Mr. Galen Weston reports

LOBLAW REPORTS 2023 FIRST QUARTER RESULTS

Loblaw Companies Ltd. has released its unaudited financial results for the first quarter ended March 25, 2023.

Loblaw's sales and earnings growth continued to reflect its focus on retail excellence. Drug retail sales were led by continued strength in higher margin beauty and cough and cold products. Drug retail sales growth rates were further magnified by lapping Omicron-related lockdowns last year. Food retail sales growth accelerated through the quarter, after lapping lockdown-related benefits in the first part of 2022. This was the case in both market and discount stores, though the latter continued to outperform, benefiting from the heightened consumer focus on price. Total retail gross margin increased due to higher sales growth in more profitable front-store sales in drug stores, offsetting a slight decline in food retail gross margin as costs continued to increase faster than prices. Higher sales and cost control leverage drove earnings in the quarter.

"In the face of ongoing inflation, we are working hard to deliver the value and choice Canadians are looking for," said Galen G. Weston, chairman and president, Loblaw Companies. "I'm pleased that customers are responding positively to the breadth of our offerings including our diverse store formats, market leading prices, private label brands and loyalty offers."

2023 first quarter highlights:

• Revenue was $12,995-million, an increase of $733-million, or 6.0 per cent.
• Retail segment sales were $12,735-million, an increase of $690-million, or 5.7 per cent:
  • Food retail (Loblaw) same-stores sales increased by 3.1 per cent, including the negative impact of 1.1 per cent related to the timing of New Year's Day.
  • Drug retail (Shoppers Drug Mart) same-store sales increased by 7.4 per cent, with front store same-store sales growth of 10.3 per cent and pharmacy same-store sales growth of 4.7 per cent.
• E-commerce sales decreased by 1.1 per cent, lapping elevated on-line sales due to lockdowns last year.
• Operating income was $769-million, an increase of $31-million, or 4.2 per cent.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $1,448-million, an increase of $105-million, or 7.8 per cent.
• Retail segment adjusted gross profit percentage was 31.3 per cent, an increase of 20 basis points.
• Net earnings available to common shareholders of the company were $418-million, a decrease of $19-million, or 4.3 per cent. Diluted net earnings per common share were $1.29, a decrease of one cent, or 0.8 per cent. The decrease was primarily driven by a prior year gain related to a favourable court ruling.
• Adjusted net earnings available to common shareholders of the company were $505-million, an increase of $46-million, or 10.0 per cent.
• Adjusted diluted net earnings per common share were $1.55, an increase of 19 cents, or 14.0 per cent.
• Repurchased for cancellation 3.3 million common shares at a cost of $383-million and invested $208-million in capital expenditures, net of proceeds from property disposals. Free cash flow used in the retail segment was $81-million.
• Twelfth consecutive annual increase to the quarterly common share dividend from 40.5 cents per common share to 44.6 cents per common share, an increase of 10 per cent.
• The company just announced the release of its 2022 environmental, social and governance (ESG) report.

Consolidated and segment results of operations

An attached table provides key performance metrics for the company by segment.

An attached table provides a breakdown of the company's total and same-store sales for the retail segment.

Retail segment:

• Retail segment sales were $12,735-million, an increase of $690-million, or 5.7 per cent:
  • Food retail (Loblaw) sales were $9,011-million and food retail same-store sales grew by 3.1 per cent (2022 -- grew by 2.1 per cent), including the negative impact of 1.1 per cent related to the timing of New Year's Day. Food retail same-store sales were also negatively impacted by higher than normal eat-at-home levels in the prior year:
    • The consumer price index as measured by the consumer price index for food purchased from stores was 10.5 per cent (2022 -- 7.5 per cent) which was generally in line with the company's internal food inflation.
    • Food retail traffic increased and basket size decreased.
  • Drug retail (Shoppers Drug Mart) sales were $3,724-million and drug retail same-store sales grew by 7.4 per cent (2022 -- 5.2 per cent), with pharmacy and health care services same-store sales growth of 4.7 per cent (2022 -- 6.8 per cent) and front store same-store sales growth of 10.3 per cent (2022 -- 3.6 per cent). Pharmacy and health care services sales include Lifemark Health Group revenues of $118-million. Lifemark revenues are excluded from same-store sales:
    • On a same-store basis, the number of prescriptions dispensed decreased by 1.9 per cent (2022 -- increased by 5.8 per cent) and the average prescription value increased by 6.0 per cent (2022 -- 0.4 per cent).
• Operating income was $726-million, an increase of $36-million, or 5.2 per cent.
• Adjusted gross profit was $3,980-million, an increase of $237-million, or 6.3 per cent. The adjusted gross profit percentage of 31.3 per cent increased by 20 basis points (2022 -- increased by 80 basis points), primarily driven by growth in higher margin drug retail front store categories, partially offset by a slight decrease in food retail margins.
• Adjusted EBITDA was $1,390-million, an increase of $105-million, or 8.2 per cent. The increase was driven by an increase in adjusted gross profit, partially offset by an increase in SG&A (selling, general and administrative). SG&A as a percentage of sales was 20.3 per cent, a favourable decrease of 10 basis points. The favourable decrease of 10 basis points was primarily due to operating leverage from higher sales.
• Depreciation and amortization was $660-million, an increase of $39-million, or 6.3 per cent, primarily driven by an increase in depreciation of IT (information technology) assets, leased assets, accelerated depreciation of $10-million (2022 -- nil) due to the reassessment of the estimated useful life of certain IT assets and accelerated depreciation of $7-million (2022 -- nil) as a result of network optimization. Included in depreciation and amortization was and the amortization of intangible assets related to the acquisitions of Shoppers Drug Mart Corp. and Lifemark of $114-million (2022 -- $117-million).
• The company recorded charges of $15-million associated with network optimization, which include accelerated depreciation of $7-million as described above, and other charges.
• In the first quarter of 2023, the company disposed of 16 real estate properties for proceeds of $87-million (2022 -- $13-million). Real estate disposition proceeds will be used to partially finance increased capital investments.

