Mr. Galen Weston reports
LOBLAW COMPANIES LIMITED REPORTS 2014 FIRST QUARTER RESULTS AND ANNOUNCES 2.1% INCREASE TO QUARTERLY COMMON SHARE DIVIDEND
Loblaw Companies Ltd. has released its unaudited financial
results for the first quarter ended March 22, 2014. The company's first-quarter report will be available in the investor centre section of the
company's website and will be filed with SEDAR.
On March 28, 2014, subsequent to the end of the first quarter of 2014,
the company completed the acquisition of Shoppers Drug Mart Corp. A summary of Shoppers Drug Mart operating
results for the first quarter ended March 22, 2014, is included as an
addendum to this news release.
First-quarter highlights:
- Revenue of $7,292-million, an increase of 1.2 per cent over the first quarter of
2013;
-
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) up 5.0 per cent to $463-million compared with $441-million in the first quarter
of 2013;
-
Adjusted basic net earnings per common share up 2.1 per cent to 49 cents compared with 48 cents in the first quarter of 2013;
-
Basic net earnings per common share down 39.3 per cent to 37 cents compared with 61 cents in the first quarter of 2013,
with 2013 positively impacted by a gain related to defined benefit plan
amendments;
- Retail sales growth of 0.8 per cent and same-store sales growth of 0.9 per cent compared with the first quarter of 2013;
- Retail same-store
sales growth was negatively impacted by approximately 0.2 per cent due to the shift
in the timing of Easter;
- Normalized for the shift, same-store sales growth for the quarter was approximately 1.1 per cent;
-
Financial services revenue increased by 9.1 per cent over the first quarter of
2013;
-
Quarterly common share dividend increase of approximately 2.1 per cent, from
24 cents per common share to 24.5 cents per common share.
"The first quarter of 2014 marked another quarter of steady progress in
our core business," said Galen G. Weston, executive chairman, Loblaw
Companies. "We remained focused on balancing our commitment to
competitiveness and financial performance, achieving positive
same-store sales and growing adjusted operating income. While the
industry backdrop continues to be challenging with the intensely
competitive market environment and the continued impact of drug reform,
we still expect to advance our combined business both financially and
operationally this year.
"With the acquisition of Shoppers Drug Mart completed, we are able to
move into the next chapter for Loblaw, as we continue to build a
portfolio of strong, complementary and independent businesses,"
continued Mr. Weston. "The near-term financial benefits, as well as the
long-term strategic rationale of this transaction are extremely
compelling."
The $90-million increase in revenue compared with the first quarter of
2013 was primarily driven by an increase in the company's retail
segment. Revenue also increased in the company's financial services
segment.
Operating income decreased by $56-million compared with the first quarter of 2013. The
change in operating income was negatively impacted by the gain related
to defined benefit plan amendments recorded in the first quarter of
2013, costs related to the acquisition of Shoppers Drug Mart, general
and administrative costs related to Choice Properties Real Estate
Investment Trust, and unfavourable year-over-year
changes in fixed-asset and other related impairments. Adjusted
operating income increased by $10-million compared with the first quarter of 2013,
primarily driven by an increase in adjusted operating income in the company's financial services segment.
Adjusted operating margin was 3.7 per cent for the first quarter of 2014 compared with 3.6 per cent in the same
quarter in 2013. Adjusted EBITDA margin was 6.3 per cent for the first quarter of 2014 compared with 6.1 per cent in the same
quarter in 2013.
Net interest expense and other financing charges increased by $39-million compared with the first quarter of 2013 and included net interest
of $15-million related to indebtedness incurred to finance the
acquisition of Shoppers Drug Mart, and an unfavourable $12-million fair
value adjustment related to the trust unit liability for the change in
the fair value of Choice Properties' trust units held by
unitholders other than the company. Excluding these impacts net
interest expense and other financing charges increased by $12-million,
driven primarily by distributions paid by Choice Properties on its
units and by higher interest on long-term debt.
Income tax expense for the first quarter of 2014 was $35-million (2013
-- $62-million) and the effective income tax rate was 25.4 per cent (2013 --
26.6 per cent). The decrease in the effective tax rate over the first quarter
of 2013 was primarily due to an increase in income tax recoveries
related to prior-year tax matters, partially offset by an increase in
non-deductible amounts, including fair value adjustments on the trust
unit liability. After excluding the tax impact of items excluded from
adjusted net earnings, the effective income tax rate on adjusted net earnings was 22.8 per cent (2013 -- 26.4 per cent).
Net earnings decreased by $68-million compared with the first quarter of
2013, primarily driven by the decrease in operating income and the
increase in net interest expense and other financing charges described
above, partially offset by a lower income tax expense. Adjusted net
earnings increased by $5-million compared with the first quarter of 2013,
primarily driven by higher adjusted operating income and a lower effective income tax rate on adjusted net earnings, partially offset by higher net interest and other financing charges
after excluding certain items described above.
