- CONTINUED GROWTH IN SALES AND NET EARNINGS
TORONTO, April 28 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today announced its financial results for the first quarter ended March 28, 2009.
First Quarter Results (12 Weeks)
First quarter sales increased 8.5% to $2.195 billion, with the Company continuing to experience strong sales growth in all regions of the country. On a same-store basis and excluding tobacco products, sales increased 4.0% during the quarter.
Prescription sales increased 11.7% in the first quarter to $1.086 billion, accounting for 49.5% of the Company's sales mix compared to 48.0% in the same period last year. On a same-store basis, prescription sales increased 5.9%, driven by strong growth in the number of prescriptions filled, while increased generic utilization continued to have a deflationary impact on sales growth in the category. In the first quarter of 2009, generic molecules represented 52.8% of prescriptions dispensed compared to 50.2% of prescriptions dispensed in the first quarter of 2008.
Front store sales increased 5.5% in the first quarter to $1.109 billion, with the Company continuing to experience sales and market share gains in all categories except tobacco. On a same-store basis and excluding tobacco products, front store sales increased 2.1%. The Company estimates that the shift in the Easter selling season to the second quarter of this year from the first quarter last year had a negative impact on comparable front store sales growth of approximately 150 basis points.
First quarter net earnings increased 6.1% to $107 million or 49 cents per share (diluted) from $101 million or 46 cents per share (diluted) a year ago. Strong top line growth, an enhanced sales mix and a continued emphasis on cost reduction, productivity and efficiency, partially offset by higher operating expenses at store-level and increased amortization associated with the continued expansion of the store network, as well as stepped-up investments in marketing and promotional activities, resulted in growth in operating income and net earnings.
Commenting on the quarter, Jurgen Schreiber, President and CEO stated, "We are pleased with our first quarter results, particularly in the context of these challenging economic times. Against this backdrop we remain cautious in our outlook for the balance of 2009, but confident in our ability to deliver continued growth in sales and net earnings. Together with our Associate-owners and their teams, we are committed to staying the course and executing on our clearly defined strategic growth priorities and initiatives."
Store Network Development
During the first quarter, 40 drug stores were opened or acquired, 14 of which were relocations, and one smaller drug store was closed. At quarter-end, there were 1,242 stores in the system, comprised of 1,174 drug stores (1,144 Shoppers Drug Mart/Pharmaprix stores and 30 Shoppers Simply Pharmacy/Pharmaprix Simplement Sante stores), 66 Shoppers Home Health Care stores and two Murale stores. Drug store selling space was approximately 11.0 million square feet at the end of the first quarter, an increase of 11.6% compared to a year ago.
Dividend
The Company also announced today that its Board of Directors has declared a dividend of 21.5 cents per common share, payable July 15, 2009 to shareholders of record as of the close of business on June 30, 2009.
Other Information
The Company will hold an analyst call at 3:00 p.m. (Eastern Daylight Time) today to discuss its first quarter results. The call may be accessed by dialing 416-641-6114 from within the Toronto area, or 1-866- 696-5895 outside of Toronto. The call will also be simulcast on the Company's website for all interested parties. The webcast can be accessed via the Investor Relations section of the Shoppers Drug Mart website at www.shoppersdrugmart.ca. The conference call will be archived in the Investor Relations section of the Shoppers Drug Mart website until the Company's next analyst call. A playback of the call will also be available by telephone until 11:59 p.m. (Eastern Daylight Time) on May 12, 2009. The call playback can be accessed after 5:00 p.m. (Eastern Daylight Time) on Tuesday, April 28, 2009 by dialing 416-695-5800 from within the Toronto area, or 1-800-408-3053 outside of Toronto. The seven-digit passcode number is 5473877.
About Shoppers Drug Mart Corporation
Shoppers Drug Mart Corporation is one of the most recognized and trusted names in Canadian retailing. The Company is the licensor of full-service retail drug stores operating under the name Shoppers Drug Mart (Pharmaprix in Quebec). With more than 1,144 Shoppers Drug Mart and Pharmaprix stores operating in prime locations in each province and two territories, the Company is one of the most convenient retailers in Canada. The Company also licenses or owns more than 30 medical clinic pharmacies operating under the name Shoppers Simply Pharmacy (Pharmaprix Simplement Sante in Quebec) and two luxury beauty destinations operating as Murale. As well, the Company also owns and operates 66 Shoppers Home Health Care stores, making it the largest Canadian retailer of home health care products and services. In addition to its retail store network, the Company owns Shoppers Drug Mart Specialty Health Network Inc., a provider of specialty drug distribution, pharmacy and comprehensive patient support services, and MediSystem Technologies Inc., a provider of pharmaceutical products and services to long-term care facilities in Ontario and Alberta.
For more information, visit www.shoppersdrugmart.ca.
Forward-looking Information and Statements
This news release, including the Management's Discussion and Analysis, contains forward-looking information and statements which constitute "forward-looking information" under Canadian securities law and which may be material, regarding, among other things, the Company's beliefs, plans, objectives, estimates, intentions and expectations. Forward-looking information and statements are typically identified by words such as "anticipate", "believe", "expect", "estimate", "forecast", "goal", "intend", "plan", "will", "may", "should", "could" and similar expressions. Specific forward-looking information in this news release includes, but is not limited to, statements with respect to the Company's future operating and financial results, its capital expenditure plans and the ability to execute on its future operating, investing and financing strategies.
The forward-looking information and statements contained herein are based on certain factors and assumptions, certain of which appear proximate to the applicable forward-looking information and statements contained herein. Inherent in the forward-looking information and statements are known and unknown risks, uncertainties and other factors beyond the Company's ability to control or predict, which give rise to the possibility that the Company's predictions, forecasts, expectations or conclusions will not prove to be accurate, that its assumptions may not be correct and that the Company's plans, objectives and statements will not be achieved. Actual results or developments may differ materially from those contemplated by the forward-looking information and statements.
The material risk factors that could cause actual results to differ materially from the forward-looking information and statements contained herein include, without limitation: the risk of adverse changes to laws and regulations relating to prescription drugs and their sale, including pharmacy reimbursement and the availability of manufacturer allowances, or changes to such laws and regulations that increase compliance costs; the risk of adverse changes to existing pharmacy reimbursement programs and the availability of manufacturer allowance funding; the risk of adverse changes in economic and financial conditions in Canada and globally; the risk of increased competition from other retailers; the risk of an inability of the Company to manage growth and maintain its profitability; the risk of exposure to fluctuations in interest rates; the risk of material adverse changes in foreign currency exchange rates; the risk of an inability to attract and retain pharmacists and key employees; the risk of an inability of the Company's information technology systems to support the requirements of the Company's business; the risk of changes to estimated contributions of the Company in respect of its pension plans or post-employment benefit plans which may adversely impact the Company's financial performance; the risk of changes to the relationships of the Company with third-party service providers; the risk that the Company will not be able to lease or obtain suitable store locations on economically favourable terms; the risk of adverse changes to the Company's results of operations due to seasonal fluctuations; the risk that new, or changes to current, federal and provincial laws, rules and regulations, including environmental and privacy laws, rules and regulations, may adversely impact the Company's business and operations; the risk that violations of law, breaches of Company policies or unethical behaviour may adversely impact the Company's financial performance; property and casualty risks; the risk of injuries at the workplace or health issues; the risk that changes in tax law, or changes in the way that tax law is expected to be interpreted, may adversely impact the Company's business and operations; the risk that new, or changes to existing, accounting pronouncements may adversely impact the Company; the risks associated with the performance of the Associate-owned store network; and the risk of damage to the reputation of brands promoted by the Company, or to the reputation of any supplier or manufacturer of these brands.
