BRAMPTON – BUSINESS – Loblaw Companies Limited (TSX: L) (“Loblaw” or the “Company”) today announced its unaudited financial results for the first quarter ended March 25, 2017. The Company’s 2017 First 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 continued to invest to deliver value to consumers,” said Galen G. Weston, Chairman and Chief Executive Officer, Loblaw Companies Limited.
“We are pleased with our performance in the first quarter, against a highly competitive food retail environment and despite the pressures of deflation and healthcare reform.”
2017 FIRST QUARTER HIGHLIGHTS
The following highlights include the impacts of the consolidation of franchises, as set out in “Other Retail Business Matters.”
- Revenue was $10,401 million, an increase of $20 million, or 0.2%, compared to the first quarter of 2016.
- Retail segment sales were $10,166 million, an increase of $12 million, or 0.1%, compared to the first quarter of 2016.
- Same-store sales were negatively impacted by the timing of New Year’s Day and Easter.
- Food retail (Loblaw) same-store sales decline was 2.1%, excluding gas bar. Excluding the unfavourable impacts of the timing of New Year’s Day and Easter, Food retail same-store sales were relatively flat.
- Drug retail (Shoppers Drug Mart) same-store sales growth was 0.9%, with pharmacy same-store sales growth of 1.3% and front store same-store sales growth of 0.6%. Excluding the unfavourable impacts of the timing of New Year’s Day and Easter, Drug retail same-store sales growth was approximately 2.5%, with pharmacy same-store sales growth of approximately 1.4% and front store same-store sales growth of approximately 3.6%.
- Operating Income was $492 million, an increase of $56 million, or 12.8%, compared to the first quarter of 2016.
- Adjusted EBITDA(2) was $865 million, an increase of $36 million, or 4.3%, compared to the first quarter of 2016.
- Net earnings available to common shareholders of the Company were $230 million, an increase of $37 million, or 19.2%, compared to the first quarter of 2016. Diluted net earnings per common share were $0.57, an increase of $0.10, or 21.3%, compared to the first quarter of 2016.
- Adjusted net earnings available to common shareholders of the Company(2) were $364 million, an increase of $26 million, or 7.7%, compared to the first quarter of 2016. Adjusted diluted net earnings per common share(2) were $0.90, an increase of $0.08, or 9.8%, compared to the first quarter of 2016.
- The Company repurchased 3.4 million common shares at a cost of $240 million.
- Quarterly common share dividend to be increased by 3.8% from $0.26 per common share to $0.27 per common share.
See “News Release Endnotes” at the end of this News Release.
CONSOLIDATED RESULTS OF OPERATIONS
|
For the periods ended March 25, 2017 and March 26, 2016 |
2017 |
2016 |
|||||
|
(millions of Canadian dollars except where otherwise indicated) |
(12 weeks) |
(12 weeks) |
$ Change |
% Change |
|||
|
Revenue |
$ |
10,401 |
$ |
10,381 |
$ |
20 |
0.2% |
|
Operating Income |
492 |
436 |
56 |
12.8% |
|||
|
Adjusted EBITDA(2) |
865 |
829 |
36 |
4.3% |
|||
|
Adjusted EBITDA margin(2) |
8.3% |
8.0% |
|||||
|
Net earnings attributable to shareholders of the Company |
$ |
233 |
$ |
196 |
$ |
37 |
18.9% |
|
Net earnings available to common shareholders of the Company(i) |
230 |
193 |
37 |
19.2% |
|||
|
Adjusted net earnings available to common shareholders of the Company(2) |
364 |
338 |
26 |
7.7% |
|||
|
Diluted net earnings per common share ($) |
$ |
0.57 |
$ |
0.47 |
$ |
0.10 |
21.3% |
|
Adjusted diluted net earnings per common share(2) ($) |
0.90 |
0.82 |
0.08 |
9.8% |
|||
|
Diluted weighted average common shares outstanding (millions) |
403.2 |
412.6 |
|||||
|
(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 first quarter of 2017 were $230 million($0.57 per common share), an increase of $37 million ($0.10 per common share) compared to the first quarter of 2016. The increase in net earnings available to common shareholders of the Company was driven by improvements in underlying operating performance of $26 million and the favourable year-over-year net impact of certain adjusting items totaling $11 million as described below:
- improvements in underlying operating performance of $26 million ($0.06 per common share), were primarily due to the following:
- the Retail segment (excluding the impact of the consolidation of franchises), driven by lower selling, general and administrative expenses (“SG&A”) and stable gross margins despite the unfavourable impacts of the timing of New Year’s Day and Easter on sales; and
- the favourable impact of a decrease in depreciation and amortization, primarily due to a change in the estimated useful life of certain equipment and fixtures in the second quarter of 2016.
