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STELLARTON, NS, Sept. 11 /CNW/ -- Empire Company Limited (TSX: EMP.A) today announced financial results for its first quarter ended August 1, 2009. For the first quarter, the Company recorded earnings before capital gains and other items of $72.2 million ($1.05 per share) as compared to $70.9 million ($1.08 per share) in the first quarter last year, a $1.3 million increase.
As a result of the equity issue completed on April 24, 2009, Empire had a diluted weighted average number of shares outstanding of 68.5 million in the first quarter ended August 1, 2009 as compared to 65.7 million in the first quarter last year.
First Quarter Highlights
- Revenue of $3.97 billion, up $190.3 million or 5.0 percent.
- Sobeys Inc. ("Sobeys") same-store sales increased 4.0 percent.
- Earnings before capital gains and other items of $72.2 million ($1.05
per share) as compared to $70.9 million ($1.08 per share) last year.
- Capital gains and other items, net of tax, of $17.5 million versus
$4.8 million last year.
- Net earnings of $89.7 million ($1.31 per share) as compared to
$75.7 million ($1.15 per share) last year.
- Net funded debt to total capital of 26.3 percent, down from
28.6 percent at the end of the last fiscal year and 35.7 percent at the
end of Q1 last year.
"Empire's consolidated operating earnings and financial condition continued to strengthen in the first quarter of fiscal 2010 as a result of an 18.6 percent increase in Sobeys' earnings," stated Paul Sobey, President and CEO, Empire Company Limited. "Our performance overall is in line with our expectation and was again driven by Sobeys' operating performance, innovation and disciplined growth."
Dividend Declaration
The Board of Directors declared a quarterly dividend of 18.5 cents per share on both the Non-Voting Class A shares and the Class B common shares that will be payable on October 30, 2009 to shareholders of record on October 15, 2009. The Board also declared regular dividends on the Company's outstanding preferred shares. The dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation and, therefore, qualify for the favourable tax treatment applicable to such dividends.
CONSOLIDATED FINANCIAL OVERVIEW
Revenue
Consolidated revenue for the first quarter equalled $3.97 billion compared to $3.78 billion last year, an increase of $190.3 million or 5.0 percent. Sobeys' revenue equalled $3.91 billion, an increase of $195.2 million or 5.3 percent compared to the first quarter last year. Sobeys' first quarter same-store sales increased 4.0 percent.
Real estate division revenue (net of elimination) in the first quarter was $14.5 million, a decrease of $10.1 million from the $24.6 million recorded in the first quarter last year. Commercial property revenue declined by $1.5 million while residential property revenue decreased by $8.6 million from the first quarter last year. The decline in residential property revenue was expected, reflecting a marked reduction of residential lot sales in Western Canada.
Investments and other operations recorded revenue of $47.3 million in the first quarter versus $42.1 million in the first quarter last year, an increase of $5.2 million or 12.4 percent.
Operating Income
Consolidated operating income (earnings before capital gains and other items, minority interest, interest expense and income tax) in the first quarter was $130.2 million, an increase of $1.9 million or 1.5 percent from the $128.3 million recorded in the first quarter last year.
The contributors to the change in consolidated operating income from the first quarter last year were as follows:
(i) Sobeys' operating income contribution to Empire in the first
quarter totalled $121.6 million, an increase of $15.3 million or
14.4 percent from the $106.3 million recorded in the first quarter
last year.
(ii) Residential property operating income contribution in the first
quarter was $5.1 million, a decrease of $8.6 million from the $13.7
million recorded in the first quarter last year as a result of
lower residential lot sales activity in Western Canada.
(iii) Commercial property operating income for the quarter was $4.6
million as compared to $5.8 million in the first quarter last
fiscal year, a decline of $1.2 million. Crombie REIT contributed
$4.9 million to operating income in the first quarter versus a $4.6
million contribution in the first quarter last year.
(iv) Investments and other operations (net of corporate expenses)
contributed operating income of negative $1.1 million in the first
quarter compared to $2.5 million in the first quarter last year.
Equity accounted earnings generated from the Company's 27.6 percent
interest in Wajax Income Fund ("Wajax") amounted to $2.7 million in
the first quarter versus $5.5 million in the first quarter last
year. Operating income generated from other operations (net of
corporate expenses) amounted to negative $3.8 million as compared
to negative $3.0 million in the first quarter last year.
The table below presents a summary of financial performance for the 13
weeks ended August 1, 2009 compared to the 13 weeks ended August 2, 2008.
Summary Table of Consolidated Financial Results
13 Weeks Ended
------------------------
($ in millions, except per August 1, August 2,
share information) 2009 2008(1)
----------- ------------
Segmented revenue
Food retailing $ 3,906.7 $ 3,711.5
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Real estate
Residential 11.4 20.0
Other Commercial 3.1 4.6
Inter-segment 0.6 0.3
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15.1 24.9
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Investments and other operations 47.3 42.1
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3,969.1 3,778.5
Elimination (0.6) (0.3)
----------- ------------
$ 3,968.5 $ 3,778.2
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Segmented operating income
Food retailing $ 121.6 $ 106.3
----------- ------------
Real estate
Residential 5.1 13.7
Crombie REIT(2) 4.9 4.6
Other Commercial (0.3) 1.2
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9.7 19.5
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Investments and other operations
Wajax(3) 2.7 5.5
Other investments and operations,
net of corporate expenses (3.8) (3.0)
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(1.1) 2.5
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$ 130.2 $ 128.3
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----------- ------------
Earnings before capital gains and
other items $ 72.2 $ 70.9
Capital gains and other items, net of tax 17.5 4.8
----------- ------------
Net earnings $ 89.7 $ 75.7
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----------- ------------
Basic earnings per share
Operating earnings $ 1.05 $ 1.08
Capital gains and other items, net of tax 0.26 0.07
----------- ------------
Net earnings $ 1.31 $ 1.15
----------- ------------
----------- ------------
Basic weighted average number of shares
outstanding (in millions)(4) 68.4 65.6
----------- ------------
----------- ------------
Diluted earnings per share
Operating earnings $ 1.05 $ 1.08
Capital gains and other items, net of tax 0.26 0.07
----------- ------------
Net earnings $ 1.31 $ 1.15
----------- ------------
----------- ------------
Diluted weighted average number of shares
outstanding (in millions)(4) 68.5 65.7
----------- ------------
----------- ------------
Annualized dividends per share $ 0.74 $ 0.70
----------- ------------
----------- ------------
(1) Amounts have been restated as a result of a change in accounting
policy and a reclassification with respect to goodwill and
intangible assets. Please refer to note 1 of the unaudited
consolidated financial statements for the first quarter ended
August 1, 2009.
(2) 47.4 percent equity accounted interest in Crombie REIT.
(3) 27.6 percent equity accounted interest in Wajax.
(4) The increase in the weighted average number of shares outstanding
reflects an equity issue completed on April 24, 2009 which resulted
in a total of 2,713,000 shares being issued.
Additional segmented information is contained in note 10 of the unaudited consolidated financial statements for the first quarter of fiscal 2010 included in this release.
Interest Expense
Interest expense in the first quarter amounted to $18.2 million, a decrease of $2.9 million or 13.7 percent from the $21.1 million recorded in the same quarter last year. The decline in interest expense largely reflects lower funded debt levels which are principally related to repaying debt with the net proceeds of $129.1 million from the equity issue completed on April 24, 2009, as well as with free cash flow generated by Sobeys.