This is not an exhaustive list of the factors that may affect any of the Company's forward-looking information and statements. Investors and others should carefully consider these and other risk factors and not place undue reliance on the forward-looking information and statements. Further information regarding these and other risk factors is included in the Company's public filings with provincial securities regulatory authorities including, without limitation, the sections entitled "Risks and Risk Management" and "Risks Associated with Financial Instruments" in the Company's Management's Discussion and Analysis for the 53 week period ended January 3, 2009. The forward-looking information and statements contained in this news release represent the Company's views only as of the date of this release. Forward-looking information and statements contained in this news release about prospective results of operations, financial position or cash flows that are based upon assumptions about future economic conditions and courses of action are presented for the purpose of assisting the Company's shareholders in understanding management's current views regarding those future outcomes and may not be appropriate for other purposes. While the Company anticipates that subsequent events and developments may cause the Company's views to change, the Company does not undertake to update any forward-looking information and statements, except to the extent required by applicable securities laws.
Additional information about the Company, including the Annual Information Form, can be found at www.sedar.com.
SHOPPERS DRUG MART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
As at April 21, 2009
The following is a discussion of the consolidated financial condition and results of operations of Shoppers Drug Mart Corporation (the "Company") for the periods indicated and of certain factors that the Company believes may affect its prospective financial condition, cash flows and results of operations. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of the Company and the notes thereto for the 12 week period ended March 28, 2009. The Company's unaudited interim period financial statements and the notes thereto have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are reported in Canadian dollars. These financial statements do not contain all disclosures required by Canadian GAAP for annual financial statements and, accordingly, should be read in conjunction with the most recently prepared annual consolidated financial statements for the 53 week period ended January 3, 2009.
FORWARD-LOOKING INFORMATION AND STATEMENTS
This discussion of the consolidated financial condition and results of operations of the Company contains forward-looking information and statements which constitute "forward-looking information" under Canadian securities law and which may be material regarding, among other things, the Company's beliefs, plans, objectives, strategies, estimates, intentions and expectations. Forward-looking information and statements are typically identified by words such as "anticipate", "believe", "expect", "estimate", "forecast", "goal", "intend", "plan", "will", "may", "should", "could" and similar expressions. Specific forward-looking information in this discussion includes, but is not limited to, statements with respect to the Company's future operating and financial results, its capital expenditure plans and the ability to execute on its future operating, investing and financing strategies.
The forward-looking information and statements contained herein are based on certain factors and assumptions, certain of which appear proximate to the applicable forward-looking information and statements contained herein. Inherent in the forward-looking information and statements are known and unknown risks, uncertainties and other factors beyond the Company's ability to control or predict, which give rise to the possibility that the Company's predictions, forecasts, expectations or conclusions will not prove to be accurate, that its assumptions may not be correct and that the Company's plans, objectives and statements will not be achieved. Actual results or developments may differ materially from those contemplated by the forward-looking information and statements.
The material risk factors that could cause actual results to differ materially from the forward-looking information and statements contained herein include, without limitation: the risk of adverse changes to laws and regulations relating to prescription drugs and their sale, including pharmacy reimbursement and the availability of manufacturer allowances, or changes to such laws and regulations that increase compliance costs; the risk of adverse changes to existing pharmacy reimbursement programs and the availability of manufacturer allowance funding; the risk of adverse changes in economic and financial conditions in Canada and globally; the risk of increased competition from other retailers; the risk of an inability of the Company to manage growth and maintain its profitability; the risk of exposure to fluctuations in interest rates; the risk of material adverse changes in foreign currency exchange rates; the risk of an inability to attract and retain pharmacists and key employees; the risk of an inability of the Company's information technology systems to support the requirements of the Company's business; the risk of changes to the estimated contributions of the Company in respect of its pension plans or post-employment benefit plans which may adversely impact the Company's financial performance; the risk of changes to the relationships of the Company with third-party service providers; the risk that the Company will not be able to lease or obtain suitable store locations on economically favourable terms; the risk of adverse changes to the Company's results of operations due to seasonal fluctuations; the risk that new, or changes to current, federal and provincial laws, rules and regulations, including environmental and privacy laws, rules and regulations, may adversely impact the Company's business and operations; the risk that violations of law, breaches of Company policies or unethical behaviour may adversely impact the Company's financial performance; property and casualty risks; the risk of injuries at the workplace or health issues; the risk that changes in tax law, or changes in the way that tax law is expected to be interpreted, may adversely impact the Company's business and operations; the risk that new, or changes to existing, accounting pronouncements may adversely impact the Company; the risks associated with the performance of the Associate-owned store network; and the risk of damage to the reputation of brands promoted by the Company, or to the reputation of any supplier or manufacturer of these brands.
This is not an exhaustive list of the factors that may affect any of the Company's forward-looking information and statements. Investors and others should carefully consider these and other factors and not place undue reliance on the forward-looking information and statements. Further information regarding these and other risk factors is included in the Company's public filings with provincial securities regulatory authorities including, without limitation, the sections entitled "Risks and Risk Management" and "Risks Associated with Financial Instruments" in the Company's Management's Discussion and Analysis for the 53 week period ended January 3, 2009. The forward-looking information and statements contained in this discussion of the consolidated financial condition and results of operations of the Company represent the Company's views only as of the date hereof. Forward-looking information and statements contained in this Management's Discussion and Analysis about prospective results of operations, financial position or cash flows that are based upon assumptions about future economic conditions and courses of action are presented for the purpose of assisting the Company's shareholders in understanding management's current views regarding those future outcomes and may not be appropriate for other purposes. While the Company anticipates that subsequent events and developments may cause the Company's views to change, the Company does not undertake to update any forward-looking information and statements, except to the extent required by applicable securities laws.
Additional information about the Company, including the Annual Information Form, can be found at www.sedar.com.
OVERVIEW
The Company is the licensor of full-service retail drug stores operating under the name Shoppers Drug Mart(R) (Pharmaprix(R) in Quebec). As at March 28, 2009, there were 1,144 Shoppers Drug Mart/Pharmaprix retail drug stores owned and operated by the Company's licensees ("Associates"). An Associate is a pharmacist-owner of a corporation that is licensed to operate a retail drug store at a specific location using the Company's trademarks. The Company's licensed stores are located in prime locations in each province and two territories, making Shoppers Drug Mart/Pharmaprix stores among the most convenient retail outlets in Canada. The Company also licenses or owns 30 medical clinic pharmacies operating under the name Shoppers Simply Pharmacy(TM) (Pharmaprix Simplement Sante(MC) in Quebec) and two luxury beauty destinations operating as Murale(TM).