- the favourable year-over-year net impact of certain adjusting items totaling $11 million ($0.02 per common share) which included the impact of a prior year land transfer tax assessment of $7 million ($0.02 per common share).
- diluted net earnings per common share were also impacted by the favourable impact of the repurchase of common shares ($0.02 per common share).
Adjusted net earnings available to common shareholders of the Company(2) in the first quarter of 2017 were $364 million ($0.90 per common share), an increase of $26 million ($0.08 per common share) compared to the first quarter of 2016, due to the improvements in underlying operating performance and the favourable impact of the repurchase of common shares, as described above.
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, gas bars and apparel and other general merchandise. This segment is comprised of several operating segments that are aggregated primarily due to similarities in the nature of products and services offered for sale in the retail operations and the customer base;
- The Financial Services segment provides credit card services, loyalty programs, insurance brokerage services, personal banking services provided by a major Canadian chartered bank, deposit taking services and telecommunication services; and
- The Choice Properties 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 March 25, 2017 and March 26, 2016 |
2017 |
2016 |
|||||
|
(millions of Canadian dollars except where otherwise indicated) |
(12 weeks) |
(12 weeks) |
$ Change |
% Change |
|||
|
Sales |
$ |
10,166 |
$ |
10,154 |
$ |
12 |
0.1% |
|
Operating Income |
446 |
393 |
53 |
13.5% |
|||
|
Adjusted gross profit(2) |
2,844 |
2,777 |
67 |
2.4% |
|||
|
Adjusted gross profit %(2) |
28.0% |
27.3% |
|||||
|
Adjusted EBITDA(2) |
$ |
811 |
$ |
780 |
$ |
31 |
4.0% |
|
Adjusted EBITDA margin(2) |
8.0% |
7.7% |
|||||
|
Depreciation and amortization |
$ |
352 |
$ |
362 |
$ |
(10) |
(2.8)% |
|
For the periods ended March 25, 2017 and March 26, 2016 |
2017 |
2016 |
|||||
|
(millions of Canadian dollars except where otherwise indicated) |
(12 weeks) |
(12 weeks) |
|||||
|
Sales |
Same-store sales |
Sales |
Same-store sales |
||||
|
Food retail |
$ |
7,393 |
(1.2)% |
$ |
7,390 |
2.0% |
|
|
Drug retail |
2,773 |
0.9% |
2,764 |
6.3% |
|||
|
Pharmacy |
1,343 |
1.3% |
1,313 |
4.2% |
|||
|
Front Store |
1,430 |
0.6% |
1,451 |
8.2% |
|||
Sales, operating income, adjusted gross profit(2), adjusted gross profit percentage(2), adjusted EBITDA(2) and adjusted EBITDA margin(2) in the first quarter of 2017 included the impacts of the consolidation of franchises, as set out in “Other Retail Business Matters”.