Basic net earnings per common share were 37 cents in the first quarter of 2014 compared with 61 cents in the first
quarter of 2013. Adjusted basic net earnings per common share were 49 cents in the first quarter of 2014 compared with 48 cents in the first
quarter of 2013.
In the first quarter of 2014, the company invested $116-million (2013 --
$119-million) in capital expenditures.
Retail segment
In the first quarter of 2014, the increase in retail sales of $58-million, or 0.8 per cent, over the same period in the prior year was a result
of the following factors:
- Same-store sales growth was 0.9 per cent (2013 -- 2.8 per cent) and was negatively impacted by
approximately 0.2 per cent due to the shift in the timing of Easter. Normalized
for the shift, same-store sales growth for the quarter was approximately 1.1 per cent.
- Same-store sales growth excluding gas bar for the quarter was 0.8 per cent (2013 -- 2.8 per cent) and
normalized for the effect of the shift in the timing of Easter, was
approximately 1.0 per cent.
- Sales growth in food was moderate.
- Sales in drugstore declined marginally.
- Sales growth in gas bar was moderate.
- Sales in general merchandise, excluding apparel, were flat.
- Sales in apparel were flat.
- The company's average quarterly internal food price index was slightly
higher (2013 -- lower) than the average quarterly national food price
inflation of 1.2 per cent (2013 -- 1.4 per cent) as measured by the Consumer Price
Index for Food Purchased from Stores. CPI does not necessarily
reflect the effect of inflation on the specific mix of goods sold in
Loblaw stores.
- Twenty-three corporate and franchise stores were opened and 12 corporate and
franchise stores were closed in the last 12 months, resulting in a net
increase of 400,000 square feet, or 0.8 per cent.
In the first quarter of 2014, gross profit percentage was 22.3 per cent, down 10
basis points compared with the first quarter of 2013. The decline was
primarily driven by higher shrink due to the investment in fresh
assortment and increased transportation costs, which were mainly the
result of higher fuel prices. Gross profit dollars increased by $4-million, or 0.3 per cent, compared with the same period in 2013, driven by higher
sales partially offset by the decline in gross profit percentage.
Operating income decreased by $62-million compared with the first quarter
of 2013, and was negatively impacted by the gain related to defined
benefit plan amendments recorded in the first quarter of 2013, costs
related to the acquisition of Shoppers Drug Mart and unfavourable
year-over-year changes in fixed-asset and other related impairments.
Adjusted operating income decreased by $2-million compared with the first quarter of 2013,
primarily driven by increased other operating costs, including
depreciation and amortization, higher foreign exchange losses, and costs
related to certain of the company's emerging businesses, partially
offset by supply chain and labour efficiencies, and higher gross
profit. For the first quarter of 2014, adjusted operating margin was 3.2 per cent, flat compared with the same period in 2013.
Adjusted EBITDA increased by $8-million compared with the first quarter of 2013. For the
first quarter of 2014 adjusted EBITDA margin was 5.9 per cent compared with 5.8 per cent in the same period in 2013. Retail segment
depreciation and amortization increased by $10-million compared with the
first quarter of 2013.
Financial services segment
Revenue for the first quarter of 2014 increased by 9.1 per cent compared with the
first quarter of 2013. This increase was primarily driven by higher
interest income from higher credit card receivable balances and an
increased interest income yield, and higher other service-fee-related
income.
Operating income and earnings before income taxes increased by $6-million and $4-million, respectively, compared with the first quarter of
2013. These increases were mainly attributable to higher revenue as
described above, partially offset by higher operating costs as a result
of an increase in the active customer base, and higher credit losses.
As at March 22, 2014, credit card receivables were $2,399-million, an
increase of $224-million compared with March 23, 2013. This increase was
primarily driven by growth in the active customer base as a result of
continued investments in customer acquisitions and marketing
initiatives over the past two years. As at March 22, 2014, the
allowance for credit card receivables was $47-million, an increase of
$4-million compared with March 23, 2013, primarily due to the growth in
the credit card portfolio.
Choice Properties segment
Revenue for the first quarter of 2014 was $167-million, of which $150-million was received from the retail segment. Revenue consists of base
rent, operating cost and property tax recoveries.
Operating income for the first quarter of 2014 was $118-million and
included $5-million of general and administrative costs. Adjusted
operating income was $124-million.
Net operating income for the first quarter of 2014 was $115-million, which consisted of cash
rental revenue less property operating costs.
Funds from operations and adjusted funds from operations for the first quarter of 2014 were $87-million and $69-million,
respectively.