The Company has successfully leveraged its leadership position in pharmacy and its convenient store locations to capture a significant share of the market in front store merchandise. Front store merchandise categories include over-the-counter medications, health and beauty aids, cosmetics and fragrances (including prestige brands), everyday household needs and seasonal products. The Company also offers a broad range of high-quality private label products marketed under the trademarks Life Brand(R), Quo(R), Everyday Market(R), Bio-Life(R), Nativa(R) and Easypix(R), among others, and value-added services such as the HealthWatch(R) program, which offers patient counselling and advice on medications, disease management and health and wellness, and the Shoppers Optimum(R) program, one of the largest retail loyalty card programs in Canada. In fiscal 2008, the Company recorded consolidated sales in excess of $9.4 billion.
Under the licensing arrangement with Associates, the Company provides the capital and financial support to enable Associates to operate Shoppers Drug Mart(R) and Pharmaprix(R) stores without any initial investment. The Company also provides a package of services to facilitate the growth and profitability of each Associate's business. These services include the use of trademarks, operational support, marketing and advertising, purchasing and distribution, information technology and accounting. In return for being provided these and other services, Associates pay fees to the Company. Fixtures, leasehold improvements and equipment are purchased by the Company and leased to Associates over periods ranging from two to 15 years, with title retained by the Company. The Company also provides its Associates with assistance in meeting their working capital and long-term financing requirements through the provision of loans and loan guarantees. (See discussion on "Associate Loans Guarantees" under "Off-balance Sheet Arrangements" in this Management's Discussion and Analysis.)
Under the licensing arrangement, the Company receives a substantial share of Associate store profits. The Company's share of Associate store profits is reflective of its investment in, and commitment to, the operations of the Associates' stores.
The Company operates in Quebec under the Pharmaprix(R) and Pharmaprix Simplement Sante(MC) trade names. Under Quebec law, profits generated from the prescription area or dispensary may only be earned by a pharmacist or a corporation controlled by a pharmacist. As a result of these restrictions, the licence agreement used for Quebec Associates differs from the Associate agreement used in other provinces. Pharmaprix(R) and Pharmaprix Simplement Sante(MC) stores and their Associates benefit from the same infrastructure and support provided to all other Shoppers Drug Mart(R) and Shoppers Simply Pharmacy(TM) stores and Associates.
The Company has determined that the individual Associate-owned stores that comprise its store network are deemed to be variable interest entities and that the Company is the primary beneficiary in accordance with the Canadian Institute of Chartered Accountants Accounting Guideline 15, "Consolidation of Variable Interest Entities" ("AcG-15"). As such, the Associate-owned stores are subject to consolidation by the Company. However, as the Associate-owned stores remain separate legal entities from the Company, consolidation of these stores has no impact on the underlying risks facing the Company. (See note 1 to the accompanying unaudited consolidated financial statements of the Company.)
The Company also owns and operates 66 Shoppers Home Health Care(R) stores. These retail stores are engaged in the sale and service of assisted-living devices, medical equipment, home-care products and durable mobility equipment to institutional and retail customers.
In addition to its retail store network, the Company owns Shoppers Drug Mart Specialty Health Network Inc., a provider of specialty drug distribution, pharmacy and comprehensive patient support services, and MediSystem Technologies Inc., a provider of pharmaceutical products and services to long-term care facilities in Ontario and Alberta.
OVERALL FINANCIAL PERFORMANCE
Key Operating, Investing and Financial Metrics
The following provides an overview of the Company's operating performance
for the 12 week period ended March 28, 2009 compared to the 12 week period
ended March 22, 2008, as well as certain other metrics with respect to
investing activities for the 12 week period ended March 28, 2009 and financial
position as at that same date.
- Sales of $2.195 billion, an increase of 8.5%.
- Total comparable store sales growth, excluding tobacco products, of
4.0%.
- Comparable store prescription sales growth of 5.9%.
- Comparable store front store sales growth, excluding tobacco
products, of 2.1%.
- EBITDA(1) of $224 million, an increase of 9.1%.
- EBITDA margin(2) of 10.20%, an increase of 6 basis points.
- Net earnings of $107 million, an increase of 6.1%.
- Earnings per share (diluted) of $0.49 versus $0.46 in the prior
year.
- Capital expenditure program of $111 million compared to $147 million
in the prior year.
- Opened or acquired 40 new drug stores, 14 of which were
relocations.
- Year-over-year increase in drug store selling space of 11.6%.
- Maintained desired capital structure and financial position.
- Net debt to total capitalization ratio of 0.30:1 at March 29, 2009
compared to 0.28:1 a year ago.
(1) Earnings before interest, taxes, depreciation and amortization. (See
reconciliation to the most directly comparable GAAP measure under
"Results of Operations" in this Management's Discussion and
Analysis.)
(2) EBITDA divided by sales.
Results of Operations
The following table presents a summary of certain selected consolidated
financial information for the Company for the periods indicated.
12 Weeks Ended
--------------------------
March 28, March 22,
($000s, except per share data) 2009 2008
-------------------------------------------------------------------------
(unaudited) (unaudited)
Sales $ 2,195,260 $ 2,023,799
Cost of goods sold and other operating
expenses(1) 1,971,422 1,818,667
--------------------------
EBITDA(2) 223,838 205,132
Amortization 55,603 44,771
--------------------------
Operating income 168,235 160,361
Interest expense 14,506 13,760
--------------------------
Earnings before income taxes 153,729 146,601
Income taxes 46,887 45,861
--------------------------
Net earnings $ 106,842 $ 100,740
--------------------------
--------------------------
Per common share
- Basic net earnings $ 0.49 $ 0.46
- Diluted net earnings $ 0.49 $ 0.46
(1) Reflects the impact of the retrospective application of the new
accounting standard concerning Goodwill and Other Intangible Assets -
CICA Handbook Section 3064. (See discussion on "Accounting Standards
Implemented in 2009" under "New Accounting Pronouncements" in this
Management's Discussion and Analysis and in note 2 to the
accompanying unaudited consolidated financial statements of the
Company.)
(2) Earnings before interest, taxes, depreciation and amortization.
Sales
Sales represent the combination of sales of the retail drug stores owned by the Associates, sales at the Murale(TM) stores and sales of the Company-owned home health care business, Shoppers Drug Mart Specialty Health Network Inc. and MediSystem Technologies Inc.
Sales in the first quarter were $2.195 billion compared to $2.024 billion in the same period last year, an increase of $171 million or 8.5%, with the Company continuing to experience strong sales growth in all regions of the country. The Company's capital investment program, which resulted in an 11.6% increase in selling square footage compared to a year ago, continues to have a positive impact on sales growth. On a same-store basis and excluding tobacco products, sales increased 4.0% during the first quarter of 2009.
Prescription sales were $1.086 billion in the first quarter compared to $972 million in the first quarter of 2008, an increase of $114 million or 11.7%. During the first quarter of 2009, prescription sales accounted for 49.5% of the Company's sales mix compared to 48.0% in the same period last year. On a same-store basis, prescription sales increased 5.9% during the first quarter of 2009, driven by strong growth in the number of prescriptions filled, while increased generic utilization continued to have a deflationary impact on sales growth in the category. In the first quarter of 2009, generic molecules represented 52.8% of prescriptions dispensed compared to 50.2% of prescriptions dispensed in the first quarter of 2008.