Sales Retail segment sales in the first quarter of 2017 were $10,166 million, an increase of $12 million compared to the first quarter of 2016. Excluding the consolidation of franchises, Retail segment sales decreased by $65 million, primarily driven by the following factors:
- Food retail same-store sales decline was 2.1% (2016 – growth of 2.6%) for the quarter, after excluding the gas bar increase of 0.9% (2016 – decline of 0.6%). Food retail same-store sales reflect the impact of retail promotional investments and were relatively flat excluding the unfavourable impacts of the timing of New Year’s Day and Easter. Including gas bar, Food retail same-store sales decline was 1.2% (2016 – growth of 2.0%).
- The Company’s Food retail average quarterly internal food price index declined and was relatively flat compared to (2016 – moderately higher than) the average quarterly national food price deflation of 3.9% (2016 – inflation of 4.3%), 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 0.9% (2016 – 6.3%) and was comprised of pharmacy same-store sales growth of 1.3% (2016 – 4.2%) and front store same-store sales growth of 0.6% (2016 – 8.2%). Excluding the unfavourable impacts of the timing of New Year’s Day and Easter, Drug retail same-store sales growth was approximately 2.5%, and was comprised of pharmacy same-store sales growth of approximately 1.4% and front store same-store sales growth of approximately 3.6%.
- 28 food and drug stores were opened and 29 food and drug stores were closed in the last 12 months, resulting in a net increase in Retail square footage of 0.3 million square feet, or 0.4%.
Operating Income Operating Income in the first quarter of 2017 was $446 million, an increase of $53 millioncompared to the first quarter of 2016. The increase in operating income was driven by improvements in underlying operating performance of $38 million and the favourable year-over-year net impact of certain adjusting items totaling $15 million as described below:
- the improvements in underlying operating performance of $38 million included lower SG&A, lower depreciation and amortization, stable gross margins despite the unfavourable impacts of the timing of New Year’s Day and Easter on sales and the favourable impact from the consolidation of franchises; and
- the favourable year-over-year net impact of certain adjusting items totaling $15 million which included the impact of a prior year land transfer tax assessment of $10 million.
Adjusted Gross Profit(2) Adjusted gross profit(2) in the first quarter of 2017 was $2,844 million, an increase of $67 million compared to the first quarter of 2016. Adjusted gross profit percentage(2) of 28.0% increased by 70 basis points compared to the first quarter of 2016. Excluding the consolidation of franchises, adjusted gross profit(2) decreased by $13 million, primarily driven by the unfavourable impacts of the timing of New Year’s Dayand Easter on sales. Adjusted gross profit percentage(2), excluding the consolidation of franchises, was 27.0%, an increase of 10 basis points compared to the first quarter of 2016. The increase in adjusted gross profit percentage(2) was driven by Drug retail margins partially offset by the impact of Food retail promotional investments.
Adjusted EBITDA(2) Adjusted EBITDA(2) in the first quarter of 2017 was $811 million, an increase of $31 million, compared to the first quarter of 2016 driven by the increase in adjusted gross profit(2) described above, partially offset by an increase in SG&A of $36 million. SG&A as a percentage of sales was 20.0%, an increase of 40 basis points compared to the first quarter of 2016. Excluding the consolidation of franchises, SG&A decreased $31 million and as a percentage of sales was 19.0%, an improvement of 10 basis points compared to the first quarter of 2016, driven by the following factors:
- the positive impact of store closures and divestitures effective in the second quarter of 2016; and
- favourable changes in the value of the Company’s investments in its franchise business; partially offset by
- the unfavourable impacts of the timing of New Year’s Day and Easter in both Food and Drug retail.
Depreciation and Amortization Depreciation and amortization in the first quarter of 2017 was $352 million, a decrease of $10 million compared to the first quarter of 2016 primarily attributable to a change in the estimated useful life of certain equipment and fixtures in the second quarter of 2016 partially offset by an increase in depreciation from the consolidation of franchises. Included in depreciation and amortization in the first quarter of 2017 is the amortization of intangible assets related to the acquisition of Shoppers Drug Mart Corporation (“Shoppers Drug Mart”) of $121 million (2016 – $124 million).
