Mr. Galen Weston reports

LOBLAW REPORTS 2018 FOURTH QUARTER AND FISCAL YEAR ENDED DECEMBER 29, 2018 RESULTS

Loblaw Companies Ltd. has released its unaudited financial results for the fourth quarter ended Dec. 29, 2018, and has released its 2018 annual report -- financial review, which includes the company's audited consolidated financial statements and management's discussion and analysis for the fiscal year ended Dec. 29, 2018. The company's 2018 annual report will be available in the investors section of the company's website and will be filed with SEDAR.

"We are pleased to deliver strong operational performance again this quarter, achieving our full-year financial targets in a challenging year," said Galen G. Weston, executive chairman, Loblaw Companies.

"Our strategy has momentum and we are accelerating our investments to deliver customer and shareholder value over the long term."

On Nov. 1, 2018, the company and its parent George Weston Ltd. completed a reorganization under which the company distributed its approximate 61.6-per-cent effective interest in Choice Properties Real Estate Investment Trust to Weston. 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 health care, digital retail, and payments and rewards strategy.

As of the date of 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 spinout of the company's interest in Choice Properties has been presented separately as discontinued operations in the current and comparative results. The company's 2018 financial results from discontinued operations include 10 months of Choice Properties' financial results compared with a full year in 2017.

2018 fourth quarter highlights

Unless otherwise indicated, the following highlights represent the company's results from continuing operations and also reflect the impact of the consolidation of franchises. The fourth quarter of 2018 included the negative impacts of minimum wage increases and incremental health care reform:

• Revenue was $11,218-million, an increase of $226-million, or 2.1 per cent, compared with the fourth quarter of 2017.
• Retail segment sales were $10,976-million, an increase of $181-million, or 1.7 per cent, compared with the fourth quarter of 2017:
  • Food retail (Loblaw) same-store sales growth was 0.8 per cent.
  • Drug retail (Shoppers Drug Mart) same-store sales growth was 1.9 per cent, with pharmacy same-store sales growth of 0.6 per cent and front store same-store sales growth of 2.8 per cent.
• Operating income was $445-million, an increase of $388-million, or 680.7 per cent, compared with the fourth quarter of 2017:
  • Operating income was positively impacted year over year by charges recorded in the fourth quarter of 2017 related to the launch of the PC Optimum program, restructuring and other related costs, and the Loblaw Card program.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $895-million, an increase of $13-million, or 1.5 per cent, compared with the fourth quarter of 2017.
• Net earnings available to common shareholders of the company from continuing operations were $228-million, an increase of $252-million compared with the fourth quarter of 2017. Diluted net earnings per common share were 61 cents, an increase of 67 cents compared with the fourth quarter of 2017:
  • Net earnings available to common shareholders of the company from continuing operations were positively impacted year over year by the net impact of amounts recorded in the fourth quarter of 2017, as discussed above.
• Adjusted net earnings available to common shareholders of the company from continuing operations were $388-million, a decrease of $10-million, or 2.5 per cent, compared with the fourth quarter of 2017. Adjusted diluted net earnings from continuing operations per common share were $1.03, an increase of one cent, or 1.0 per cent, compared with the fourth quarter of 2017:
  • Adjusted net earnings available to common shareholders of the company from continuing operations included the decline in underlying operating performance of the financial services segment, which included investments in digital strategy and was negatively impacted by lower core banking income attributable to the discontinuation of the personal banking services under the PC Financial brand, partially offset by the improvement in underlying operating performance of the retail segment. The increase in adjusted diluted earnings from continuing operations per common share was due to the favourable impact of the repurchase of common shares.
• Inclusive of discontinued operations, adjusted net earnings available to common shareholders of the company were $402-million, a decrease of $34-million, or 7.8 per cent. Adjusted diluted net earnings per common share were $1.07 a decrease of five cents, or 4.5 per cent compared with the fourth quarter of 2017. Normalized for the impact of the reorganization and Choice Properties' acquisition of Canadian Real Estate Investment Trust (CREIT), adjusted net earnings available to common shareholders of the company decreased by approximately $4-million and adjusted diluted net earnings per common share increased by three cents or 2.9 per cent per common share compared with 2017.
• The company repurchased 3.9 million common shares at a cost of $238-million in the fourth quarter of 2018. In 2018, the company repurchased 16.6 million common shares at a cost of $1,082-million.