Front store sales were $1.109 billion in the first quarter compared to $1.052 billion in the first quarter of 2008, an increase of $57 million or 5.5%, with the Company continuing to experience sales and market share gains in all categories except tobacco. On a same-store basis and excluding tobacco products, front store sales increased 2.1% during the first quarter of 2009. The Company estimates that the shift in the Easter selling season to the second quarter of this year from the first quarter last year had a negative impact on comparable front store sales growth of approximately 150 basis points.
Cost of Goods Sold and Other Operating Expenses
Cost of goods sold is comprised of the cost of goods sold at the retail drug stores owned by the Associates, the cost of goods sold at the Murale(TM) stores and the cost of goods sold at the Company-owned home health care business, Shoppers Drug Mart Specialty Health Network Inc. and MediSystem Technologies Inc. Other operating expenses include corporate selling, general and administrative expenses, operating expenses at the retail drug stores owned by the Associates, including Associates' earnings, operating expenses at Murale(TM) and operating expenses at the Company-owned home health care business, Shoppers Drug Mart Specialty Health Network Inc. and MediSystem Technologies Inc.
Total cost of goods sold and other operating expenses were $1.971 billion in the first quarter compared to $1.819 billion in the same period last year, an increase of $152 million or 8.4%. Expressed as a percentage of sales, cost of goods sold declined by 59 basis points in the first quarter of 2009 versus the comparative prior year period, reflecting an enhanced sales mix and the benefits from improved buying synergies. Largely offsetting this improvement were higher operating expenses which, when expressed as a percentage of sales, increased by 53 basis points over the prior year period. Operating expenses were higher due in large part to increased store-level expenses, primarily occupancy, wages and benefits associated with the continued growth and expansion of the store network, and due to stepped-up investments in marketing and promotional activities in response to continued softness in market conditions and greater promotional efforts on the part of other retailers.
Amortization
Amortization of capital assets and other intangible assets was $56 million in the first quarter compared to $45 million in the same period last year, an increase of $11 million or 24.2%. Expressed as a percentage of sales, amortization increased 32 basis points in the first quarter of 2009 versus the comparative prior year period, reflecting the continued growth of the Company's capital investment and store development program.
Operating Income
Operating income was $168 million in the first quarter of 2009 compared to $160 million in the same period last year, an increase of $8 million or 4.9%. Sales growth, an enhanced sales mix and a continued emphasis on cost reduction, productivity and efficiency, partially offset by increased marketing costs, higher operating expenses at store-level and increased amortization tied largely to the continued expansion of the store network, drove this increase. In 2009, first quarter operating margin (operating income divided by sales) declined by 26 basis points to 7.66% compared to 7.92% in the first quarter of last year. The Company's EBITDA margin (EBITDA divided by sales) was 10.20% in the first quarter of 2009, a 6 basis point improvement over the EBITDA margin of 10.14% posted in the first quarter of last year.
Interest Expense
Interest expense is comprised of interest expense arising from borrowings at the Associate-owned stores and from debt obligations of the Company.
Interest expense was $15 million in the first quarter of 2009 compared to $14 million in the same period last year. This increase can be largely attributed to growth in the amount of consolidated net debt outstanding, coupled with the Company's decision to extend the term on a portion of its floating rate, short-term debt obligations, and higher amortization of deferred financing costs related to the Company's financing activities in 2008 and the first quarter of 2009. These increases were partially offset by a market-driven decrease in short-term interest rates on the Company's remaining floating rate debt obligations. (See note 5 to the accompanying unaudited consolidated financial statements of the Company.)
Income Taxes
The Company's effective income tax rate in the first quarter of 2009 was 30.5% compared to 31.3% in the same period last year. This decrease in the effective income tax rate can be attributed to a reduction in statutory rates.
Net Earnings
First quarter net earnings were $107 million compared to $101 million in the same period last year, an increase of $6 million or 6.1%. On a diluted basis, earnings per share were $0.49 in the first quarter of 2009 compared to $0.46 in the same period last year.
Capitalization and Financial Position
The following table provides a summary of certain information with respect to the Company's capitalization and consolidated financial position at the end of the periods indicated.
March 28, January 3,
($000s) 2009 2009
-------------------------------------------------------------------------
Cash $ (26,190) $ (36,567)
Bank indebtedness 265,058 240,844
Commercial paper 293,045 339,943
Short-term debt - 197,845
Long-term debt 943,384 647,250
--------------------------
Net debt 1,475,297 1,389,315
Shareholders' equity(1) 3,483,236 3,420,529
--------------------------
Total capitalization $ 4,958,533 $ 4,809,844
--------------------------
--------------------------
Net debt:Shareholders' equity 0.42:1 0.41:1
Net debt:Total capitalization 0.30:1 0.29:1
Net debt:EBITDA(2) 1.35:1 1.30:1
EBITDA:Cash interest expense(2)(3) 17.39:1 17.21:1
(1) Reflects the impact of the retrospective application of the new
accounting standard concerning Goodwill and Other Intangible Assets -
CICA Handbook Section 3064. (See discussion on "Accounting Standards
Implemented in 2009" under "New Accounting Pronouncements" in this
Management's Discussion and Analysis and in note 2 to the
accompanying unaudited consolidated financial statements of the
Company.)
(2) For purposes of calculating the ratios, EBITDA is comprised of EBITDA
for each of the 53 week periods then ended and reflects the impact of
the new accounting standard concerning Goodwill and Other Intangible
Assets - CICA Handbook Section 3064.
(3) Cash interest expense is comprised of interest expense for each of
the 53 week periods then ended and excludes the amortization of
deferred financing costs.
Outstanding Share Capital
The Company's outstanding share capital is comprised of common shares. An unlimited number of common shares is authorized and the Company had 217,355,791 common shares outstanding at April 21, 2009. As at this same date, the Company had issued options to acquire 966,169 of its common shares pursuant to its stock-based compensation plans, of which 741,196 were exercisable.
Financing Activities
On January 20, 2009, the Company issued $250 million of three-year medium-term notes maturing January 20, 2012, which bear interest at a fixed rate of 4.80% per annum (the "Series 3 Notes") and $250 million of five-year medium-term notes maturing January 20, 2014, which bear interest at a fixed rate of 5.19% per annum (the "Series 4 Notes"). The Series 3 Notes and Series 4 Notes were issued pursuant to a final short form base shelf prospectus dated May 22, 2008 (the "Prospectus"), as supplemented by pricing supplements dated January 14, 2009, and filed by the Company with Canadian securities regulators in all of the provinces of Canada. At the time of issuance, the Series 3 Notes and Series 4 Notes were assigned ratings of A (low) from DBRS Limited and BBB+ from Standard & Poor's. The net proceeds from the issuance of the Series 3 Notes and Series 4 Notes were used to refinance existing indebtedness, including repayment of all amounts outstanding under the Company's then existing senior unsecured 364-day bank credit facility. As a result of applying the net proceeds from the issuance of the Series 3 Notes and Series 4 Notes to refinance existing indebtedness, the consolidated net debt position of the Company remained substantially unchanged. (See note 8 to the accompanying unaudited consolidated financial statements of the Company.)