Consolidated funded debt was $1,287.6 million at the end of the first quarter of fiscal 2010 compared to $1,515.9 million at the end of the first quarter last year, a $228.3 million or 15.1 percent decrease.
Income Taxes
Included in income taxes for the first quarter of fiscal 2010 was an income tax recovery of $17.0 million related to the settlement negotiated with Canada Revenue Agency relating to the tax treatment of gains realized on the sale of shares in Hannaford Bros. Co. in fiscal 2001.
Excluding the impact of the Hannaford Bros. Co. tax settlement, the effective income tax rate for the first quarter of fiscal 2010 was 31.1 percent versus 30.0 percent in the first quarter last year.
Earnings before Capital Gains and Other Items
For the 13 weeks ended August 1, 2009, Empire recorded earnings before capital gains and other items of $72.2 million ($1.05 per share) versus $70.9 million ($1.08 per share) last year, a $1.3 million or 1.8 percent increase. The increase in earnings before capital gains and other items is the result of a $1.9 million increase in operating income and a $2.9 million reduction in interest expense, partially offset by an increase in income taxes of $2.6 million and an increase in minority interest expense of $0.9 million.
Empire's per share earnings were impacted by an increase in the weighted average number of shares outstanding, to 68.5 million on a diluted basis from 65.7 million last year, as a result of an equity issue completed April 24, 2009.
The table below presents Empire's segmented earnings before capital gains by division for the 13 weeks ended August 1, 2009 as compared to the 13 weeks ended August 2, 2008.
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13 Weeks Ended
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August 1, August 2, ($)
($ in millions) 2009 2008(1) Change
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Food retailing(2) $ 69.2 $ 58.2 $ 11.0
Real estate 6.1 13.1 (7.0)
Investments &
other operations (3.1) (0.4) (2.7)
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Consolidated $ 72.2 $ 70.9 $ 1.3
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(1) Amounts have been restated as a result of a change in accounting
policy and a reclassification with respect to goodwill and intangible
assets. Please refer to note 1 of the unaudited consolidated
financial statements for the first quarter ended August 1, 2009.
(2) Adjusted for the impact of depreciation and amortization related to
the privatization of Sobeys in June 2007.
Capital Gains and Other Items
Excluding the impact of the Hannaford Bros. Co. tax settlement, the Company recorded capital gains and other items, net of tax, of $0.5 million in the first quarter as compared to $4.8 million in the first quarter last year. Capital gains and other items, net of tax, in the first quarter last year were the result of the sale of non-core properties.
The table below presents capital gains and other items, net of tax, including the impact of the tax recovery related to the sale of the shares in Hannaford Bros. Co. as discussed.
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13 Weeks Ended
-------------------------
Aug. 1, Aug. 2, ($)
($ in millions) 2009 2008 Change
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Gain on sale of properties, net
of tax $ 0.2 $ 4.8 $ (4.6)
Other items, net of tax 0.3 - 0.3
Tax recovery related to sale of
shares in Hannaford Bros. Co. 17.0 - 17.0
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$ 17.5 $ 4.8 $ 12.7
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Net Earnings
Consolidated net earnings in the first quarter equalled $89.7 million ($1.31 per share) as compared to $75.7 million ($1.15 per share) last year. The increase of $14.0 million compared to the first quarter last year is attributed to the $12.7 million increase in capital gains and other items, net of tax and $1.3 million increase in earnings before capital gains and other items, as discussed.
QUARTERLY RESULTS OF OPERATIONS
The following table is a summary of selected consolidated financial information derived from the Company's unaudited interim period consolidated financial statements for each of the eight most recently completed quarters.
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Fiscal
2010 Fiscal 2009(1)
---------- -------------------------------------------
Q1 Q4 Q3 Q2 Q1
($ in millions, (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks)
except per share Aug. 1, May 2, Jan. 31, Nov. 1, Aug. 2,
information) 2009 2009 2009 2008 2008
----------------------------- -------------------------------------------
Revenue $3,968.5 $3,709.0 $3,800.0 $3,727.9 $3,778.2
Operating income 130.2 109.0 115.6 113.4 128.3
Operating
earnings(2) 72.2 62.6 65.0 63.2 70.9
Capital gains
(losses) and other
items, net of tax 17.5 (0.8) (3.5) 2.5 4.8
----------------------------- -------------------------------------------
Net earnings $ 89.7 $ 61.8 $ 61.5 $ 65.7 $ 75.7
----------------------------- -------------------------------------------
----------------------------- -------------------------------------------
Per share
information,
diluted
Operating earnings $ 1.05 $ 0.95 $ 0.99 $ 0.96 $ 1.08
Capital gains
(losses) and other
items, net of tax 0.26 (0.01) (0.05) 0.04 0.07
----------------------------- -------------------------------------------
Net earnings $ 1.31 $ 0.94 $ 0.94 $ 1.00 $ 1.15
----------------------------- -------------------------------------------
----------------------------- -------------------------------------------
Diluted weighted
average number of
shares outstanding
(in millions) 68.5 66.0 65.7 65.7 65.7
----------------------------- -------------------------------------------
----------------------------- -------------------------------------------
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Fiscal 2008(1)
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Q4 Q3 Q2
($ in millions, (13 Weeks) (13 Weeks) (13 Weeks)
except per share May 3, Feb. 2, Nov. 3,
information) 2008 2008 2007
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Revenue $3,557.8 $3,503.0 $3,484.8
Operating income 136.2 90.7 118.2
Operating
earnings(2) 73.6 48.9 59.9
Capital gains
(losses) and other
items, net of tax (7.1) (0.3) (1.5)
-------------------------------------------------------------------------
Net earnings $ 66.5 $ 48.6 $ 58.4
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Per share
information,
diluted
Operating earnings $ 1.12 $ 0.74 $ 0.91
Capital gains
(losses) and other
items, net of tax (0.11) - (0.02)
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Net earnings $ 1.01 $ 0.74 $ 0.89
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Diluted weighted
average number of
shares outstanding
(in millions) 65.7 65.7 65.7
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(1) Amounts have been restated as a result of a change in accounting
policy and a reclassification with respect to goodwill and
intangible assets. Please refer to note 1 of the unaudited
consolidated financial statements for the first quarter ended
August 1, 2009.
(2) Operating earnings is earnings before capital gains (losses) and
other items.
Consolidated sales and operating earnings growth have been influenced by the Company's investing activities, the competitive and economic environment, general industry trends and by other risk factors as outlined in the fiscal 2009 annual MD&A, as contained on pages 23 - 60 of the Company's 2009 Annual Report.
OPERATING PERFORMANCE BY DIVISION
FOOD RETAILING
Sobeys, Empire's wholly-owned food division, conducts business through more than 1,300 retail grocery stores (corporately owned and franchised) which operate in every province across Canada under retail banners that include Sobeys, IGA, IGA extra, Foodland, Price Chopper and Thrifty Foods, as well as Lawtons Drug Stores.
The table below presents Sobeys' contribution to Empire's consolidated sales, operating income and net earnings:
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13 Weeks Ended Year over Year
----------------------- -----------------------
Aug. 1, Aug. 2, ($) (%)
($ in millions) 2009 2008(1) Change Change
-------------------------------------------------------------------------
Sales $ 3,906.7 $ 3,711.5 $ 195.2 5.3%
Operating income(2) 121.6 106.3 15.3 14.4%
Net earnings(2) 69.2 58.2 11.0 18.9%
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(1) Amounts have been restated as a result of a change in accounting
policy and a reclassification with respect to goodwill and
intangible assets. Please refer to note 1 of the unaudited
consolidated financial statements for the first quarter ended
August 1, 2009.
