Mr. Galen Weston reports

LOBLAW COMPANIES LIMITED REPORTS 2011 FOURTH QUARTER AND FISCAL YEAR ENDED DECEMBER 31, 2011 RESULTS

Loblaw Companies Ltd. has released its unaudited financial results for the fourth quarter of 2011 and its 2011 annual report, which includes the company's audited consolidated financial statements, and management's discussion and analysis for the fiscal year ended Dec. 31, 2011. The company's 2011 annual report will be available in the investor centre section of the company's website and will be filed with SEDAR.

Fourth quarter 2011 summary

• Basic net earnings per common share of 62 cents up 5.1 per cent compared with the fourth quarter of 2010;
• Earnings before interest, taxes, depreciation and amortization margin of 6.6 per cent compared with 6.7 per cent in the fourth quarter of 2010;
• Revenue of $7,373-million, an increase of 3.6 per cent over the fourth quarter of 2010;
• Retail sales growth of 3.2 per cent and same-store sales growth of 2.5 per cent, positively impacted by an extra day of store operations compared with the fourth quarter of 2010.

"We are pleased with our performance in the fourth quarter and the year. The ongoing strengthening of our customer proposition delivered improved sales at satisfactory margins, particularly in the second half of the year," said Galen Weston, executive chairman, Loblaw Companies. "Looking ahead to 2012, we estimate incremental costs related to investments in information technology and supply chain to be approximately $70-million, and the continuation of investments in our customer proposition to be approximately $40-million. We do not expect our operations to cover these incremental costs, and as a result, we anticipate full-year 2012 net earnings per share to be down year over year, with more pressure in the first half of the year."

Due to the transition to international financial reporting standards effective Jan. 2, 2011, all comparative figures for 2010 that were previously reported in the consolidated financial statements prepared in accordance with Canadian generally accepted accounting principles have been restated to conform with IFRS. Further information on the transition to IFRS, and its impact on the company's financial position, financial performance and cash flows is included in Note 31 of the company's 2011 annual report -- financial review.

With this transition, the company has two reportable operating segments:

• The retail segment, which consists primarily of food, and also includes drugstore, gas bars, apparel and other general merchandise;
• The financial services segment, which includes credit card services, a retail loyalty program, insurance brokerage services, personal banking services provided by a major Canadian chartered bank, deposit-taking services and telecommunication services.

Consolidated quarterly results of operations

• The $254-million increase in revenue compared with the fourth quarter of 2010 was driven by improvements in both retail sales and financial services revenue, as described below.
• Operating income decreased by $9-million compared with the fourth quarter of 2010 as a result of a decrease in retail operating income of $6-million and a decrease in financial services operating income of $3-million. Operating margin was 4.3 per cent for the fourth quarter of 2011 compared with 4.6 per cent in the same quarter in 2010.
• Consolidated operating income included the following notable items:
  • A $23-million charge (2010 -- nil) related to the transition of certain Ontario conventional stores to more cost-effective and efficient operating terms of collective agreements ratified in 2010;
  • Incremental costs of $22-million related to investments in information technology and supply chain. These costs included the following charges:
    • Charges related to depreciation and amortization of $43-million (2010 -- $34-million);
    • Charges related to other supply chain and IT costs of $74-million (2010 -- $60-million);
    • A nil charge (2010 -- $1-million) related to changes in the distribution network;
  • Start-up costs associated with the launch of the company's Joe Fresh brand in the United States of $16-million (2010 -- nil);
  • A $5-million charge (2010 -- $7-million recovery) for fixed asset impairments net of recoveries, related to asset carrying values in excess of recoverable amounts for specific retail locations;
  • A charge of $4-million (2010 -- $7-million) related to the effect of share-based compensation net of equity forwards;
• The increase in net earnings of $9-million, or 5.5 per cent, compared with the fourth quarter of 2010 was primarily due to a decrease in net interest expense and other financing charges, and a decline in the effective income tax rate, partially offset by the decrease in operating income. In the fourth quarter of 2010, the company recognized a tax expense of $14-million related to changes in the federal tax legislation that resulted in the elimination of the company's ability to deduct costs associated with cash-settled stock options.
• Basic net earnings per common share were impacted by the following:
  • A six-cent charge (2010 -- nil) related to the transition of certain Ontario conventional stores to the operating terms under collective agreements ratified in 2010;
  • A six-cent charge related to incremental investments in IT and supply chain;
  • A four-cent charge (2010 -- nil) related to the start-up costs associated with the launch of the company's Joe Fresh brand in the United States;
  • A one-cent charge (2010 -- two-cent recovery) for fixed asset impairments net of recoveries;
  • A one-cent charge (2010 -- two cents) related to the effect of share-based compensation net of equity forwards;
  • A nil charge (2010 -- five cents) related to the tax expense recognized due to changes in federal tax legislation related to share-based compensation.
• In 2011, the company invested $1.0-billion in capital expenditures with approximately 50 per cent invested in its IT and supply chain infrastructure, and the remaining 50 per cent invested in its retail operations.