Liquidity and Capital Resources
Sources of Liquidity
The Company has the following sources of liquidity: (i) cash provided by operating activities; (ii) cash available from a committed $800 million revolving bank credit facility maturing June 6, 2011, less what is currently drawn and/or being utilized to support commercial paper issued and outstanding; and (iii) up to $500 million in availability under its commercial paper program, less what is currently issued. The Company's commercial paper program is rated R-1 (low) by DBRS Limited. In the event that the Company's commercial paper program is unable to maintain this rating, the program is supported by the Company's $800 million revolving bank credit facility. The Company does not currently foresee any reasonable circumstances under which this credit rating would not be maintained.
The Company has also arranged for its Associates to obtain financing to facilitate their purchase of inventory and fund their working capital requirements by providing guarantees to various Canadian chartered banks that support Associate loans. (See discussion on "Associate Loans Guarantees" under "Off-balance Sheet Arrangements" in this Management's Discussion and Analysis.)
The Company has obtained additional long-term financing from the issuance of $450 million of five-year medium-term notes maturing June 3, 2013, which bear interest at a fixed rate of 4.99% per annum (the "Series 2 Notes"), the Series 3 Notes and the Series 4 Notes. The Series 2 Notes were issued pursuant to the Prospectus, as supplemented by a pricing supplement dated May 28, 2008. The Series 3 Notes and Series 4 Notes were issued pursuant to the Prospectus, as supplemented by pricing supplements dated January 14, 2009. The pricing supplements were filed by the Company with Canadian securities regulators in all of the provinces of Canada. At the time of issuance, the medium-term notes were assigned ratings of A (low) from DBRS Limited and BBB+ from Standard & Poor's.
At the end of the first quarter of 2009, $11 million of the Company's $800 million revolving bank credit facility was utilized, all in respect of outstanding letters of credit. At January 3, 2009, $209 million of this facility was utilized, including $9 million in respect of outstanding letters of credit. At March 28, 2009, the Company had $294 million of commercial paper issued and outstanding under its commercial paper program compared to $341 million at the end of 2008. At the end of the first quarter of 2009, Associates had drawn an aggregate amount of $278 million in the form of Associate loans from various Canadian chartered banks compared to $264 million at the end of the 2008. (See discussion on "Associate Loans Guarantees" under "Off-balance Sheet Arrangements" in this Management's Discussion and Analysis.)
In addition to the above, MediSystem Technologies Inc., a subsidiary of the Company, has arranged for up to $1 million of revolving demand bank credit facilities. At the end of the first quarter of 2009, no amounts were outstanding on these facilities, unchanged from the end of 2008.
Cash Flows from Operating Activities
Cash flows from operating activities were $71 million in the first quarter of 2009 compared to cash flows used in operating activities of $7 million in the same period last year. Growth in net earnings, adjusted for non-cash items, combined with a reduced investment in non-cash working capital balances versus the comparative quarter accounted for a substantial portion of the year-over-year variance. The reduction in amounts invested in working capital balances can be largely attributed to the timing of accounts receivable, tax payments and trade payables.
Cash Flows Used in Investing Activities
Cash flows used in investing activities were $105 million in the first quarter of 2009 compared to $102 million in the same period last year. Of these totals, investments in property and equipment, net of proceeds from any dispositions, amounted to $76 million in the first quarter of this year compared to $58 million in the same period last year, reflecting the continued growth of the Company's capital investment and store development program. The Company also invested $27 million in business acquisitions during the first quarter of 2009 compared to $78 million in the same period last year. Consistent with the Company's stated growth objectives, these investments relate primarily to acquisitions of drug stores and prescription files, as the Company continues to pursue attractive opportunities in the marketplace, albeit at a slower pace relative to the prior year. During the first quarter of 2009, the balance of funds deposited and held in escrow in respect of outstanding offers to purchase drug stores and land decreased by $1 million compared to a decrease of $44 million in the same period last year.
During the first quarter of 2009, 40 new drug stores were opened or acquired, 14 of which were relocations, and one smaller drug store was closed. As a result of this activity, drug store selling space increased by 11.6% compared to a year ago. At the end of the first quarter of 2009, there were 1,242 stores in the Company's retail network, comprised of 1,174 drug stores (1,144 Shoppers Drug Mart/Pharmaprix stores and 30 Shoppers Simply Pharmacy/Pharmaprix Simplement Sante stores), 66 Shoppers Home Health Care(R) stores and two Murale(TM) stores.
Cash Flows from Financing Activities
Cash flows from financing activities were $23 million in the first quarter of 2009, as cash inflows of $526 million were largely offset by cash outflows of $503 million. Cash inflows were comprised of a $24 million increase in the amount of bank indebtedness, $500 million from the issuance of medium-term notes and $2 million of proceeds received from the issuance of common shares and loan repayments under the Company's stock-based incentive plans. Cash outflows were comprised of a $47 million decrease in the amount of commercial paper issued and outstanding by the Company under its commercial paper program, $200 million to repay all amounts outstanding under the Company's previously existing senior unsecured 364-day bank credit facility, a $200 million reduction in bankers' acceptance borrowings under the Company's $800 million revolving bank credit facility, $2 million to funds costs associated with financing activities, a $7 million reduction in the amount of Associate investment and $47 million for the payment of dividends. (See discussion on "Financing Activities" in this Management's Discussion and Analysis and note 8 to the accompanying unaudited consolidated financial statements of the Company.)
In the first quarter of 2009, the net result of the Company's operating, investing and financing activities was a decrease in cash balances of $10 million.
Future Liquidity
The Company believes that its current credit facilities, commercial paper program and financing programs available to its Associates, together with cash generated from operating activities, will be sufficient to fund its operations, including the operations of its Associate-owned store network, investing activities and commitments for the foreseeable future. While credit markets in Canada and globally have tightened, causing credit spreads to widen and liquidity risk to intensify, the Company does not foresee any major difficulty in obtaining additional short or long-term financing given its current credit ratings and past experiences in the capital markets.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting Standards Implemented in 2009
Financial Statement Concepts
In February 2008, the Canadian Institute of Chartered Accountants (the "CICA") issued amendments to CICA Handbook Section 1000, "Financial Statement Concepts" ("Section 1000"), to clarify the criteria for recognition of an asset and the timing of expense recognition; specifically deleting the guidance permitting the deferral of costs. The new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The Company applied the amendments to Section 1000 at the beginning of its current fiscal year in conjunction with CICA Handbook Section 3064, "Goodwill and Intangible Assets".
Goodwill and Intangible Assets
In February 2008, the CICA issued a new accounting standard concerning Goodwill and Intangible Assets ("Section 3064"), which is based on the International Accounting Standards Board's (the "IASB") International Accounting Standard 38, "Intangible Assets". The new section replaced the existing guidance on goodwill and other intangible assets and research and development costs. The objective of the new standard is to eliminate the practice of deferring costs that do not meet the definition and recognition criteria of assets. The standard is effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008. The Company applied the new accounting standard retrospectively at the beginning of its current fiscal year, with restatement of prior periods. Intangible assets recognized prior to the Company's current fiscal year that no longer meet the new recognition or measurement criteria and the definition of an asset were removed from the consolidated balance sheets in accordance with CICA Handbook Section 1506, "Accounting Changes". The balance of such deferred costs as at the end of the Company's 2007 and 2008 fiscal years was reflected as a charge to opening retained earnings.