(2) Adjusted for the impact of depreciation and amortization related to
the privatization of Sobeys in June 2007.
Sales
Sobeys' sales for the first quarter of fiscal 2010 were $3.91 billion compared to $3.71 billion for the same quarter last year, an increase of $195.2 million or 5.3 percent. Sobeys' same-store sales (sales from stores in the same locations in both reporting periods) increased by 4.0 percent during the first quarter of fiscal 2010. The growth in sales continues to be a direct result of the increased retail selling square footage from new stores and enlargements, coupled with the continued implementation of sales and merchandising initiatives, improved consistency of store level execution and retail food price inflation.
Operating Income
Sobeys reported operating income of $122.9 million during the first quarter of fiscal 2010, a $15.3 million or 14.2 percent increase from the first quarter last year. Operating income margin in the first quarter equalled 3.15 percent compared to 2.90 percent in the first quarter last year.
After adjusting for the impact of depreciation and amortization of $1.3 million related to the privatization, Sobeys' operating income contribution to Empire in the first quarter of fiscal 2010 was $121.6 million (first quarter of fiscal 2009 - $106.3 million). Sobeys' operating income margin in the first quarter after adjusting for the above items equalled 3.11 percent compared to 2.86 percent in the first quarter last year.
Net Earnings
Sobeys recorded first quarter of fiscal 2010 net earnings of $70.1 million, an increase of $11.0 million or 18.6 percent compared to the $59.1 million recorded in the first quarter last year.
Adjusting for the impact of depreciation and amortization related to the privatization and the related tax impact, Sobeys contributed net earnings of $69.2 million to Empire for the first quarter of fiscal 2010, an increase of $11.0 million or 18.9 percent over the $58.2 million recorded in the first quarter last year.
REAL ESTATE
Empire's real estate operations are focused on: (i) the development of food-anchored shopping plazas; (ii) ownership of retail and office properties through a 47.4 percent ownership interest in Crombie REIT; and (iii) residential land development through an ownership interest in Genstar.
Commercial real estate operations are conducted through ECL Properties and its wholly-owned subsidiary, ECL Developments, while residential land development is primarily conducted through Genstar, which operates principally in Ontario and Western Canada.
Revenue
Real estate division revenue (net of elimination) amounted to $14.5 million for the first quarter ended August 1, 2009, a $10.1 million or 41.1 percent decrease from the first quarter last year. The decline is primarily attributed to lower residential property revenues from Genstar related to weaker lot sales, particularly in the Calgary and Edmonton, Alberta markets along with lower revenue from commercial operations due to the sale of several properties in the first half of last year.
Operating Income
First quarter real estate division operating income was $9.7 million versus $19.5 million in the same quarter last year. The $9.8 million decline in real estate division operating income is largely a result of an $8.6 million decrease in residential property operating income due to lower residential lot sales activity in Western Canada, along with a $1.5 million decrease in other commercial property operating income primarily due to the sale of several properties in the first half of fiscal 2009. Equity accounted earnings from Empire's 47.4 percent interest in Crombie REIT increased $0.3 million.
The table below presents revenue, operating income, net earnings and funds from operations for the real estate division's commercial operations and residential operations:
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13 Weeks Ended
-------------------------
Aug. 1, Aug. 2, ($)
($ in millions) 2009 2008 Change
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Revenue
Residential $ 11.4 $ 20.0 $ (8.6)
Other Commercial 3.1 4.6 (1.5)
Inter-segment 0.6 0.3 0.3
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15.1 24.9 (9.8)
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Elimination (0.6) (0.3) (0.3)
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$ 14.5 $ 24.6 $ (10.1)
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Operating income
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Residential $ 5.1 $ 13.7 $ (8.6)
Crombie REIT(1) 4.9 4.6 0.3
Other Commercial (0.3) 1.2 (1.5)
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$ 9.7 $ 19.5 $ (9.8)
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Net earnings
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Residential $ 3.4 $ 9.6 $ (6.2)
Commercial 2.7 3.5 (0.8)
Capital gains, net of tax - 4.0 (4.0)
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$ 6.1 $ 17.1 $ (11.0)
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Funds from operations(2)
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Residential $ 3.4 $ 9.6 $ (6.2)
Commercial 3.2 3.5 (0.3)
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$ 6.6 $ 13.1 $ (6.5)
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(1) Equity accounted earnings in Crombie REIT during the period.
(2) Operating earnings plus depreciation and amortization.
Net Earnings
Real estate division net earnings contribution in the first quarter amounted to $6.1 million compared to $17.1 million last year, an $11.0 million or 64.3 percent decrease. The earnings decrease reflects the $9.8 million reduction in operating income, a $4.0 million decrease in net capital gains and an increase in interest expense of $0.2 million, partially offset by a $3.0 million reduction in income taxes.
Funds from Operations
Funds from operations in the first quarter of $6.6 million decreased $6.5 million or 49.6 percent compared to funds from operations in the first quarter of last year largely as a result of lower operating earnings.
INVESTMENTS AND OTHER OPERATIONS
The third component of Empire is its investments and other operations, consisting primarily of a 27.6 percent ownership interest in Wajax and wholly-owned Empire Theatres (the second largest movie exhibitor in Canada).
Portfolio Composition
At August 1, 2009, Empire's investment portfolio (including equity accounted investments in Crombie REIT and Genstar U.S.) consisted of:
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Aug. 1, 2009 May 2, 2009
----------------------------- ----------------------------
Unreali- Unreali-
Market Carrying zed Market Carrying zed
($ in millions) Value Value Gain Value Value Gain
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Investment in
Wajax $ 85.8 $ 30.9 $ 54.9 $ 71.3 $ 31.0 $ 40.3
Investment in
Crombie REIT 265.5 18.3 247.2 175.6 (19.7) 195.3
Investment in
Genstar U.S.(1) 12.5 12.5 - 7.5 7.5 -
Other
investments 1.2 1.2 - 1.1 1.1 -
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$ 365.0 $ 62.9 $ 302.1 $ 255.5 $ 19.9 $ 235.6
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Aug. 2, 2008
----------------------------
Unreali-
Market Carrying zed
($ in millions) Value Value Gain
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Investment in
Wajax $ 131.1 $ 32.4 $ 98.7
Investment in
Crombie REIT 290.4 10.5 279.9
Investment in
Genstar U.S.(1) 0.3 0.3 -
Other
investments 1.6 1.6 -
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$ 423.4 $ 44.8 $ 378.6
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(1) Assumes market value equals book value.
The table below presents investments and other operations' financial
highlights for the 13 weeks ended August 1, 2009 compared to the same period
last year:
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13 Weeks Ended
-------------------------
Aug. 1, Aug. 2, ($)
($ in millions) 2009 2008 Change
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Revenue $ 47.3 $ 42.1 $ 5.2
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Operating income
Wajax 2.7 5.5 (2.8)
Other operations, net of corporate
expenses (3.8) (3.0) (0.8)
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Total operating income (1.1) 2.5 (3.6)
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Operating earnings (3.1) (0.4) (2.7)
Capital gains and other items, net
of tax(1) 17.5 0.8 16.7
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Net earnings $ 14.4 $ 0.4 $ 14.0
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(1) First quarter fiscal 2010 capital gains and other items, net of tax,
includes $17.0 million related to the settlement of Canada Revenue
Agency tax reassessment relating to the sale of Hannaford Bros. Co.
shares in fiscal 2001.