2018 select annual highlights

Relative to the company's 2018 outlook, on a full-year comparative basis, normalized for the disposition of the gas bar business, the impact of the CREIT acquisition and spinout of Choice Properties in the fourth quarter, the company delivered essentially flat adjusted net earnings growth of 0.2 per cent with positive adjusted earnings per share growth of 5.0 per cent driven by its share buyback program.

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 CREIT by Choice Properties:

• Inclusive of discontinued operations, net earnings available to common shareholders of the company were $754-million, a decrease of $751-million compared with 2017. Diluted net earnings per common share were $1.99, a decrease of $1.80 compared with 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 Ltd. 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 were $1,746-million, a decrease of $51-million, or 2.8 per cent, compared with 2017. Adjusted diluted net earnings per common share were $4.60, an increase of eight cents, or 1.8 per cent, compared with 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 increased by approximately $3-million (22 cents or 5.0 per cent per common share) compared with 2017:
  • The spinout of Choice Properties in the fourth quarter of 2018 had a negative year-over-year impact on financial performance in 2018. The spinout negatively impacted adjusted net earnings available to common shareholders of the company by approximately $30-million (eight cents per common share) compared with 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 of $2-million. The acquisition had a nominal impact on adjusted diluted net earnings per common share 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 by approximately $26-million (six cents per common share) compared with 2017. In 2018, the company invested $1,334-million in capital expenditures and generated $366-million of free cash flow.
• In 2018, the company's continuing operations invested $1.07-billion in capital expenditures and generated $670-million of free cash flow.

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.

                                        FINANCIAL HIGHLIGHTS
                      (millions of dollars except where otherwise indicated)

                                      For the periods ended Dec. 29, 2018, and Dec. 30, 2017
                                                2018         2017         2018          2017
                                          (12 weeks)   (12 weeks)   (52 weeks)    (52 weeks)

Revenue                                      $11,218      $10,992      $46,693       $46,587
Operating income                                 445           57        1,923         2,049
Adjusted EBITDA                                  895          882        3,528         3,521
Adjusted EBITDA margin                          8.0%         8.0%         7.6%          7.6%
Net earnings (loss) attributable to
shareholders of the company                      231          (21)         719         1,286
Net earnings available to common
shareholders of the company                      221           31          754         1,505
Continuing operations (loss)                     228          (24)         707         1,274
Discontinued operations (loss)                    (7)          55           47           231
Adjusted net earnings available to
common shareholders of the company               402          436        1,746         1,797
Continuing operations                            388          398        1,539         1,585
Discontinued operations                           14           38          207           212
Diluted net earnings per common
share ($)                                       0.59         0.08         1.99          3.79
Continuing operations (loss)                    0.61        (0.06)        1.87          3.21
Discontinued operations (loss)                 (0.02)        0.14         0.12          0.58
Adjusted diluted net earnings per
common share ($)                                1.07         1.12         4.60          4.52
Continuing operations                           1.03         1.02         4.06          3.99
Discontinued operations                         0.04         0.10         0.54          0.53

Net earnings available to common shareholders of the company from continuing operations in the fourth quarter of 2018 were $228-million (61 cents per common share), an increase of $252-million (67 cents per common share) compared with 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 totalling $262-million, as described below:

• Decline in underlying operating performance of $10-million (three cents 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 selling, general and administrative expenses (SG&A), partially offset by an increase in depreciation and amortization and a decrease in adjusted gross profit;
• The favourable year-over-year net impact of adjusting items totalling $262-million (66 cents per common share), primarily due to the following:
  • Prior-year charges related to the PC Optimum program of $137-million (35 cents per common share);
  • The year-over-year favourable impact of restructuring and other related costs of $133-million (34 cents per common share);
  • The year-over-year favourable impact of prior-year charges related to the Loblaw Card program of $79-million (20 cents 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 (six cents per common share);
  • The unfavourable impact of the prior-year deferred tax liability revaluation of $17-million (four cents 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 (three cents per common share);
  • The unfavourable change in fair value adjustment on fuel and foreign currency contract of $10-million (three cents per common share);
  • The unfavourable impact of the prior-year recovery related to a prior-year land transfer tax assessment of $7-million (two cents 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 (four cents per common share).

Adjusted net earnings available to common shareholders of the company from continuing operations in the fourth quarter of 2018 were $388-million ($1.03 per common share), a decrease of $10-million (increase of one cent per common share or 1.0 per cent), compared with the fourth quarter of 2017, primarily due to the decline in underlying operating performance, as described above. Adjusted diluted net earnings per common share also included the favourable impact of the repurchase of common shares (four cents per common share).