The implementation of the new standard has resulted in a reduction to the Company's 2009 and 2008 fiscal years' opening retained earnings of $38.9 million and $27.8 million, respectively. The impacts on other balances are described in the following paragraphs.
The impact for the year ended January 3, 2009 is an increase in cost of goods sold and operating expenses and a decrease in operating income of $15.3 million and a decrease in net earnings of $11.1 million, resulting in a decrease of $0.05 in basic and diluted net earnings per share. The adjustment relates to previously deferred costs that no longer qualify for recognition as an asset, primarily store opening costs.
The impact for the 12 weeks ended March 22, 2008 is an increase in cost of goods sold and operating expenses and a decrease in operating income of $0.8 million and a decrease in net earnings of $0.6 million, resulting in a decrease of $0.01 in basic and diluted earnings per share. The adjustment relates to previously deferred costs that no longer qualify for recognition as an asset, primarily store opening costs.
The impact on balances as at January 3, 2009 was primarily an increase in net future income tax assets of $17.7 million, a decrease in prepaid expenses and deposits of $4.7 million, a decrease in property and equipment of $110.8 million, a decrease in deferred costs of $47.2 million, an increase in intangible assets of $114.5 million and a decrease in other assets of $8.3 million. The increase in intangible assets and decrease in property and equipment primarily reflects the reclassification of certain computer software costs previously included in property and equipment.
The impact on balances as at March 22, 2008 was primarily an increase in net future income tax assets of $13.6 million, a decrease in prepaid expenses and deposits of $7.5 million, a decrease in property and equipment of $81.4 million, a decrease in deferred costs of $33.7 million, an increase in intangible assets of $83.4 million and a decrease in other assets of $2.8 million. The increase in intangible assets and decrease in property and equipment primarily reflects the reclassification of certain computer software costs previously included in property and equipment.
Goodwill is recorded as the excess amount of the purchase price of an acquired business over the fair value of the underlying net assets, including intangible assets, at the date of acquisition. Goodwill is not amortized but is tested for impairment at least on an annual basis. In the event of impairment, the excess of the carrying amount over the fair value of goodwill would be charged to earnings.
Intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. Intangible assets are tested for impairment at least on an annual basis. In the event of impairment, the excess of the carrying amount over the fair value of intangible assets would be charged to earnings.
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
The Emerging Issues Committee of the CICA (the "EIC") issued a new abstract on January 20, 2009 concerning the measurement of financial assets and financial liabilities ("EIC-173 - Credit Risk and the Fair Value of Financial Assets and Financial Liabilities") (the "Abstract"). There had been diversity in practice as to whether an entity's own credit risk and the credit risk of the counterparty were taken into account in determining the fair value of financial instruments. The EIC reached a consensus that these risks should be taken into account in the measurement of financial assets and financial liabilities. The Abstract is effective for all financial assets and financial liabilities measured at fair value in interim and annual financial statements issued for periods ending on or after the date of issuance of the Abstract, with retrospective application without restatement of prior periods. The Company applied the new Abstract at the beginning of its current fiscal year. The implementation did not have a significant impact on the Company's results of operations, financial position and disclosures.
Future Accounting Standards
Business Combinations
In January 2009, the CICA issued new accounting standards concerning Business Combinations ("Section 1582"), Non-controlling Interests ("Section 1602") and Consolidated Financial Statements ("Section 1601"), which are based on the IASB's International Financial Reporting Standard 3, "Business Combinations". The new standards replace the existing guidance on business combinations and consolidated financial statements. The objective of the new standards is to harmonize Canadian accounting for business combinations with the international and U.S. accounting standards. The new standards are to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011, with earlier application permitted. Assets and liabilities that arose from business combinations whose acquisition dates preceded the application of the new standards shall not be adjusted upon application of these new standards. Section 1602 should be applied retrospectively except for certain items.
The Company is assessing whether it will apply the new accounting standards at the beginning of its 2011 fiscal year or elect to early adopt the new accounting standards at the beginning of its 2010 fiscal year in order to minimize the amount of restatement when the Company adopts International Financial Reporting Standards ("IFRS"). The impact of the new standards on the Company's results of operations, financial position and disclosures will be assessed as part of the Company's IFRS transition project.
Transition to International Financial Reporting Standards
In January 2006, the Accounting Standards Board (the "AcSB") announced its decision to require all publicly accountable enterprises to report under IFRS for years beginning on or after January 1, 2011. As a result, financial reporting by Canadian publicly accountable enterprises will change significantly from current Canadian generally accepted accounting principles to IFRS.
On February 13, 2008, the AcSB confirmed that publicly accountable enterprises will be required to use IFRS, as issued by the IASB, unless modifications or additions to the requirements of IFRS are issued by the AcSB. IFRS must be adopted for interim and annual financial statements related to fiscal years beginning on or after January 1, 2011.
The Company launched its IFRS transition project in 2008 with a high level assessment of the key areas where conversion to IFRS may have a significant impact, or present a significant challenge. To date, the Company has engaged an external advisor and established a working team, completed a high level assessment, substantially completed the identification of differences between the Company's current policies and those under IFRS, delivered an initial training program and prepared an initial transition plan. The initial transition plan has been designed to guide the Company towards its reporting deadlines.
Where differences exist, the Company is assessing the information technology and data system impacts, the resource requirements and timing of transition activities. The options under IFRS 1, First-time Adoption of International Reporting Standards, have been identified and will be further analyzed as the Company progresses through its detailed assessment of the individual standards. The impact on other business activities, disclosure controls and procedures and internal controls over financial reporting will be assessed once the impacts of the standards as a whole are identified.
OFF-BALANCE SHEET ARRANGEMENTS
Associate Loans Guarantees
The Company has provided guarantees to various Canadian chartered banks that support Associate loans. At the end of the first quarter of 2009, the Company's maximum obligation in respect of such guarantees was $425 million, unchanged from the end of 2008. At March 28, 2009, an aggregate amount of $407 million in available lines of credit had been allocated to the Associates by the various banks compared to $398 million at January 3, 2009, against which an aggregate amount of $278 million was drawn compared to $264 million at January 3, 2009. Any amounts drawn by the Associates are included in bank indebtedness on the Company's consolidated balance sheets. As recourse in the event that any payments are made under the guarantees, the Company holds a first ranking security interest on all assets of Associate-owned stores, subject to certain prior-ranking statutory claims. As the Company is involved in allocating the available lines of credit to its Associates, it estimates that the net proceeds from secured assets would exceed the amount of any payments required in respect of the guarantees.
SELECTED QUARTERLY INFORMATION
Reporting Cycle
The annual reporting cycle of the Company is divided into four quarters of 12 weeks each, except for the third quarter which is 16 weeks in duration. The fiscal year of the Company consists of a 52 or 53 week period ending on the Saturday closest to December 31. When a fiscal year consists of 53 weeks, the fourth quarter is 13 weeks in duration.
Summary of Quarterly Results
The following table provides a summary of certain selected consolidated financial information for the Company for each of the eight most recently completed fiscal quarters. This information has been prepared in accordance with Canadian generally accepted accounting principles.