Revenue
Investments and other operations' revenue, primarily generated by Empire Theatres, equalled $47.3 million in the first quarter ended August 1, 2009 versus $42.1 million in the first quarter last year, a 12.4 percent increase.
Operating Income
Investments and other operations' operating income (net of corporate expenses) was negative $1.1 million compared to $2.5 million in the first quarter last year. Equity accounted earnings generated from the Company's 27.6 percent interest in Wajax amounted to $2.7 million in the first quarter versus $5.5 million last year. Operating income generated from other operations (net of corporate expenses) declined to negative $3.8 million from negative $3.0 million in the first quarter last year.
Operating Earnings
Investments and other operations' (net of corporate expenses) operating earnings equalled negative $3.1 million in the first quarter of fiscal 2010 compared to negative $0.4 million in the same quarter last year, a decrease of $2.7 million. This decrease was largely the result of lower equity earnings from Wajax due to the economic slowdown in the first quarter of fiscal 2010 compared to the same quarter last year.
Net Earnings
Investments and other operations (net of corporate expenses) contributed $14.4 million to Empire's consolidated first quarter fiscal 2010 net earnings as compared to a $0.4 million net earnings contribution in the first quarter last year. The increase is primarily due to a tax settlement for $17.0 million relating to the sale of Hannaford Bros. Co. in fiscal 2001, partially offset by the $2.7 million decline in operating earnings, as discussed.
CONSOLIDATED FINANCIAL CONDITION
The Company's financial condition has improved since the start of the fiscal year as evidenced by the capital structure and key financial condition measures in the table below.
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($ in millions, except per share and Aug. 1, May 2, Aug. 2,
ratio calculations) 2009 2009(1) 2008(1)
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Shareholders' equity $ 2,764.7 $ 2,678.8 $ 2,422.1
Book value per share $ 40.32 $ 39.07 $ 36.76
Bank indebtedness $ 69.8 $ 45.9 $ 53.5
Long-term debt, including current
portion(2) $ 1,217.8 $ 1,257.0 $ 1,462.4
Funded debt to total capital 31.8% 32.7% 38.5%
Net debt to capital ratio(3) 26.3% 28.6% 35.7%
Debt to EBITDA(4) 1.62x 1.64x 1.93x
EBITDA to interest expense(4) 10.22x 9.84x 7.42x
Total assets $ 6,036.7 $ 5,891.1 $ 5,729.1
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(1) Amounts have been restated as a result of a change in accounting
policy and a reclassification with respect to goodwill and
intangible assets. Please refer to note 1 of the unaudited
consolidated financial statements for the first quarter ended
August 1, 2009.
(2) Includes liabilities related to assets held for sale.
(3) Net debt to total capital reduces funded debt by cash and cash
equivalents.
(4) Calculation uses trailing 12-month EBITDA and interest expense.
Funded debt has decreased $15.3 million since the end of the fiscal year, May 2, 2009 ($1,302.9 million) and $228.3 million since the first quarter last year ($1,515.9 million). The significant decrease over the first quarter last fiscal year is primarily the result of repaying debt with net proceeds of $129.1 million from the equity issue completed on April 24, 2009 and free cash flow generation by Sobeys. The ratio of funded debt to total capital has declined by 6.7 percentage points since the first quarter last year to 31.8 percent as a result of the repayment of debt as discussed.
Liquidity and Capital Resources
The Company maintains the following sources of liquidity: (i) cash and cash equivalents on hand; (ii) unutilized bank credit facilities; and (iii) cash generated from operating activities. The Company anticipates that these sources of liquidity will be sufficient to meet expected cash outflows over the next year.
At August 1, 2009, consolidated cash and cash equivalents were $300.6 million versus $170.4 million at August 2, 2008 and $231.6 million at fiscal year-end, May 2, 2009.
At the end of the first quarter of fiscal 2010, on a non-consolidated basis, Empire directly maintained authorized bank lines for operating, general and corporate purposes of $650 million, of which approximately $281 million or 43 percent were utilized. Empire's non-consolidated credit facility of $650 million matures on June 8, 2010. It is Empire's intention to renew or replace this credit facility prior to its maturity. To that end, management has held preliminary discussions with the financial institutions providing the credit facility and has developed a timeline for its renegotiation to ensure that new credit facilities are in place prior to the maturity of the existing credit facilities. However, given the current credit environment, the terms of the renewed or replacement credit facility may not be as favorable as those of the in-place credit facility.
On a consolidated basis, Empire's authorized bank credit facilities exceeded borrowings by approximately $958 million at August 1, 2009, versus $930 million at May 2, 2009 and $734 million at August 2, 2008. The Company anticipates that the above mentioned in-place sources of liquidity will adequately meet its short-term and long-term financial requirements. The Company mitigates potential liquidity risk by ensuring its various sources of funds are diversified by term to maturity and source of credit.
The table below highlights major cash flow components for the 13 weeks ended August 1, 2009 compared to the 13 weeks ended August 2, 2008.
Major Cash Flow Components
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13 Weeks Ended
------------------------
Aug. 1, Aug. 2,
($ in millions) 2009 2008(1)
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Earnings for common shareholders $ 89.7 $ 75.6
Items not affecting cash 89.4 85.2
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179.1 160.8
Net change in non-cash working capital 27.9 (11.1)
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Cash flows from operating activities 207.0 149.7
Cash flows (used in) from investing activities (102.6) (96.2)
Cash flows (used in) from financing activities (35.4) (74.5)
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Increase (decrease) in cash and cash equivalents $ 69.0 $ (21.0)
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-------------------------------------------------------------------------
(1) Amounts have been restated as a result of a change in accounting
policy and a reclassification with respect to goodwill and intangible
assets. Please refer to note 1 of the unaudited consolidated
financial statements for the first quarter ended August 1, 2009.
Operating Activities
First quarter cash flows from operating activities equalled $207.0 million compared to $149.7 million in the comparable period last year. The increase of $57.3 million is attributed to an increase in the net change in non-cash working capital of $39.0 million, an increase in earnings available for common shareholders of $14.1 million and an increase in items not affecting cash of $4.2 million.
Investing Activities
Cash used in investing activities of $102.6 million in the first quarter consisted primarily of purchases of property and equipment of $101.7 million compared to purchases of property and equipment of $121.6 million in the first quarter last year. Proceeds on disposal of property and equipment increased $28.6 million over the first quarter last year to $57.6 million in the first quarter of the current year. Included in disposals for the first quarter of fiscal 2010 was the sale-leaseback of a distribution centre by Sobeys.
Cash used in investing activities for the first quarter of fiscal 2010 included an additional investment of $30.0 million in Crombie REIT Class B units which coincided with the closing of Crombie REIT's public offering of units on June 25, 2009. As a result of the public offering, Empire's equity ownership interest was reduced modestly to 47.4 percent from 47.9 percent.
The table below outlines the number of stores Sobeys invested in during the first quarter of fiscal 2010 compared to the same quarter of fiscal 2009:
Sobeys' Corporate and Franchised Store
Construction Activity
-------------------------------------------------------------------------
13 Weeks Ended
------------------------
Aug. 1, Aug. 2,
Number of Stores 2009 2008
-------------------------------------------------------------------------
Opened/Acquired/Relocated 14 11
Expanded 3 4
Rebannered/Redeveloped 5 5
Closed 22 10
-------------------------------------------------------------------------
The following table shows Sobeys' square footage changes for the 13 and 52
weeks ended August 1, 2009 by type:
Sobeys' Square Footage Changes
(in thousands)
-------------------------------------------------------------------------
Q1 F10 vs. Q1 F10 vs.
