Mr. Galen Weston reports

LOBLAW REPORTS 2023 SECOND QUARTER RESULTS, EARNINGS GROWTH ELEVATED BY PC BANK PRIOR YEAR CHARGE

Loblaw Companies Ltd. has released its unaudited financial results for the second quarter ended June 17, 2023.

Loblaw delivered another quarter of strong operational and financial results as it continued to execute on retail excellence. The quarter was characterized by increased sales, a focus on value and lower gross margins. Net earnings were up 31.3 per cent, unusually elevated by lapping a prior-year charge at President's Choice Bank (PC Bank), while adjusted net earnings were up 10.6 per cent. Loblaw's ability to deliver everyday value and savings to Canadians was reflected in strong sales growth across its food and drug businesses. Food retail sales growth was led by a continued consumer shift to discount stores as customers continued to find value in Loblaw's private label brands and personalized PC Optimum offers. Drug front-store and pharmacy sales remained strong, led by continued strength in beauty products. Retail gross margin declined slightly in both food and drug as the company faced double-digit supplier cost increases that were not fully passed on to consumers and higher shrink. Higher sales and cost control initiatives drove adjusted net earnings growth in the quarter.

"Our businesses remain focused on providing Canadians with the selection, freshness, care and value they need today," said Galen G. Weston, chairman and president of Loblaw Companies. "We will build on this strength and continue to take meaningful steps to fight back against inflation. Our discount offering, best-in-class control brand products and PC Optimum program are resonating with customers who are looking for value without sacrificing quality."

2023 second quarter highlights:

• Revenue was $13,738-million, an increase of $891-million, or 6.9 per cent.
• Retail segment sales were $13,471-million, an increase of $848-million, or 6.7 per cent:
  • Food retail (Loblaw) same-store sales increased by 6.1 per cent.
  • Drug retail (Shoppers Drug Mart) same-store sales increased by 5.7 per cent, with front-store same-store sales growth of 5.0 per cent and pharmacy same-store sales growth of 6.3 per cent.
• E-commerce sales increased by 13.9 per cent.
• Operating income was $927-million, an increase of $185-million, or 24.9 per cent.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $1.64-billion, an increase of $141-million, or 9.4 per cent.
• Retail segment adjusted gross profit percentage was 31.1 per cent, a decrease of 30 basis points.
• Net earnings available to common shareholders of the company were $508-million, an increase of $121-million, or 31.3 per cent. Diluted net earnings per common share were $1.58, an increase of 42 cents, or 36.2 per cent. The increase included the lapping of a prior-year charge of $111-million related to a PC Bank commodity tax matter.
• Adjusted net earnings available to common shareholders of the company were $626-million, an increase of $60-million, or 10.6 per cent.
• Adjusted diluted net earnings per common share were $1.94, an increase of 25 cents, or 14.8 per cent.
• The company repurchased for cancellation 4.2 million common shares at a cost of $511-million and invested $410-million in capital expenditures, net of proceeds from property disposals. Free cash flow used in the retail segment was $600-million.

Consolidated and segment results of operations

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

Retail segment

• Retail segment sales were $13,471-million, an increase of $848-million, or 6.7 per cent:
  • Food retail (Loblaw) sales were $9.56-billion and food retail same-store sales grew by 6.1 per cent (2022: 0.9 per cent):
    • The consumer price index (CPI) as measured by the consumer price index for food purchased from stores was 9.1 per cent (2022: 9.6 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 $3,911-million and drug retail same-store sales grew by 5.7 per cent (2022: 5.6 per cent), with pharmacy and health care services same-store sales growth of 6.3 per cent (2022: 6.1 per cent) and front-store same-store sales growth of 5.0 per cent (2022: 5.2 per cent). Pharmacy and health care services sales include Lifemark Health Group revenues of $112-million (2022: $49-million). Lifemark was acquired on May 10, 2022:
    • On a same-store basis, the number of prescriptions dispensed increased by 0.9 per cent (2022: 2.3 per cent) and the average prescription value increased by 4.7 per cent (2022: 3.6 per cent).
• Operating income was $925-million, an increase of $114-million, or 14.1 per cent.
• Adjusted gross profit was $4,192-million, an increase of $230-million, or 5.8 per cent. The adjusted gross profit percentage of 31.1 per cent decreased by 30 basis points (2022: increased by 50 basis points). Retail margins declined slightly, primarily driven by higher shrink and higher supplier costs that were not passed on to consumers.
• Adjusted EBITDA was $1,587-million, an increase of $142-million, or 9.8 per cent. The increase was driven by an increase in adjusted gross profit, partially offset by an increase in selling, general and administrative (SG&A) expenses. SG&A expenses as a percentage of sales was 19.3 per cent, a favourable decrease of 60 basis points. The favourable decrease of 60 basis points was primarily due to operating leverage from higher sales.
• Depreciation and amortization were $657-million, an increase of $36-million, or 5.8 per cent, primarily driven by an increase in depreciation of information technology (IT) assets and leased assets and accelerated depreciation of $8-million (2022: nil) as a result of network optimization. Included in depreciation and amortization was the amortization of intangible assets related to the acquisitions of Shoppers Drug Mart Corp. and Lifemark of $116-million (2022: $114-million).
• The company recorded charges of $17-million associated with network optimization, which include accelerated depreciation of $8-million as described herein, and other charges.