Retail results of operations

• In the fourth quarter of 2011, the increase of $225-million, or 3.2 per cent, in retail sales over the same period in the prior year was impacted by the following factors:
  • Same-store sales growth was 2.5 per cent (2010 -- 1.6-per-cent decline), with an extra day of store operations having a positive impact estimated to be between 0.8 per cent and 1.0 per cent.
  • Sales growth in food was strong, partially driven by the extra day of store operations.
  • Sales growth in drugstore was flat.
  • Gas bar sales growth was strong as a result of higher retail gas prices and moderate volume growth.
  • Sales in general merchandise, excluding apparel, declined marginally due to continued reductions in square footage and optimization of range and assortment of products.
  • Sales growth in apparel was strong, partially driven by increased apparel square footage, including five new Joe Fresh free-standing stores.
  • The company experienced moderate average quarterly internal food price inflation during the fourth quarter of 2011, which was lower than the average quarterly national food price inflation of 5.2 per cent (2010 -- 1.5 per cent) 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 Loblaw stores.
• In the fourth quarter of 2011 the gross profit percentage was 21.7 per cent, consistent with the third quarter of 2011, but a decline from 22.6 per cent in the fourth quarter of 2010. The decline was primarily driven by a higher level of promotional activity and higher input costs outpacing internal food price inflation, a higher proportion of lower margin gas bar sales, and increased transportation costs, partially offset by improved shrink. The $14-million decrease in gross profit was mainly due to increases in promotional pricing programs and transportation costs, partially offset by improved control brand profitability, improved shrink, and the growth and performance of the company's franchise business.
• Operating income decreased by $6-million compared with the fourth quarter of 2010, and operating margin was 4.1 per cent for the fourth quarter of 2011 compared with 4.3 per cent in the same period in 2010. In addition to the notable items described in the consolidated quarterly results of operations above, these decreases were also driven by the decline in gross profit, partially offset by improvements in the growth and performance of the company's franchisees, and continued labour, supply chain, and other operating cost-efficiencies.

Financial services results of operations

• The 24.6-per-cent increase in revenue over the fourth quarter of 2010 was driven by increased credit card transaction values resulting in higher interchange fee income and higher PC Telecom revenues as a result of the launch of the new mobile shop kiosks in the fourth quarter.
• The decreases of $3-million in operating income and $4-million in earnings before income taxes compared with the fourth quarter of 2010 were attributable to investments in the launch of PC Telecom's mobile shop kiosks and an increased credit card loss provision as a result of quarterly growth in the receivables program, partially offset by the increase in interchange fee income.

Outlook

• For fiscal 2012, the company expects:
  • Capital expenditures to be approximately $1.1-billion, with approximately 40 per cent to be dedicated to investing in the IT infrastructure and supply chain projects, and the remaining 60 per cent to be spent on retail operations;
  • Costs associated with the transition of certain Ontario conventional stores under collective agreements ratified in 2010 to range from $30-million to $40-million;
  • Incremental costs related to investments in IT and supply chain to be approximately $70-million;
  • Incremental investments in its customer proposition to be approximately $40-million;
  • Full-year 2012 net earnings per share to be down year over year, with more pressure in the first half of the year, as a result of the company's expectation that operations will not cover the incremental costs related to the investments in IT and supply chain, and its customer proposition.

                                         CONSOLIDATED STATEMENTS OF EARNINGS
                                           (In millions, except per share)
                                                               
                                                       For the quarter ended Dec. 31,    For the year ended Dec. 31,
                                                               2011             2010           2011            2010

Revenue                                                    $  7,373         $  7,119      $  31,250       $  30,836
Cost of merchandise inventories sold                          5,664            5,420         23,894          23,534
Selling, general and administrative expenses                  1,394            1,375          5,972           5,955
Operating income                                                315              324          1,384           1,347
Net interest expense and other financing charges                 81               83            327             353
Earnings before income taxes                                    234              241          1,057             994
Income taxes                                                     60               76            288             319
Net earnings                                               $    174         $    165      $     769       $     675
Net earnings per common share 
Basic                                                      $   0.62         $   0.59      $    2.73       $    2.43
Diluted                                                    $   0.60         $   0.58      $    2.71       $    2.38

We seek Safe Harbor.