Square Feet Q4 F09 Q1 F09
-------------------------------------------------------------------------
Opened 379 997
Relocated 23 73
Acquired - 33
Expanded 41 113
Closed (257) (832)
-------------------------------------------------------------------------
Net Change 185 383
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At August 1, 2009, Sobeys' square footage totalled 27.7 million square feet, a 1.5 percent increase over the 27.3 million square feet operated at the end of the first quarter last year.
Financing Activities
Financing activities during the first quarter of fiscal 2010 used $35.4 million of cash compared to $74.5 million of cash used in financing activities in the same quarter last year. The decrease of $39.1 million in cash flows used in financing activities when compared to the same quarter last year is primarily the result of an increase in long-term debt issuance of $39.2 million and an increase in bank indebtedness of $23.9 million during the first quarter compared to a decrease in bank indebtedness of $38.6 million last year, partially offset by an increase in repayment of long-term debt of $62.5 million. The increase in long-term debt issuance in the first quarter compared to last year was the result of the additional investment made in Crombie REIT during the quarter as discussed.
Accounting Policy Changes
The accounting policy changes are explained in note 1 to the unaudited consolidated financial statements included in this release.
Additional Information
Additional information about the Company has been filed electronically with various securities regulators in Canada through the System for Electronic Document Analysis and Retrieval (SEDAR) and is available online at www.sedar.com.
Definition of Non-GAAP Measures
Certain measures included in this news release do not have a standardized meaning under Canadian Generally Accepted Accounting Principles ("GAAP") and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies. The Company includes these measures because it believes certain investors use these measures as a means of assessing Empire's financial performance. Empire's definition of the non-GAAP terms are as follows: (i) operating earnings is net earnings before capital gains (losses) and other items; (ii) operating income or earnings before interest and taxes ("EBIT") is calculated as operating earnings before minority interest, interest expense and income taxes; (iii) earnings before interest, taxes, depreciation and amortization ("EBITDA") is calculated as EBIT plus depreciation and amortization; (iv) funded debt is all interest-bearing debt which includes bank loans, bankers' acceptances, long-term debt and debt related to assets held for sale; (v) total capital is calculated as funded debt plus equity; (vi) funds from operations are calculated as operating earnings plus depreciation and amortization; and (vii) same-store sales are sales from stores in the same location in both reporting periods.
Forward-Looking Statements
This news release contains forward-looking statements which reflect management's expectations regarding the Company's objectives, plans, goals, strategies, future growth, financial condition, results of operations, cash flows, performance, business prospects and opportunities. All statements other than statements of historical facts included in this news release, including statements regarding the Company's objectives, plans, goals, strategies, future growth, financial condition, results of operations, cash flows, performance, business prospects and opportunities, may constitute forward-looking information. Forward-looking information and statements are identified by words or phrases such as "anticipates", "expects", "believes", "estimates", "intends", "could", "may", "plans", "predicts", "projects", "will", "would", "foresees", "remain confident that" and other similar expressions or the negative of these terms. These statements are based on Empire's management's reasonable assumptions and beliefs in light of the information currently available to them. The forward-looking information contained in this news release is presented for the purpose of assisting the Company's security holders in understanding its financial position and results of operation as at and for the periods ended on the dates presented and the Company's strategic priorities and objectives and may not be appropriate for other purposes. By its very nature, forward-looking information requires the Company to make assumptions and is subject to inherent risks and uncertainties, which give rise to the possibility that the Company's predictions, forecasts, expectations or conclusions will not prove to be accurate, that the Company's assumptions may not be correct and that the Company's objectives, strategic goals and priorities will not be achieved. Although the Company believes that the predictions, forecasts, expectations or conclusions reflected in the forward-looking information are reasonable, it can give no assurance that such matters will prove to have been correct. Such forward-looking information is not fact but only reflections of management's estimates and expectations. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These factors include but are not limited to: changes in general industry, market and economic conditions, competition from existing and new competitors, energy prices, supply issues, inventory management, changes in demand due to seasonality of the business, interest rates, changes in laws and regulations, operating efficiencies and cost saving initiatives. In addition, these uncertainties and risks are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including the Risk Management section of the annual Management Discussion and Analysis included in the Company's Annual Report.
Empire cautions that the list of important factors is not exhaustive and other factors could also adversely affect our results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information. Forward-looking statements may not take into account the effect on the Company's business of transactions occurring after such statements have been made. For example, dispositions, acquisitions, asset write-downs or other changes announced or occurring after such statements are made may not be reflected in forward-looking statements. The forward-looking information in this news release reflects the Company's expectations as of September 11, 2009, and is subject to change after this date. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company other than as required by applicable securities laws.
Conference Call Invitation
The Company will hold an analyst call on Friday, September 11, 2009 beginning at 2:00 p.m. Eastern Time during which senior management will discuss the Company's financial results for the first quarter of fiscal 2010 ended August 1, 2009. To join this conference call dial 1-888-231-8191 outside of the Toronto area or 647-427-7450 from within the Toronto area. You may also listen to a live audiocast of the conference call by visiting the Company's website located at www.empireco.ca. Replay will be available by dialling 1-888-562-2825 or 402-220-7740 and entering passcode 27004861 until midnight September 18, 2009, or on the Company's website for 90 days after the meeting.