Other Retail Business Matters
Gas Bar Network Subsequent to the end of the first quarter, the Company entered into an agreement with Brookfield Business Partners L.P. (“Brookfield”) to sell its gas bar operations for approximately $540 million. Closing of the transaction is subject to Competition Bureau approval and other customary closing conditions and is expected to occur in the third quarter of 2017. As a result of the transaction, Brookfield will 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, Brookfield will be rebranding the gas station portfolio to the Mobil fuel brand, which will mark the introduction of the Mobil fuel brand to Canada.The Company has included $78 million of fixed assets and $11 million of inventory, related to the gas bar operations, as assets held for sale. In addition, the Company has classified $49 million of related accounts payable and accrued liabilities that will be assumed by the purchaser as liabilities held for sale. No impairment or other charges were recognized on the net assets of the gas bar operations. 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 loss of 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 to adjusted EBITDA(2) will be approximately $80 million, based on 2016 information.
Consolidation of Franchises The Company has more than 500 franchise food retail stores in its network. As at the end of the first quarter of 2017, 225 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 March 25, 2017 and March 26, 2016 |
2017 |
2016 |
||
|
(millions of Canadian dollars unless where otherwise indicated) |
(12 weeks) |
(12 weeks) |
||
|
Number of Consolidated Franchise stores, beginning of period |
200 |
85 |
||
|
Add: Net number of Consolidated Franchise stores in the period |
25 |
30 |
||
|
Number of Consolidated Franchise stores, end of period |
225 |
115 |
||
|
Sales |
$ |
141 |
$ |
64 |
|
Adjusted gross profit(2) |
139 |
59 |
||
|
Adjusted EBITDA(2) |
7 |
(6) |
||
|
Depreciation and amortization |
9 |
4 |
||
|
Operating loss |
(2) |
(10) |
||
|
Net loss attributable to Non-Controlling Interests |
(1) |
(9) |
||
Operating loss included in the table above does not significantly impact net earnings available to common shareholders of the Company as the related losses are largely attributable to Non-Controlling Interests.
Financial Services Segment(3)
|
For the periods ended March 25, 2017 and March 26, 2016 |
2017 |
2016 |
|||||
|
(millions of Canadian dollars except where otherwise indicated) |
(12 weeks) |
(12 weeks) |
$ Change |
% Change |
|||
|
Revenue |
$ |
210 |
$ |
207 |
$ |
3 |
1.4% |
|
Earnings before income taxes |
25 |
28 |
(3) |
(10.7)% |
|||
|
As at |
As at |
||||||
|
(millions of Canadian dollars except where otherwise indicated) |
March 25, 2017 |
March 26, 2016 |
$ Change |
% Change |
|||
|
Average quarterly net credit card receivables |
$ |
2,808 |
$ |
2,692 |
$ |
116 |
4.3% |
|
Credit card receivables |
2,689 |
2,594 |
95 |
3.7% |
|||
|
Allowance for credit card receivables |
49 |
53 |
(4) |
(7.5)% |
|||
|
Annualized yield on average quarterly gross credit card receivables |
13.8% |
14.0% |
|||||
|
Annualized credit loss rate on average quarterly gross credit card receivables |
4.1% |
4.5% |
|||||
Earnings Before Income Taxes Earnings before income taxes in the first quarter of 2017 were $25 million, a decrease of $3 million compared to the first quarter of 2016, primarily driven by:
- higher costs associated with the Financial Services’ loyalty program; and
- higher operating costs; partially offset by
- lower credit losses due to the strong credit performance of the portfolio;
- higher interest and net interchange income attributable to the growth in the credit card portfolio; and
- higher sales attributable to The Mobile Shop.