First Quarter Fourth Quarter
($000s, except per ------------------------- -------------------------
share data - 2009 2008 2008 2007(1)
unaudited) (12 Weeks) (12 Weeks) (13 Weeks) (12 Weeks)
-------------------------------------------------------------------------
Sales $ 2,195,260 $ 2,023,799 $ 2,496,799 $ 2,168,822
Net earnings $ 106,842 $ 100,740 $ 166,537 $ 151,331
Per common share
- Basic net earnings $ 0.49 $ 0.46 $ 0.77 $ 0.70
- Diluted net
earnings $ 0.49 $ 0.46 $ 0.77 $ 0.70
Third Quarter Second Quarter
($000s, except per ------------------------- -------------------------
share data - 2008 2007(1) 2008 2007(1)
unaudited) (16 Weeks) (16 Weeks) (12 Weeks) (12 Weeks)
-------------------------------------------------------------------------
Sales $ 2,793,005 $ 2,542,671 $ 2,109,308 $ 1,928,094
Net earnings $ 160,276 $ 141,672 $ 126,593 $ 112,154
Per common share
- Basic net earnings $ 0.74 $ 0.65 $ 0.58 $ 0.52
- Diluted net
earnings $ 0.74 $ 0.65 $ 0.58 $ 0.52
(1) Does not reflect the impact of the retrospective application of the
new accounting standard concerning Goodwill and Other Intangible
Assets - CICA Handbook Section 3064. (See discussion on "Accounting
Standards Implemented in 2009" under "New Accounting Pronouncements"
in this Management's Discussion and Analysis and in note 2 to the
accompanying unaudited consolidated financial statements of the
Company.)
The Company experienced growth in sales and net earnings in each of the four most recent quarters when compared to the same quarter of the prior year. The Company continues to invest capital in expanded and relocated stores and in new store development, which has allowed the Company to increase the selling square footage of its store network, resulting in increased sales and profitability.
The Company's core prescription drug operations are not typically subject to seasonal fluctuations. The Company's front store operations include seasonal promotions which may have an impact on quarterly results, particularly when the season, notably Easter, does not fall in the same quarter each year. Also, as the Company continues to expand its front store product and service offerings, including seasonal promotions, its results of operations may become subject to more seasonal fluctuations.
RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Company is exposed to a number of risks associated with financial instruments that have the potential to affect its operating and financial performance. The Company's primary financial instrument risk exposures are interest rate risk and liquidity risk. The Company's exposures to foreign currency risk, credit risk and other price risk are not considered to be material. The Company may use derivative financial instruments to manage certain of these risks. The Company does not use derivative financial instruments for trading or speculative purposes.
Exposure to Interest Rate Fluctuations
The Company, including its Associate-owned store network, is exposed to fluctuations in interest rates by virtue of its borrowings under its bank credit facilities, commercial paper program and financing programs available to its Associates. Increases or decreases in interest rates will positively or negatively impact the financial performance of the Company.
The Company uses interest rate derivatives to manage this exposure and monitors market conditions and the impact of interest rate fluctuations on its fixed and floating rate debt instruments on an ongoing basis. The Company has interest rate derivative agreements converting an aggregate notional principal amount of $100 million (2008 - $250 million) of floating rate debt into fixed rate debt. The fixed rates payable by the Company under these agreements range from 4.11% to 4.18% (2008 - 4.03% to 4.18%). These agreements mature as follows: $50 million in December 2009 and $50 million in December 2010, with reset terms of one month.
Furthermore, the Company may be exposed to losses should any counterparty to its derivative agreements fail to fulfil its obligations. The Company has sought to minimize counterparty risk by transacting with counterparties that are large financial institutions. There is no unrecognized exposure as at March 28, 2009, as the interest rate derivative agreements are in a liability position, unchanged from a year ago.
As at March 28, 2009, the Company had $472 million of unhedged floating rate debt. During the 12 weeks ended March 28, 2009, the Company's average outstanding unhedged floating rate debt was $671 million. Had interest rates been higher or lower by 50 basis points during the period, net earnings would have decreased or increased, respectively, by approximately $0.5 million as a result of the Company's exposure to interest rate fluctuations on its unhedged floating rate debt.
Foreign Currency Exchange Risk
The Company conducts the vast majority of its business in Canadian dollars. The Company's foreign currency exchange risk principally relates to purchases made in U.S. dollars and this risk is tied to fluctuations in the exchange rate of the Canadian dollar, vis-a-vis the U.S. dollar. The Company monitors its foreign currency purchases in order to monitor its foreign currency exchange risk. The Company does not consider its exposure to foreign currency exchange rate risk to be material.
Credit Risk
Accounts receivable arise primarily in respect of prescription sales billed to governments and third-party drug plans and as a result, collection risk is low. There is no concentration of balances with debtors in the remaining accounts receivable. The Company does not consider its exposure to credit risk to be material.
Other Price Risk
The Company uses cash-settled equity forward agreements to limit its exposure to future changes in the market price of its common shares by virtue of its obligations under its long-term incentive plan ("LTIP"). The income or expense arising from the use of these instruments is included in cost of goods sold and other operating expenses.
Based on market values of the equity forward agreements in place at March 28, 2009, the Company recognized a liability of $2.3 million, of which $1.1 million is presented in accounts payable and accrued liabilities and $1.2 million is presented in other long-term liabilities. Based on market values of the equity forward agreements in place at March 22, 2008, the Company recognized a net liability of $0.8 million, of which $0.1 million was presented in accounts receivable and $0.9 million was presented in other long-term liabilities. During the 12 week periods ended March 28, 2009 and March 22, 2008, the Company assessed that the percentage of the equity forward agreements in place related to unearned units under the LTIP were an effective hedge for its exposure to future changes in the market price of its common shares in respect of the unearned units. Market values were determined based on information received from the Company's counterparty to these equity forward agreements.
Capital Management and Liquidity Risk
The Company's primary objectives when managing its capital and liquidity are to profitably grow its business while maintaining adequate financing flexibility to fund attractive new investment opportunities and other unanticipated requirements or opportunities that may arise. Profitable growth is defined as earnings growth commensurate with the additional capital being invested in the business in order that the Company earns an attractive rate of return on that capital. The primary investments undertaken by the Company to drive profitable growth include additions to the selling square footage of its store network via the construction of new, relocated and expanded stores, including related leasehold improvements and fixtures, the acquisition of sites as part of a land bank program, as well as through the acquisition of independent drug stores or their prescription files. In addition, the Company makes capital investments in information technology and its distribution capabilities to support an expanding store network. The Company also provides working capital to its Associates via loans and/or loan guarantees. The Company largely relies on its cash flow from operations to fund its capital investment program and dividend distributions to its shareholders. This cash flow is supplemented, when necessary, through the borrowing of additional debt. No changes were made to these objectives during the period.
The Company considers its total capitalization to be bank indebtedness, commercial paper, short-term debt, long-term debt (including the current portion thereof) and shareholders' equity, net of cash. The Company also gives consideration to its obligations under operating leases when assessing its total capitalization. The Company manages its capital structure with a view to maintaining investment grade credit ratings from two credit rating agencies. In order to maintain its desired capital structure, the Company may adjust the level of dividends paid to shareholders, issue additional equity, repurchase shares for cancellation or issue or repay indebtedness. The Company has certain debt covenants and is in compliance with those covenants.