About Empire
Empire Company Limited (TSX: EMP.A) is a Canadian company headquartered in Stellarton, Nova Scotia. Empire's core businesses include food retailing and related real estate. With over $15 billion in annual revenue and approximately $6.0 billion in assets, Empire and its related companies, including its franchisees and affiliates, employ over 90,000 people.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in millions)
August 1 May 2 August 2
2009 2009 2008
Unaudited Audited Unaudited
Restated Restated
(Note 1) (Note 1)
----------- ----------- -----------
ASSETS
Current
Cash and cash equivalents $ 300.6 $ 231.6 $ 170.4
Receivables 319.3 318.7 292.0
Loans and other receivables 79.6 55.8 66.4
Income taxes receivable 28.8 4.9 -
Inventories (Note 2) 854.7 842.8 815.6
Prepaid expenses 68.0 63.9 65.7
----------- ----------- -----------
1,651.0 1,517.7 1,410.1
Investments, at realizable value 1.2 1.1 1.6
Investments, at equity (realizable
value $363.8; May 2, 2009 -
$254.4; August 2, 2008 - $421.8)
(Note 4) 61.7 18.8 43.2
Loans and other receivables 78.6 75.3 60.9
Other assets 82.8 89.0 89.1
Property and equipment 2,539.6 2,567.8 2,485.4
Assets held for sale 7.4 8.5 45.7
Intangibles 442.8 441.5 433.2
Goodwill 1,171.6 1,171.4 1,159.9
----------- ----------- -----------
$ 6,036.7 $ 5,891.1 $ 5,729.1
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES
Current
Bank indebtedness $ 69.8 $ 45.9 $ 53.5
Accounts payable and accrued
liabilities 1,556.1 1,487.1 1,372.7
Income taxes payable - - 9.2
Future income taxes 46.2 40.5 34.2
Long-term debt due within one
year (Note 5) 364.9 133.0 55.5
Liabilities relating to assets
held for sale - - 6.3
----------- ----------- -----------
2,037.0 1,706.5 1,531.4
Long-term debt (Note 5) 852.9 1,124.0 1,400.6
Employee future benefits obligation
(Note 11) 119.9 118.4 112.3
Future income taxes 86.1 89.5 118.7
Other long-term liabilities 135.9 135.0 106.4
Minority interest 40.2 38.9 37.6
----------- ----------- -----------
3,272.0 3,212.3 3,307.0
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Capital stock 324.5 324.5 194.4
Contributed surplus 2.1 1.7 1.1
Retained earnings 2,478.1 2,401.1 2,246.7
Accumulated other comprehensive
loss (40.0) (48.5) (20.1)
----------- ----------- -----------
2,764.7 2,678.8 2,422.1
----------- ----------- -----------
$ 6,036.7 $ 5,891.1 $ 5,729.1
----------- ----------- -----------
----------- ----------- -----------
Contingent liabilities (Note 13)
See accompanying notes to the unaudited interim period consolidated
financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
--------------------------------------------
13 WEEKS ENDED
--------------
(Unaudited, in millions)
August 1 August 2
2009 2008
Restated
(Note 1)
----------- -----------
Balance, beginning of period as previously
reported $ 2,405.8 $ 2,207.6
Adjustment due to implementation of new
accounting standard (Note 1) (4.7) (25.0)
----------- -----------
Balance, beginning of period as restated 2,401.1 2,182.6
Net earnings 89.7 75.7
Dividends
Preferred shares - (0.1)
Common shares (12.7) (11.5)
----------- -----------
Balance, end of period $ 2,478.1 $ 2,246.7
----------- -----------
----------- -----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS
---------------------------------------------------------------
13 WEEKS ENDED
--------------
(Unaudited, in millions)
August 1 August 2
2009 2008
----------- -----------
Balance, beginning of period $ (48.5) $ (21.5)
Other comprehensive income for the period 8.5 1.4
----------- -----------
Balance, end of period $ (40.0) $ (20.1)
----------- -----------
----------- -----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
13 WEEKS ENDED
--------------
(Unaudited, in millions, except per share amounts)
August 1 August 2
2009 2008
Restated
(Note 1)
----------- -----------
Revenue $ 3,968.5 $ 3,778.2
Operating expenses
Cost of sales, selling and administrative
expenses 3,763.9 3,577.4
Depreciation and amortization 82.0 82.6
----------- -----------
122.6 118.2
Investment income (Note 6) 7.6 10.1
----------- -----------
Operating income 130.2 128.3
----------- -----------
Interest expense
Long-term debt 17.4 20.1
Short-term debt 0.8 1.0
----------- -----------
18.2 21.1
----------- -----------
112.0 107.2
Capital gains and other items (Note 7) 0.6 6.1
----------- -----------
Earnings before income taxes and minority
interest 112.6 113.3
----------- -----------
Income taxes (Note 8)
Current 18.9 37.2
Future (1.0) (3.7)
----------- -----------
17.9 33.5
----------- -----------
Earnings before minority interest 94.7 79.8
Minority interest 5.0 4.1
----------- -----------
Net earnings $ 89.7 $ 75.7
----------- -----------
----------- -----------
Earnings per share (Note 3)
Basic $ 1.31 $ 1.15
----------- -----------
----------- -----------
Diluted $ 1.31 $ 1.15
----------- -----------
----------- -----------
Weighted average number of common shares
outstanding, in millions
Basic 68.4 65.6
Diluted 68.5 65.7
See accompanying notes to the unaudited interim period consolidated
financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
13 WEEKS ENDED
--------------
(Unaudited, in millions)
August 1 August 2
2009 2008
Restated
(Note 1)
----------- -----------
Net earnings $ 89.7 $ 75.7
----------- -----------
Other comprehensive income, net of income taxes
Unrealized gains on available-for-sale
financial assets, net of income taxes of
$nil (2008 - $nil) 0.1 -
Unrealized gains (losses) on derivatives
designated as cash flow hedges, net of income
taxes of $1.2 (2008 - $nil) 2.0 (0.1)
Reclassification of loss on derivative
instruments designated as cash flow hedges to
earnings, net of income taxes of $0.8
(2008 - $0.3) 1.5 0.6
Share of comprehensive income of entities
accounted using the equity method, net of
income taxes of $3.1 (2008 - $0.5) 5.5 0.9
Foreign currency translation adjustment (0.6) -
----------- -----------
8.5 1.4
----------- -----------
Comprehensive income $ 98.2 $ 77.1
----------- -----------
----------- -----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
EMPIRE COMPANY LIMITED
----------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
13 WEEKS ENDED
--------------
(Unaudited, in millions)
August 1 August 2
2009 2008
Restated
(Note 1)
----------- -----------
Operating Activities
Net earnings $ 89.7 $ 75.7
Items not affecting cash (Note 9) 89.4 85.2
Preferred dividends - (0.1)
----------- -----------
179.1 160.8
Net change in non-cash working capital 27.9 (11.1)
----------- -----------
Cash flows from operating activities 207.0 149.7
----------- -----------
Investing Activities
Net increase in investments (35.6) -
Purchase of property and equipment (101.7) (121.6)
Proceeds on disposal of property and equipment 57.6 29.0
Loans and other receivables (27.1) (1.1)
Decrease in other assets 7.3 3.9
Business acquisitions (Note 12) (3.1) (6.4)
----------- -----------
Cash flows used in investing activities (102.6) (96.2)
----------- -----------
Financing Activities
Increase (decrease) in bank indebtedness 23.9 (38.6)
Issue of long-term debt 44.6 5.4
Repayment of long-term debt (87.5) (25.0)
Minority interest (3.7) (3.4)
Repurchase of preferred shares - (1.4)
Common dividends (12.7) (11.5)
----------- -----------
Cash flows used in financing activities (35.4) (74.5)
----------- -----------
Increase (decrease) in cash and cash equivalents 69.0 (21.0)
Cash and cash equivalents, beginning of period 231.6 191.4
----------- -----------
Cash and cash equivalents, end of period $ 300.6 $ 170.4
----------- -----------
----------- -----------
See accompanying notes to the unaudited interim period consolidated
financial statements.
EMPIRE COMPANY LIMITED
----------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AUGUST 1, 2009
--------------
(Unaudited, in millions, except per share amounts)
1. Summary of Significant Accounting Policies
The unaudited interim period consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and include the accounts of Empire Company Limited (the "Company"), all subsidiary companies, including 100% owned Sobeys Inc. ("Sobeys") and its subsidiaries and variable interest entities ("VIEs") which the Company is required to consolidate.
Interim consolidated financial statements
These interim consolidated financial statements do not include all of the disclosures included in the Company's annual consolidated financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended May 2, 2009, as set out in the 2009 Annual Report.
Generally accepted accounting principles
The accounting standards and policies used in the preparation of these interim consolidated financial statements conform with those used in the Company's 2009 annual consolidated financial statements except as noted below:
Adopted during fiscal 2010
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, "Goodwill and
Intangible Assets", which replaced existing Section 3062, "Goodwill and
Other Intangible Assets", and Section 3450, "Research and Development".
The new standard provides guidance on the recognition, measurement,
presentation and disclosure of goodwill and intangible assets. As a
result of adopting Section 3064, Emerging Issues Committee Abstract 27,
"Revenues and Expenditures During the Pre-operating Period", no longer
applies. The Company has implemented these requirements effective for
the first quarter of fiscal 2010 retroactively with restatement of the
comparative period. The initial impact under the new standard as at
May 2, 2009 was a decrease to prepaid expenses of $6.9, a decrease to
other assets of $62.4, a decrease in property and equipment of $33.7,
an increase to intangibles of $96.1, a decrease of future tax
liabilities of $2.2 as well as a reduction of retained earnings of
$4.7. The impact of implementation on the balance sheet as at August 2,
2008 was a decrease of prepaid expenses of $4.2, a decrease to other
assets of $59.3, a decrease in property and equipment of $27.4, an
increase to intangibles of $86.7, a decrease in future tax liabilities
of $1.3 and an opening retained earnings reduction of $3.5. For the 13
weeks ended August 2, 2008, cost of sales, selling and administrative
expenses decreased $3.4, depreciation and amortization expense
increased $2.6 and income taxes increased $0.2.
