for the fourth quarter and the year
were $414 million and 6.2% and $1.9 billion and 6.7% respectively. For the
comparable periods of 2005, adjusted EBITDA and EBITDA margin(2) were
$573 million and 8.9% and $2.1 billion and 7.8% respectively. The items
excluded in arriving at adjusted EBITDA and EBITDA margin(2) are set out
below:
2006 2005 2006 2005
($ millions) (12 weeks) (12 weeks) (52 weeks) (52 weeks)
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Adjusted operating
income(2) $ 286 $ 441 $ 1,326 $ 1,600
Add (deduct) impact of the
following:
Depreciation and
amortization 133 140 590 558
VIE depreciation and
amortization (5) (8) (24) (26)
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Adjusted EBITDA(2) $ 414 $ 573 $ 1,892 $ 2,132
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In addition to the expected goodwill impairment charge, items which were
excluded in arriving at adjusted basic net earnings per common share(2) are
set out below:
2006 2005 2006 2005
($) (12 weeks) (12 weeks) (52 weeks) (52 weeks)
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Basic net earnings per
common share before
expected goodwill impairment
charge $ 0.16 $ 0.73 $ 2.12 $ 2.72
Add (deduct) impact of
the following:
Ontario collective labour
agreement 0.20 - 0.20 -
Inventory liquidation 0.16 - 0.16 -
Restructuring and other
charges 0.09 0.01 0.11 0.20
Net effect of stock-based
compensation and the
associated equity forwards (0.02) 0.15 0.17 0.22
Departure entitlement
charge - - 0.03 -
Changes in statutory
income tax rates - 0.01 (0.06) 0.01
Goods and Services Tax
and provincial sales taxes - - - 0.10
Direct costs associated
with supply chain
disruptions - 0.02 - 0.07
VIEs (0.01) 0.02 (0.01) 0.03
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Adjusted basic net earnings
per common share(2) $ 0.58 $ 0.94 $ 2.72 $ 3.35
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Loblaw's previously announced "Formula for Growth" is focused on
delivering sustainable long-term growth and the Company believes that the
actions described above support this direction. Subsequent to the end of the
fourth quarter of 2006, the Company approved and announced the restructuring
of its merchandising and store operations into more streamlined functions.
Costs for this restructuring, including severance, retention and other costs
are expected to be in the range of $150 million to $200 million, the
substantial portion of which should be recorded in the first quarter of 2007.
The new management team is highly focused on improving performance and
creating an exciting platform on which the Company can execute its "Formula
for Growth". Although the Company has many strengths, there is no escaping the
fact that the retailing basics of availability, accountability, value and
format economics are in poorer shape than expected. There is still much hard
work to be done.
Non-GAAP Financial Measures
---------------------------
The Company's consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting principles ("GAAP").
This News Release includes certain non-GAAP financial measures and ratios
which the Company believes provide useful information to both management and
readers of this News Release in measuring the financial performance and
financial condition of the Company for the reasons set out below. These
measures do not have a standardized meaning prescribed by Canadian GAAP and
therefore may not be comparable to similarly titled measures presented by
other publicly traded companies and they should not be construed as an
alternative to other financial measures determined in accordance with Canadian
GAAP.
Sales and Sales Growth Excluding the Impact of VIEs
These financial measures exclude the impact on sales from the
consolidation by the Company of certain independent franchisees which resulted
from the implementation of Accounting Guideline 15, "Consolidation of Variable
Interest Entities", retroactively without restatement effective January 2,
2005. This impact on sales is excluded because the Company believes this
allows for a more effective analysis of the operating performance of the
Company. Both the current and comparative measures reflect the retroactive
implementation of EIC 156.
Adjusted Operating Income and Margin
Items listed in the table on page 2 are excluded because the Company
believes this allows for a more effective analysis of the operating
performance of the Company. In addition, they affect the comparability of the
financial results and could potentially distort the analysis of trends. The
exclusion of these items does not imply they are non-recurring. Adjusted
operating income and margin are useful to management in assessing the
Company's performance and in making decisions regarding the ongoing operations
of its business. Adjusted operating margin is calculated as adjusted operating
income divided by sales excluding the impact of VIEs.
Adjusted EBITDA and Margin
Adjusted earnings before interest, income taxes, depreciation and
amortization ("EBITDA") is useful to management in assessing the Company's
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
sales excluding the impact of VIEs.
Adjusted Basic Net Earnings per Common Share
Items listed in the table on page 4 are excluded because the Company
believes this allows for a more effective analysis of the operating
performance of the Company. In addition, they affect the comparability of the
financial results and could potentially distort the analysis of trends. The
exclusion of these items does not imply they are non-recurring. Adjusted basic
net earnings per common share is useful to management in assessing the
Company's performance and in making decisions regarding the ongoing operations
of its business.
2006 Annual Consolidated Financial Statements and MD&A
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The Company's audited consolidated financial statements and Management's
Discussion and Analysis ("MD&A") for the year ended December 30, 2006 will be
released on or before March 30, 2007. Both documents will be contained in the
Company's 2006 Annual Report and will be available in the Investor Zone
section of the Company's website at www.loblaw.ca or at www.sedar.com.
Investor Relations
------------------
Shareholders, security analysts and investment professionals should
direct their requests to Mr. Geoffrey H. Wilson, Senior Vice President,
Financial Services and Investor Relations at the Company's National Head
Office or by e-mail at investor@loblaw.ca.