Discontinued operations

Net earnings available to common shareholders of the company from discontinued operations were a loss of $7-million (two cents per common share) in the fourth quarter of 2018, a decrease of $62-million (16 cents per share) compared with the fourth quarter of 2017. The decrease included a decline in underlying operating performance of $24-million (six cents 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 totalling $38-million (10 cents 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 (11 cents per common share).

Other business matters

Process and efficiency

The company continues to execute on a multiyear plan, initiated in 2018, focused on improving processes and generating efficiencies across its administrative, store and distribution network infrastructures. Many initiatives are under way 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.

Spinout of Choice Properties

On Nov. 1, 2018, the company and its parent Weston completed a reorganization under which the company distributed its approximate 61.6-per-cent 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 spinout, and Weston received the company's approximate 61.6-per-cent 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 Oct. 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 spinout represents a decrease in total assets and liabilities of $4.8-billion and $4.5-billion, respectively, compared with Dec. 30, 2017. The transaction has no significant impact on the continuing 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 spinout 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 Oct. 31, 2018. Subsequent to the spinout, from Nov. 1, 2018, to Dec. 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, postspinout, the company's consolidated financial results reflect the continuing operating relationship between the company and Choice Properties, including but not limited to rent paid to Choice Properties from Nov. 1, 2018, to Dec. 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 spinout had a negative year-over-year impact on the total company consolidated financial performance in 2018. The spinout negatively impacted adjusted net earnings available to common shareholders of the company, including discontinued operations by approximately $30-million (eight cents per common share) compared with 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.

Postspinout 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 spinout, 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 spinout, buildings owned by Choice Properties and leased by the company will be accounted for as operating leases. The building components associated with these leases postspinout 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 with 2018. The company's 2018 financial results includes incremental depreciation and amortization for the postspinout period.

The spinout 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 continuing operating relationship with Choice Properties, as discussed above.

Declaration of dividends

Subsequent to the end of the fourth quarter of 2018, the board of directors declared a quarterly dividend on common shares and second preferred shares, Series B.

 
                            $0.295 per common share, payable on April 1, 2019,
Common shares                      to shareholders of record on March 15, 2019
Second preferred                $0.33125 per share, payable on March 31, 2019,
shares, Series B                   to shareholders of record on March 15, 2019

Outlook

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 finance continued incremental investments in its strategic growth areas of everyday digital retail, connected health care, and payments and rewards.

In 2019, on a full-year comparative basis, excluding the impact of the spinout of Choice Properties, the company expects 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;
• Return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.

                            CONSOLIDATED STATEMENTS OF EARNINGS
                  (millions of dollars except where otherwise indicated)  

                                   Dec. 29, 2018   Dec. 30, 2017  Dec. 29, 2018  Dec. 30, 2017 
                                      (12 weeks)     (12 weeks)      (52 weeks)     (52 weeks)

Revenue                                  $11,218        $10,806         $46,693         46,587
Cost of merchandise
inventories sold                           7,780          7,657          32,537         32,913
Selling, general and
administrative expenses                    2,993          3,092          12,233         11,625
Operating income                             445             57           1,923          2,049
Net interest expense
and other financing charges                   95             89             564            374
Earnings before income
taxes (loss)                                 350            (32)          1,359          1,675
Income taxes (loss)                          100            (25)            606            365
Net earnings (loss) from
continuing operations                        250             (7)            753          1,310
Net earnings (loss) from 
discontinued operations                       (7)            55              47            231
Net earnings                                 243             48             800          1,541
Attributable to
shareholders of the company                  224             34             766          1,517
Attributable to
non-controlling interests                     19             14              34             24
Net earnings                                 243             48             800          1,541
Net earnings per common
share -- basic
Continuing operations (loss)                0.61          (0.06)           1.88           3.24
Discontinued operations (loss)             (0.02)          0.14            0.12           0.58
Net earnings per common
share -- diluted
Continuing operations (loss)                0.61          (0.06)           1.87           3.21
Discontinued operations (loss)             (0.02)          0.14            0.12           0.58

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. 

2018 annual report

The company's 2018 annual report is available in the investors section of the company's website and on SEDAR.

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. 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.

Conference call and webcast

Loblaw Companies will host a conference call as well as an audio webcast on Feb. 21, 2019, at 10 a.m. Eastern Time.

To access via teleconference, please dial 647-427-7450 or 888-231-8191. The playback will be made available approximately two hours after the event at 416-849-0833 or 855-859-2056, access code: 4561898. To access via audio webcast, please go to the investors section the company's website. Preregistration will be available.

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