Financial services segment:

• Revenue was $326-million, an increase of $52-million, or 19.0 per cent. The increase was primarily driven by higher interest income from growth in credit card receivables, higher interchange income and other credit card related revenue from an increase in customer spending.
• Earnings before income taxes were $12-million, a decrease of $20-million. The decrease in earnings was mainly driven by the year-over-year impact of the expected credit loss provision from lapping the prior year release of $5-million versus the current quarter increase of $6-million, higher costs from an increase in customer spending and the growth in credit card portfolio which includes an increase in financing costs, partially offset by the higher revenue as described above.

Outlook

Loblaw will continue to execute on retail excellence while advancing its growth initiatives in 2023. The company's businesses remain well placed to service the everyday needs of Canadians. However, the company cannot predict the precise impacts of global economic uncertainties, including the inflationary environment, on its 2023 financial results.

For the full-year 2023, the company continues to expect:

• Its retail business to grow earnings faster than sales;
• Adjusted net earnings per common share growth in the low double digits;
• To increase investments in our store network and distribution centres by investing a net amount of $1.6-billion in capital expenditures, which reflects gross capital investments of approximately $2.1-billion offset by approximately $500-million of proceeds from real estate dispositions;
• To return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.

Environmental, social and governance

The company just issued its 2022 ESG report. For the first time, the report aligns with all three of the following: Global Reporting Initiatives (GRI) standards, Sustainability Accounting Standards Board (SASB) disclosures and the Taskforce for Climate-Related Financial Disclosure (TCFD). The report highlights many significant 2022 achievements, including reducing the carbon emissions of enterprise operations by 8 per cent since 2020, achieving multiple inclusion and representation goals ahead of schedule, and contributing more than $110-million in community finances to support research, charities and non-profits.

In the quarter, Loblaw collected and donated seven million pounds of food for local food banks in support of its new Feed More Families pledge, began the final phase of eliminating front-end single-use bags and launched the rebrand of Love You by Shoppers Drug Mart program to the Shoppers Foundation for Women's Health, with a strengthened focus on supporting women's health equity.

Normal course issuer bid program

From time to time, the company participates in an automatic share purchase plan (ASPP) with a broker in order to facilitate the repurchase of the company's common shares under its NCIB. During the effective period of the ASPP, the company's broker may purchase common shares at times when the company would not be active in the market.

Declaration of dividends

Subsequent to the end of the first quarter of 2023, the board of directors declared a quarterly dividend on common shares and second preferred shares, Series B.

Common shares:  44.6 cents per common share, payable on July 1, 2023, to shareholders of record on June 15, 2023

Second preferred shares, Series B:  33.125 cents per share, payable on July 1, 2023, to shareholders of record on June 15, 2023

Conference call and webcast

Loblaw Companies will host a conference call, as well as an audio webcast, on May 3, 2023, at 10 a.m. ET.

To access through teleconference, please dial 416-764-8688 or 888-390-0546. The playback will be made available approximately two hours after the event at 416-764-8677 or 888-390-0541, with access code 498499, followed by the number sign. To access through audio webcast, please go to the investor section of the company's website. Preregistration will be available.

Full details about the conference call and webcast are available on the Loblaw Companies website.

Annual meeting of shareholders

The 2023 annual meeting of shareholders of Loblaw Companies will be held on Thursday, May 4, 2023, at 11: a.m. ET. This year's meeting will be held as a virtual meeting, by way of a live webcast. Shareholders will be able to listen, participate and vote at the meeting in real time through a live webcast on-line (meeting password: loblaw2023).

We seek Safe Harbor.