Credit Card Receivables As at March 25, 2017, credit card receivables were $2,689 million, an increase of $95 million compared to March 26, 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 March 25, 2017, the allowance for credit card receivables was $49 million, a decrease of $4 million compared to March 26, 2016 due to the strong credit performance of the portfolio.
Choice Properties Segment(3)
|
For the periods ended March 25, 2017 and March 26, 2016 |
2017 |
2016 |
|||||
|
(millions of Canadian dollars except where otherwise indicated) |
(12 weeks) |
(12 weeks) |
$ Change |
% Change |
|||
|
Revenue |
$ |
203 |
$ |
192 |
$ |
11 |
5.7% |
|
Net interest expense and other financing charges |
213 |
268 |
(55) |
(20.5)% |
|||
|
Net income (loss)(i) |
24 |
(132) |
156 |
118.2% |
|||
|
Funds from operations(2) |
109 |
103 |
6 |
5.8% |
|||
|
(i) |
Choice Properties qualifies as a “mutual fund trust” under the Income Tax Act (Canada) and therefore net income (loss) is equal to earnings before income taxes. |
Net income (loss) Net income in the first quarter of 2017 was $24 million, an increase of $156 million compared to the first quarter of 2016. The increase was primarily driven by:
- the change in fair value adjustment on investment properties;
- the change in fair value adjustment on Class B Limited Partnership units;
- additional net operating income generated from acquisitions and tenant openings in newly developed leasable space; and
- an increase in base rent from existing properties.
Funds from Operations(2) Funds from Operations(2) in the first quarter of 2017 were $109 million, an increase of $6 million compared to the first quarter of 2016, primarily driven by higher contributions from property operations, partially offset by an increase in interest expense due to higher drawings on credit facilities and a gain on settlement of bond forwards in the first quarter of 2016.
Other Matters In the first quarter of 2017, Choice Properties acquired two investment properties from third-parties for a combined purchase price of approximately $10 million, excluding acquisition costs, which was fully settled in cash.
DECLARATION OF DIVIDENDS
Subsequent to the end of the first quarter of 2017, the Board of Directors declared a quarterly dividend on Common Shares and Second Preferred Shares, Series B.
|
Common Shares |
$0.27 per common share, payable on July 1, 2017 to shareholders of record on June 15, 2017 |
|
Second Preferred Shares, Series B |
$0.33125 per share, payable on June 30, 2017 to shareholders of record on June 15, 201 |
OUTLOOK(4)
Loblaw remains focused on its strategic framework, delivering the best in food, best in health and beauty, operational excellence and growth. This framework is supported by our financial plan of maintaining a stable trading environment that targets positive same-store sales and stable gross margin, surfacing efficiencies to deliver operating leverage, and returning capital to shareholders.
In 2017, on a full-year comparative basis, despite the current deflationary environment, the Company expects to:
- deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive grocery market, with continued negative pressure from healthcare reform;
- grow adjusted net earnings;
- invest approximately $1.3 billion in capital expenditures, including $1.0 billion in its Retail segment; and
- return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.
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; and with respect to Choice Properties: funds from operations. The Company believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the Company for the reasons outlined below.
Management uses these and other non-GAAP financial measures to exclude the impact of certain expenses and income that must be recognized under GAAP when analyzing underlying consolidated and segment operating performance, as the excluded items are not necessarily reflective of the Company’s underlying operating performance and make comparisons of underlying financial performance between periods difficult. The Company excludes additional items if it believes doing so would result in a more effective analysis of underlying operating performance. The exclusion of certain items does not imply that they are non-recurring.
These measures do not have a standardized meaning prescribed by GAAP and therefore they may not be comparable to similarly titled measures presented by other publicly traded companies and should not be construed as an alternative to other financial measures determined in accordance with GAAP.
For details on the nature of items excluded in the calculation of any of the non-GAAP financial measures detailed below see the “Non-GAAP Financial Measures” section of the Company’s 2017 First Quarter Report to Shareholders.