Adopted during fiscal 2009
Inventories
In June 2007, the CICA issued Section 3031, "Inventories", which
replaced section 3030 with the same title. The Company applied the
standard prospectively to opening inventory and retained earnings for
fiscal 2009. The initial impact of measuring inventories under the new
standard using a consistent cost formula for inventories with a similar
nature and use was a decrease to the carrying amount of opening
inventories of $27.9 and a decrease to income taxes payable of
$6.4. Opening retained earnings was reduced by $21.5, equal to the
change in opening inventories, net of tax.
Future changes in accounting policies
Business combinations, consolidated financial statements and non-
controlling interests
In January 2009, the CICA issued three new accounting standards which
are based on the International Accounting Standards Board's
International Financial Reporting Standard 3, "Business Combinations".
Section 1582, "Business Combinations", which replaces Section 1581 with
the same title, aims to improve the relevance, reliability and
comparability of the information provided in financial statements about
business combinations. This Section is to be applied prospectively to
business combinations for which the acquisition date is on or after
January 1, 2011 and assets and liabilities that arose from business
combinations that preceded the adoption of this standard should not be
adjusted upon adoption. Section 1601, "Consolidated Financial
Statements", and Section 1602, "Non-controlling Interests", replace
Section 1600, "Consolidated Financial Statements", and establish
standards for the preparation of consolidated financial statements and
for accounting for a non-controlling interest in a subsidiary in
consolidated financial statements subsequent to a business
combination. These standards apply to interim and annual consolidated
financial statements beginning on or after January 1, 2011. Earlier
adoption of all three standards is permitted as of the beginning of a
fiscal year, however if an entity chooses to early adopt, all three
standards must be adopted concurrently. The Company is currently
evaluating the impact of these new standards.
Financial Instruments - Disclosures
In June 2009, the CICA issued amendments to the existing Section 3862,
"Financial Instruments - Disclosures", to more closely align the
section with those required under IFRS. The amendments include enhanced
disclosure requirements relating to fair value measurements of
financial instruments and liquidity risks. These amendments apply for
annual financial statements with fiscal years ending after September
30, 2009. The adoption of the amendments to Section 3862 are not
expected to have a material impact on the disclosures of the Company.
2. Inventories
The cost of inventories recognized as an expense during the 13 weeks ended August 1, 2009 was $2,981.2 (August 2, 2008 - $2,839.0). The cost of inventories recognized as an expense during the quarter includes $13.1 (August 2, 2008 - $10.9) for the write-down of inventories below cost to net realizable value. There were no reversals of inventories written down previously.
3. Earnings Per Share
Earnings applicable to common shares is comprised of the following:
2009 2008
(13 weeks) (13 weeks)
Restated
(Note 1)
----------- -----------
Operating earnings $ 72.2 $ 70.9
Capital gains and other items, net of income
taxes of $(16.9); (2008 - $1.3) 17.5 4.8
----------- -----------
Net earnings 89.7 75.7
Preferred share dividends - (0.1)
----------- -----------
Earnings applicable to common shares $ 89.7 $ 75.6
----------- -----------
----------- -----------
Included in income taxes of $(16.9) for the 13 weeks ended August 1, 2009
is an income tax recovery of $17.0 (see Note 8).
Earnings per share is comprised of the following:
Operating earnings $ 1.05 $ 1.08
Net capital gains and other items 0.26 0.07
----------- -----------
Basic earnings per share $ 1.31 $ 1.15
----------- -----------
----------- -----------
Operating earnings $ 1.05 $ 1.08
Net capital gains and other items 0.26 0.07
----------- -----------
Diluted earnings per share $ 1.31 $ 1.15
----------- -----------
----------- -----------
4. Investments, at Equity
August 1 May 2 August 2
2009 2009 2008
----------- ----------- -----------
Wajax Income Fund (27.6% interest) $ 30.9 $ 31.0 $ 32.4
Crombie REIT (47.4% interest) 18.3 (19.7) 10.5
U.S. residential real estate
partnerships 12.5 7.5 0.3
----------- ----------- -----------
$ 61.7 $ 18.8 $ 43.2
----------- ----------- -----------
----------- ----------- -----------
The Company's carrying value of its investment in Wajax Income Fund is as
follows:
August 1 August 2
2009 2008
----------- -----------
Balance, beginning of period $ 31.0 $ 31.6
Equity earnings 2.7 5.5
Share of comprehensive loss (0.1) -
Distributions received (2.7) (4.7)
----------- -----------
Balance, end of period $ 30.9 $ 32.4
----------- -----------
----------- -----------
The Company's carrying value of its investment in Crombie REIT is as
follows:
August 1 August 2
2009 2008
----------- -----------
Balance, beginning of period $ (19.7) $ 9.5
Equity earnings 4.9 4.6
Share of comprehensive income 8.7 1.4
Distributions received (5.6) (5.0)
Interest acquired in Crombie REIT 30.0 -
----------- -----------
Balance, end of period $ 18.3 $ 10.5
----------- -----------
----------- -----------
On June 25, 2009, Crombie REIT closed a bought-deal public offering of units at a price of $7.80 per unit. In satisfaction of its pre-emptive right with respect to the public offering, the Company subscribed for $30.0 of Class B Units (which are convertible on a one-for-one basis into units of Crombie REIT). Consequently the Company's interest in Crombie REIT was reduced from 47.9% to 47.4%.
5. Long-Term Debt
During the quarter, the Company's credit facility ($277.0 as of August 1, 2009) has been classified as current as it matures on June 8, 2010.
On November 8, 2007, Sobeys established a revolving credit facility of $75.0 that is currently unutilized. The maturity date is November 8, 2010. The interest rate was floating and fluctuated with changes in the bankers' acceptance rate, Canadian prime rate or LIBOR. On June 12, 2009, Sobeys repaid, although did not cancel, this facility.
6. Investment Income
2009 2008
(13 weeks) (13 weeks)
----------- -----------
Share of earnings of entities accounted using
the equity method $ 7.6 $ 10.1
----------- -----------
----------- -----------
7. Capital Gains and Other Items
2009 2008
(13 weeks) (13 weeks)
----------- -----------
Gain on sale of property $ 0.2 $ 6.1
Other items 0.4 -
----------- -----------
$ 0.6 $ 6.1
----------- -----------
----------- -----------
8. Income Taxes
The effective tax rate for the quarter ended August 1, 2009 of 15.9%
differs from the combined statutory rate of 31.1% due to the settlement
negotiated with Canada Revenue Agency relating to the tax treatment of gains
realized on the sale of shares in Hannaford Bros. Co. in fiscal 2001. Income
tax expense was reduced by $17.0 as a result of this settlement.