Additional 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.
Conference Call and Webcast
---------------------------
Loblaw Companies Limited will host a conference call on February 8, 2007
at 11:00 a.m. (EST).
To access via Tele-conference please dial (416) 644-3424. The playback
will be made available one hour after the event at (416) 640-1917, passcode:
21216641 followed by the number sign. To access via webcast please visit
www.loblaw.ca, go to Investor Zone and click on webcast. Pre-registration will
be available.
Loblaw Companies Limited is also hosting an analysts' meeting on
February 21, 2007 at 9:00 a.m. (EST).
To access via Tele-conference please dial (416) 644-3417. The playback
will be made available one hour after the event at (416) 640-1917, passcode:
21218703 followed by the number sign. To access via webcast please visit
www.loblaw.ca, go to Investor Zone then click on webcast. Pre-registration
will be available.
Full details are available on the Loblaw Companies Limited website at
www.loblaw.ca.
FORWARD-LOOKING STATEMENTS
This News Release contains forward-looking statements which reflect
management's expectations regarding the Company's objectives, plans, goals,
strategies, future growth, results of operations, performance and business
prospects and opportunities. These forward-looking statements include
preliminary unaudited financial update for its fourth quarter and fiscal year
2006. Forward-looking statements are typically identified by words or phrases
such as "anticipates", "expects", "believes", "estimates", "intends" and other
similar expressions.
These forward-looking statements are not guarantees, but only
predictions. Although the Company believes that these statements are based on
information and assumptions which are current, reasonable and complete, these
statements are necessarily subject to a number of factors that could cause
actual results to vary significantly from the estimates, projections and
intentions. Such differences may be caused by factors which include, but are
not limited to, changes in consumer spending and preferences, heightened
competition including new competitors and expansion of current competitors,
any of which could result in, among other things, changes in the Company's or
its competitors' pricing strategies, the ability to realize anticipated cost
savings and efficiencies, including those resulting from restructuring,
inventory liquidation and other cost reduction and simplification initiatives,
the ability to execute restructuring plans effectively and in a timely manner,
changes in the markets for the inventory intended for liquidation and changes
in the expected realizable value and costs associated with the liquidation,
unanticipated, increased or decreased costs associated with the announced
initiatives, including those related to compensation costs, the Company's
relationship with its employees, results of labour negotiations including the
terms of future collective bargaining agreements, changes to the regulatory
environment in which the Company operates now or in the future, changes in the
Company's tax liabilities, either through changes in tax laws or future
assessments, performance of third party service providers, public health
events, the ability of the Company to attract and retain key executives and
supply and quality control issues with vendors. The calculation of the
expected goodwill impairment charge described in this News Release involves
the estimation of several variables, including but not limited to market
EBITDA multiples, projected future sales, earnings and capital investment,
discount rates and terminal growth rates. These estimates and assumptions may
change in the future due to uncertain competitive and economic market
conditions or changes in business strategies. The Company cautions that this
list of factors is not exhaustive. These factors and other risks and
uncertainties are discussed in the Company's materials filed with the Canadian
securities regulatory authorities from time to time, including the Risks and
Risk Management section of the Management's Discussion and Analysis included
in the Company's 2005 Annual Report.
The assumptions applied in making the forward-looking statements
contained in this News Release include the following: economic conditions do
not materially change from those expected, patterns of consumer spending are
reasonably consistent with historical trends, no new significant competitors
enter our market nor does any existing competitor unexpectedly significantly
increase its presence, neither the Company's nor its competitors' pricing
strategies change materially, anticipated cost savings and efficiencies are
realized as planned, continuing future restructuring activities are
effectively executed and executed in a timely manner, costs associated with
the liquidation of inventory are not higher or lower than expected, the
Company's assumptions regarding average compensation costs and average years
of service for employees affected by the simplification initiatives are
materially correct, the Company does not significantly change its approach to
its current restructuring activities, there are no material work stoppages and
the performance of third-party service providers is in accordance with
expectations.
Potential investors and other readers are urged to consider these factors
carefully in evaluating these forward-looking statements and are cautioned not
to place undue reliance on them. The forward-looking statements included in
this News Release, are made only as of the date of this News Release and the
Company does not undertake to publicly update these forward-looking statements
to reflect new information, future events or otherwise. In light of these
risks, uncertainties and assumptions, the forward-looking events contained in
these forward-looking statements may or may not occur. The Company cannot
assure that projected results or events will be achieved.
(1) This News Release contains forward-looking information. See Forward-
Looking Statements on page 5 of this News Release for a discussion of
material factors that could cause actual results to differ materially
from the conclusions, forecasts and projections herein and of the
material factors and assumptions that were applied in presenting the
conclusions, forecasts and projections presented herein.
(2) See Non-GAAP Financial Measures on page 4 of this News Release.
(3) The Company implemented Emerging Issues Committee Abstract 156,
"Accounting for Consideration by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)" ("EIC 156") in the first quarter of
2006 on a retroactive basis. Accordingly certain sales incentives paid to
independent franchisees, associates and independent accounts for 2005 and
2004 have been reclassified between sales and cost of sales, selling and
administrative expenses.For further information: Geoff Wilson, Senior Vice-President, Financial
Services and Investor Relations, (416) 922-8500