Results of Choice Properties operations for the first quarter of 2014
were slightly better than the financial forecast included in Choice
Properties' equity and debt prospectuses dated June 26, 2013, primarily
driven by incremental income from properties acquired since that date.
In the first quarter of 2014, Choice Properties completed the issuance
of $450-million principal amount of senior unsecured
debentures. The majority of the proceeds were used to repay $440-million of transferor notes held by Loblaw.
Also in the first quarter of 2014, Choice Properties acquired an
industrial property in Mississauga, Ont., for approximately
$16-million. The acquisition was financed entirely with cash. This
property is fully leased to a related party.
Acquisition of Shoppers Drug Mart
On March 28, 2014, subsequent to the end of the first quarter, the
company acquired all of the outstanding shares of Shoppers Drug Mart
for total consideration of $12.3-billion, comprising approximately
$6.6-billion of cash and the issuance of approximately 119.5 million
common shares of the company.
The cash portion of the acquisition was financed as follows:
- $3.5-billion was obtained through an unsecured term loan facility
bearing interest at a rate equal to the bankers' acceptance rate plus
1.75 per cent and maturing March 28, 2019;
- $1.6-billion of proceeds from the issuance of unsecured notes in the
third quarter of 2013 were released from escrow;
- $500-million was received in consideration of the issuance of 10.5 million common shares to George Weston Ltd.;
- Approximately $1.0-billion was used from cash on hand.
Loblaw expects to achieve annualized synergies of $300-million in the
third full year following the close of the transaction (net of related
costs), phased in evenly over three years. First-year synergies are
expected to be generated primarily from improved cost of goods sold and
from purchasing efficiencies in goods not for resale.
Pursuant to a consent agreement reached with the Competition Bureau in
the first quarter of 2014, the company is required to divest of 14
Shoppers Drug Mart stores and four of the company's franchise grocery
stores, as well as nine pharmacy operations of the company. The
divestitures are not expected to have a material impact on the
operations of the company or the planned synergies.
Based on a preliminary assessment, the company expects to recognize amounts of net tangible assets, goodwill and intangible
assets in the second quarter of 2014 as shown in the associated table.
NET TANGIBLE ASSETS, GOODWILL AND INTANGIBLE ASSETS
(millions of dollars except where otherwise indicated)
Estimated
useful life
Fair value of net tangible assets acquired $ 552
Goodwill 2,251
Prescription files 5,040 11 years
Brands 3,340 indefinite
Optimum loyalty program 490 18 years
Other 600 5 to 10 years
Total intangible assets 9,470
Total net assets acquired $12,273
The company anticipates annual amortization of approximately $550-million relating to the intangible assets. In
addition, other purchase-related fair value adjustments will be
recognized, including a fair value adjustment to inventory of
approximately $800-million, representing the difference between
inventory cost and its fair value. This difference will be recognized
in cost of sales as the inventory is sold over the remainder of 2014,
with a resulting negative impact on gross profit. The company will
exclude these impacts in calculating adjusted operating income, as management does not consider them to be reflective of the company's
underlying operating performance.
In the first quarter of 2014, the company incurred costs related to the
acquisition of $23-million, of which $8-million was recorded in
selling, general and administrative expenses and $15-million was
recorded in net interest expense and other financing charges.
Upon closing of the acquisition, all amounts owing on Shoppers Drug
Mart's revolving bank credit facility were repaid and the facility was
cancelled. In addition, upon closing, the company guaranteed the
outstanding principal amount of Shoppers Drug Mart medium-term notes of
$500-million, along with any accrued interest. The company has also
provided guarantees to various Canadian banks in support of the
financing obtained by Shoppers Drug Mart associates.
Declaration of dividends
Subsequent to the end of the first quarter of 2014, the board of
directors declared a quarterly dividend on Loblaw Companies common shares of 24.5 cents payable July 1, 2014, to shareholders of
record on June 15, 2014, and a dividend on the second preferred shares,
Series A, of 37 cents per share payable July 31, 2014, to shareholders of
record on July 15, 2014.
Outlook
The company expects to update this outlook in the second-quarter
earnings announcement, which will reflect the impacts of:
- Accounting policies alignment and the purchase price allocation with
respect to the acquisition of Shoppers Drug Mart;
- Synergies expected to be achieved in 2014. The company's overall synergy
targets remain unchanged.