Financial services segment:

• Revenue was $348-million, an increase of $51-million, or 17.2 per cent. The increase was primarily driven by higher interest income from growth in credit card receivables and higher interchange income and other credit-card-related revenue from an increase in customer spending.
• Losses before income taxes were $34-million in the second quarter of 2023, as compared with losses of $86-million in the prior period. The improvement was mainly driven by the year-over-year impact from the prior-period charge of $111-million versus the current period charge of $37-million related to commodity tax matters, and higher revenue as described herein. This was partially offset by the year-over-year impact of the expected credit loss provision from the prior-period release of $3-million versus the current period increase of $8-million, higher contractual charge-off costs, and higher financing costs from an increase in interest rates and growth in the credit card portfolio.
• In the second quarter of 2023, the federal government enacted certain commodity tax legislation that may apply to PC Bank on a retroactive basis. A charge of $37-million, inclusive of interest, has been recorded for this matter.
• In July, 2022, the tax court released a decision relating to PC Bank. Although the company believes in the merits of its position, the company recorded a charge of $111-million, inclusive of interest, in the second quarter of 2022. In September, 2022, PC Bank filed a notice of appeal with the Federal Court of Appeal. The company believes that this provision is sufficient to cover its liability, if the appeal is ultimately unsuccessful.

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 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 the company's 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 (ESG)

In the second quarter, the company progressed its ESG pillars:

• Fighting climate change: Loblaw unveiled an unprecedented carbon-free energy deal that will see the electricity it purchases for its supermarkets, drugstores, offices and distribution centres in Alberta generated entirely by wind, sun and water. The arrangement is the first of its kind in Canada and will allow the company to eliminate the carbon emissions associated with electricity purchases in Alberta. This will lead to a 17-per-cent reduction in nationwide enterprise operating emissions and saving an estimated 180,000 metric tonnes of carbon emissions. The company also announced plans to purchase five hydrogen fuel cell electric vehicles (FCEVs), expanding its zero-emission fleet and enabling short-haul zero-emission deliveries.
• Advancing social equity: As part of annual community investment efforts generating nearly $110-million, the company raised over $12-million to support President's Choice Children's Charity's mission to feed one million children every year by 2025 and raised more than $2.8-million for local women's mental health programs through the annual Shoppers Drug Mart Run for Women. As part of the Feed More Families commitment, the company provided more than 18 million pounds of food to food charities in the first half of 2023. The company also extended its support to those affected by wildfires across Canada through funds raised and donated to the Canadian Red Cross.
• Ensuring reliability of the company's ESG (environmental, social and governance) disclosures: Loblaw has built a robust control environment to test and validate the accuracy of ESG information that supports its commitment to transparency and accountability. Loblaw continues to evolve and strengthen the control environment as necessary to ensure that the integrity and reliability of ESG disclosures meet the expectations of stakeholders in an evolving landscape. For the first time, the company obtained limited assurance over its Scope 1 and Scope 2 greenhouse gas emissions for 2022 and its baseline year (2020).

The company's efforts in the second quarter demonstrate its commitment to fighting climate change and advancing social equity, with a focus on reducing carbon emissions, addressing food insecurity and supporting communities in need while continuing to place importance on governance over ESG disclosures.

Normal course issuer bid (NCIB) program

On a year-to-date basis, the company repurchased 7.5 million common shares for cancellation at a cost of $894-million.

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 second 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 Oct. 1, 2023, to shareholders of record on Sept. 15, 2023;
• Second preferred shares (Series B) -- 33.125 cents per share, payable on Sept. 30, 2023, to shareholders of record on Sept. 15, 2023.

2022 annual report and 2023 second quarter report to shareholders

The company's 2022 annual report and 2023 second quarter report to shareholders are 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 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 July 26, 2023, at 10 a.m. ET.

To access by 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 (access code: 664086 followed by the number sign). To access by 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.

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