9. Supplementary Cash Flow Information
2009 2008
(13 weeks) (13 weeks)
Restated
(Note 1)
----------- -----------
a) Items not affecting cash
Depreciation and amortization $ 82.0 $ 82.6
Future income taxes (1.0) (3.7)
Loss (gain) on disposal of assets 0.2 (4.4)
Amortization of other assets (2.2) (1.5)
Equity in earnings of other entities, net of
dividends received 0.7 (0.4)
Minority interest 5.0 4.1
Stock-based compensation 0.4 0.6
Long-term lease obligation 2.8 1.6
Employee future benefits obligation 1.5 1.6
Rationalization costs (Note 15) - 4.7
----------- -----------
$ 89.4 $ 85.2
----------- -----------
----------- -----------
b) Other cash flow information
Net interest paid $ 12.3 $ 12.0
----------- -----------
----------- -----------
Net income taxes paid $ 45.4 $ 37.2
----------- -----------
----------- -----------
10. Segmented Information
2009 2008
(13 weeks) (13 weeks)
----------- -----------
Segmented revenue
Food retailing $ 3,906.7 $ 3,711.5
----------- -----------
Real estate
Residential 11.4 20.0
Other Commercial 3.1 4.6
Inter-segment 0.6 0.3
----------- -----------
15.1 24.9
----------- -----------
Investment and other operations 47.3 42.1
----------- -----------
3,969.1 3,778.5
Elimination (0.6) (0.3)
----------- -----------
$ 3,968.5 $ 3,778.2
----------- -----------
----------- -----------
2009 2008
(13 weeks) (13 weeks)
Restated
(Note 1)
----------- -----------
Segmented operating income
Food retailing $ 121.6 $ 106.3
Real estate
Residential 5.1 13.7
Crombie REIT 4.9 4.6
Other Commercial (0.3) 1.2
Investment and other operations
Wajax Income Fund 2.7 5.5
Other operations, net of corporate expenses (3.8) (3.0)
----------- -----------
$ 130.2 $ 128.3
----------- -----------
----------- -----------
August 1 May 2 August 2
2009 2009 2008
Restated Restated
(Note 1) (Note 1)
----------- ----------- -----------
Identifiable assets
Food retailing $ 4,332.0 $ 4,272.1 $ 4,078.6
Goodwill 1,130.8 1,130.6 1,119.8
----------- ----------- -----------
5,462.8 5,402.7 5,198.4
Real estate 293.9 223.1 269.6
Investment and other operations
(including goodwill of $40.8;
May 2, 2009 - $40.8; August 2,
2008 - $40.1) 280.0 265.3 261.1
----------- ----------- -----------
$ 6,036.7 $ 5,891.1 $ 5,729.1
----------- ----------- -----------
----------- ----------- -----------
2009 2008
(13 weeks) (13 weeks)
Restated
(Note 1)
----------- -----------
Depreciation and amortization
Food retailing $ 76.7 $ 76.3
Real estate 0.5 -
Investment and other operations 4.8 6.3
----------- -----------
$ 82.0 $ 82.6
----------- -----------
----------- -----------
2009 2008
(13 weeks) (13 weeks)
Restated
(Note 1)
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Capital expenditures
Food retailing $ 79.8 $ 105.1
Real estate 17.5 13.0
Investment and other operations 4.4 3.5
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$ 101.7 $ 121.6
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11. Employee Future Benefits
During the quarter ended August 1, 2009, the net employee future benefit expense was $10.2 (2008 - $8.1). The expense included costs for the Company's defined contribution pension plans, defined benefit pension plans, post-retirement benefit plans and post-employment benefit plans.
12. Business Acquisitions
Sobeys acquires franchisee and non-franchisee stores and prescription files. The results of these acquisitions have been included in the consolidated financial results of the Company, and were accounted for through the use of the purchase method. As illustrated in the table below, the acquisition of certain franchisee and non-franchisee stores resulted in the acquisition of intangible assets. The method of amortization of limited life intangibles is on a straight-line basis over its estimated useful life.
2009 2008
(13 weeks) (13 weeks)
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Franchisees
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Inventory $ 1.0 $ 1.7
Property and equipment 1.7 1.1
Intangibles - 2.4
Goodwill 0.2 0.9
Other assets 0.2 0.3
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Cash consideration $ 3.1 $ 6.4
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13. Contingent Liabilities
In the ordinary course of business, the Company is subject to ongoing audits by tax authorities. While the Company believes that its tax filing positions are appropriate and supportable, from time to time certain matters are reviewed and challenged by the tax authorities.
There are various claims and litigation, which the Company is involved with, arising out of the ordinary course of business operations. The Company's management does not consider the exposure to such litigation to be material, although this cannot be predicted with certainty.
14. Stock-Based Compensation
Deferred share units
Members of the Board of Directors may elect to receive all or any portion of their fees in deferred share units ("DSUs") in lieu of cash. The number of DSUs received is determined by the market value of the Company's Non-Voting Class A shares on each director's fee payment date. Additional DSUs are received as dividend equivalents. DSUs cannot be redeemed for cash until the holder is no longer a director of the Company. The redemption value of a DSU equals the market value of an Empire Company Limited Non-Voting Class A share at the time of the redemption. On an ongoing basis, the Company values the DSU obligation at the current market value of a corresponding number of Non-Voting Class A shares and records any increase in the DSU obligation as an operating expense. At August 1, 2009, there were 89,565 (May 2, 2009 - 84,195) DSUs outstanding. During the quarter, the compensation expense was $nil (2008 - $0.7).
Stock option plan
During the quarter ended August 1, 2009, the Company granted an additional 162,399 options under the stock option plan for employees of the Company whereby options are granted to purchase Non-Voting Class A Shares. These options allow holders to purchase Non-Voting Class A Shares at $46.04 per share and expire in June 2017. The options vest over four years with 50 percent of the options vesting only if certain financial targets are attained in a given fiscal year. These options have been treated as stock-based compensation.
The compensation cost relating to the period was determined to be $0.4 (2008 - $0.6) with amortization of the cost over the vesting period. The total increase in contributed surplus in relation to the stock option compensation cost was $0.4. The compensation cost was calculated using the Black-Scholes model with the following assumptions:
Expected life 5.25 years
Risk-free interest rate 2.625%
Expected volatility 22.8%
Dividend yield 1.60%
Phantom performance option plan
In June 2007, the Board of Directors approved a Phantom Performance Option Plan for eligible employees of Sobeys. Under the plan, units are granted at the discretion of the Board based on a notional equity value of Sobeys tied to a specified formula. Upon implementation, the units had a three year vesting period with 33.3 percent of the units vesting each year. Subsequent issuances have a four year vesting period with 25.0 percent of the units vesting each year. As the notional fair value of Sobeys changes, the employees are entitled to the incremental increase in the notional equity value over a five year period. The Company recognizes a compensation expense equal to the change in notional value over the original grant value on a straight-line basis over the vesting period. After the vesting period, any change in incremental notional equity value is recognized as a compensation expense immediately. This is recorded as an accrued liability until settlement and is remeasured at each interim and annual reporting period of the Company. As at August 1, 2009, 1,436,323 units (May 2, 2009 - 1,069,413) were outstanding and for the quarter the Company recognized $2.1 (2008 - $0.7) of compensation expense associated with this plan.
15. Business Rationalization Costs
During the quarter ended August 1, 2009, severance costs of $nil have been incurred and recognized (August 2, 2008 - $5.6). The costs associated with the organizational change are recorded as incurred as cost of sales, selling and administrative expenses in the statement of earnings. The liability as of August 1, 2009 is $12.2 (August 2, 2008 - $10.6). Costs incurred as of August 1, 2009 were $27.7.
16. Comparative Figures
Comparative figures have been reclassified, where necessary, to reflect the current period's presentation.