The company expects the competitive environment and industry square
footage to remain at historically high levels in the second quarter,
and also expects deflationary pressure from regulatory drug reform --
the impacts of which are expected to moderate in the second half of the
year. During the second quarter, the company also anticipates to be
negatively impacted by the timing of charges related to the transition
of certain stores to more cost-effective and efficient operating terms
under collective agreements. These charges are anticipated to be
approximately $25-million. Expectations for the full year with respect
to these charges are approximately $35-million. In 2013, the charges
were $8-million and $24-million, for the second quarter and full year,
respectively.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(millions of dollars except per share amounts)
March 22, 2014 March 23, 2013
(12 weeks) (12 weeks)
Revenue $ 7,292 $ 7,202
Cost of merchandise inventories sold 5,528 5,474
Selling, general and administrative expenses 1,511 1,419
-------- ---------
Operating income 253 309
Net interest expense and other financing charges 115 76
-------- ---------
Earnings before income taxes 138 233
Income taxes 35 62
-------- ---------
Net earnings $ 103 $ 171
======== =========
Net earnings per common share
Basic $ 0.37 $ 0.61
Diluted 0.36 0.60
Addendum -- Shoppers Drug Mart results
On March 28, 2014, subsequent to the end of the first quarter of 2014, the company completed the acquisition of Shoppers Drug Mart. As Shoppers Drug Mart is no longer a public issuer, it was not required to file a quarterly report for the first quarter of 2014. Beginning in the second quarter of 2014, Shoppers Drug Mart operating results will be included within the retail operating segment of the company.
SHOPPERS DRUG MART RESULTS
(in millions of dollars)
For the periods ended
March 22, March 23,
2014 2013
(12 weeks) (12 weeks)
Sales $ 2,518 $ 2,486
Cost of goods sold 1,552 1,529
------- --------
Gross profit 966 957
Operating and administrative expenses 796 782
------- --------
Operating income 170 175
Adjusted operating income 177 175
EBITDA 243 250
Adjusted EBITDA 250 250
The following provides an overview of Shoppers Drug Mart's operating performance for the quarter ended March 22, 2014, compared with the quarter ended March 23, 2013:
- Sales were $2.5-billion, an increase of 1.3 per cent over the same period of the prior year, driven by sales gains in the front of the store and continued strength in prescription count growth. On a same-store basis, sales increased 1.4 per cent in the quarter.
- Pharmacy sales were $1.2-billion, an increase of 0.5 per cent compared with the same period of the prior year, as strong growth in the number of prescriptions filled at retail was partially offset by a further reduction in average prescription value. On a same-store basis, pharmacy sales increased by 0.4 per cent in the quarter. During the first quarter of 2014, the number of prescriptions dispensed at retail increased by 4.1 per cent compared with the same period of the prior year and was up 4.0 per cent on a same-store basis. Year over year, average prescription value at retail declined by 3.0 per cent during the first quarter of 2014, largely as a result of further reductions in generic prescription reimbursement rates due to continuing drug system reform initiatives, along with increasing generic prescription utilization rates. Generic molecules made up 62.5 per cent of the prescriptions dispensed in the first quarter of 2014 compared with 60.7 per cent in the same period last year.
- Front-store sales were $1.3-billion, an increase of 2.1 per cent compared with the same period of the prior year, led by strong growth in cosmetics, food and confection and beverage. On a same-store basis, front-store sales increased by 2.2 per cent during the first quarter of 2014.
- During the first quarter, four new drug stores were opened, one of which was a relocation, one drug store was acquired and four smaller pharmacy formats were closed. Year over year, retail selling square footage increased by 2.1 per cent.
Operating income, inclusive of transaction-related costs of $7 million associated with the acquisition of Shoppers Drug Mart by Loblaw, was $170-million in the first quarter of 2014. Excluding the impact of these transaction-related costs, adjusted operating income for the first quarter of 2014 was $177-million compared with adjusted operating income of $175-million in the same period of the prior year. Year over year, gross profit dollars increased by 0.9 per cent in the first quarter of 2014, as the level of promotional intensity in the market remained high. Operating and administrative expenses, including depreciation and amortization expense, increased 1.7 per cent compared with the same period last year. Excluding the impact of the aforementioned transaction-related costs of $7-million, first quarter adjusted operating and administrative expenses were up 0.9 per cent year over year, driven largely by higher store-level expenses, primarily occupancy and wages and benefits.
Conference call and webcast
Loblaw Companies will host a conference call as well as an audio webcast on April 30, 2014, at 11 a.m. (ET).
To access via teleconference please dial 416-642-5212. The playback will be made available two hours after the event at 647-436-0148, access code: 6056008. To access via audio webcast please visit the company's website, go to investor centre and click on webcast. Preregistration will be available.
Annual meeting of shareholders
The 2014 annual meeting of shareholders of Loblaw Companies will be held on Thursday, May 1, 2014, at 11 a.m. (ET), at the Mattamy Athletic Centre, 50 Carlton St., Toronto, M5B 1J2.
We seek Safe Harbor.
© 2024 Canjex Publishing Ltd. All rights reserved.