The Company monitors its capital structure principally through measuring its net debt to shareholders' equity ratio and net debt to total capitalization ratio, and ensures its ability to service its debt and meet other fixed obligations by tracking its in terest and other fixed charges coverage ratios. (See discussion under "Capitalization and Financial Position" in this Management's Discussion and Analysis.)
Liquidity risk is the risk that the Company will be unable to meet its obligations relating to its financial liabilities. The Company prepares cash flow budgets and forecasts to ensure that it has sufficient funds through operations, access to bank credit facilities and access to debt and capital markets to meet its financial obligations, capital investment program and fund new investment opportunities or other unanticipated requirements as they arise. The Company manages its liquidity risk as it relates to financial liabilities by monitoring its cash flow from operating activities to meet its short-term financial liability obligations and planning for the repayment of its long-term financial liability obligations through cash flow from operating activities and/or the issuance of new debt.
For a complete description of the Company's sources of liquidity, see the discussions on "Sources of Liquidity" and "Future Liquidity" under "Liquidity and Capital Resources" in this Management's Discussion and Analysis.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting, its compliance with Canadian GAAP and the preparation of financial statements for external purposes. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be designed effectively can provide only reasonable assurance with respect to financial reporting and financial statement preparation.
There were no changes in internal control over financial reporting that occurred during the Company's most recent interim period that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
NON-GAAP FINANCIAL MEASURES
The Company reports its financial results in accordance with Canadian GAAP. However, the foregoing contains references to non-GAAP financial measures, such as operating margin, EBITDA (earnings before interest, taxes, depreciation and amortization), EBITDA margin and cash interest expense. Non-GAAP financial measures do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other reporting issuers.
These non-GAAP financial measures have been included in this Management's Discussion and Analysis as they are measures which management uses to assist in evaluating the Company's operating performance against its expectations and against other companies in the retail drug store industry. Management believes that non-GAAP financial measures assist in identifying underlying operating trends.
These non-GAAP financial measures, particularly EBITDA and EBITDA margin, are also common measures used by investors, financial analysts and rating agencies. These groups may use EBITDA and other non-GAAP financial measures to value the Company and assess the Company's ability to service its debt.
SHOPPERS DRUG MART CORPORATION
Consolidated Statements of Earnings
(unaudited)
(in thousands of dollars except per share amounts)
-------------------------------------------------------------------------
12 Weeks Ended
-------------------------
March 28, March 22,
2009 2008
-------------------------
Sales $ 2,195,260 $ 2,023,799
Operating expenses
Cost of goods sold and other operating
expenses (Notes 2 and 3) 1,971,422 1,818,667
Amortization 55,603 44,771
-------------------------------------------------------------------------
Operating income 168,235 160,361
Interest expense (Note 5) 14,506 13,760
-------------------------------------------------------------------------
Earnings before income taxes 153,729 146,601
Income taxes (Note 2)
Current 46,724 48,663
Future 163 (2,802)
-------------------------------------------------------------------------
46,887 45,861
-------------------------------------------------------------------------
Net earnings $ 106,842 $ 100,740
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per common share:
Basic $ 0.49 $ 0.46
Diluted $ 0.49 $ 0.46
Weighted average common shares outstanding
- Basic (millions) 217.3 216.8
- Diluted (millions) 217.4 217.4
Actual common shares outstanding (millions) 217.3 216.9
SHOPPERS DRUG MART CORPORATION
Consolidated Statements of Retained Earnings
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
12 Weeks Ended
-------------------------
March 28, March 22,
2009 2008
-------------------------------------------------------------------------
Retained earnings, beginning of period as
reported $ 1,938,023 $ 1,559,551
Impact of the adoption of new accounting
standard, Handbook Section 3064, Goodwill
and Intangible Assets (Note 2) (38,884) (27,817)
-------------------------------------------------------------------------
Retained earnings, beginning of period as
restated 1,899,139 1,531,734
Net earnings 106,842 100,740
Dividends (46,727) (46,626)
-------------------------------------------------------------------------
Retained earnings, end of period $ 1,959,254 $ 1,585,848
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income and Accumulated Other
Comprehensive Loss
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
12 Weeks Ended
-------------------------
March 28, March 22,
2009 2008
-------------------------------------------------------------------------
Net earnings $ 106,842 $ 100,740
Other comprehensive income (loss), net of tax
Change in unrealized gain/loss on interest
rate derivatives (net of tax of $121
(2008 - $1,181)) 257 (2,397)
Change in unrealized gain/loss on equity
forward derivatives (net of tax of $2
(2008 - $149)) 9 (304)
Amount of previously unrealized gain/loss
recognized in earnings during the period
(net of tax of $23 (2008 - $nil)) 91 -
-------------------------------------------------------------------------
Other comprehensive income (loss) 357 (2,701)
-------------------------------------------------------------------------
Comprehensive income $ 107,199 $ 98,039
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive (loss)
income, beginning of period $ (3,442) $ 247
Other comprehensive income (loss) 357 (2,701)
-------------------------------------------------------------------------
Accumulated other comprehensive loss, end
of period $ (3,085) $ (2,454)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SHOPPERS DRUG MART CORPORATION
Consolidated Balance Sheets
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
March 28, March 22, January 3,
2009 2008 2009
-------------------------------------------------------------------------
Assets
Current
Cash $ 26,190 $ 35,784 $ 36,567
Accounts receivable 411,293 384,310 448,476
Inventory (Note 3) 1,716,123 1,516,991 1,743,253
Income taxes recoverable 9,371 - 8,835
Future income taxes (Note 2) 82,285 77,371 84,770
Prepaid expenses and deposits
(Note 2) 53,511 83,860 59,327
-------------------------------------------------------------------------
2,298,773 2,098,316 2,381,228
Property and equipment (Note 2) 1,363,472 1,070,004 1,331,363
Goodwill (Note 2) 2,446,832 2,308,695 2,427,239
Intangible assets (Note 2) 216,512 154,848 212,279
Other assets (Note 2) 11,872 11,575 12,114
-------------------------------------------------------------------------
Total assets $ 6,337,461 $ 5,643,438 $ 6,364,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current
Bank indebtedness (Note 6) $ 265,058 $ 191,082 $ 240,844
Commercial paper 293,045 736,676 339,943
Short-term debt (Note 8) - - 197,845
Accounts payable and accrued
liabilities 845,846 844,693 1,018,505
Income taxes payable - 39,724 -
Dividends payable 46,727 46,626 46,709
Current portion of long-term
debt - 299,107 -
-------------------------------------------------------------------------
1,450,676 2,157,908 1,843,846
Long-term debt (Note 8) 943,384 - 647,250
Other long-term liabilities 317,219 257,845 303,117
Future income taxes 31,565 21,866 30,803
-------------------------------------------------------------------------
2,742,844 2,437,619 2,825,016
Associate interest 111,381 105,113 118,678
Shareholders' equity
Share capital 1,516,359 1,507,257 1,514,207
Contributed surplus 10,708 10,055 10,625
Accumulated other comprehensive
loss (3,085) (2,454) (3,442)
Retained earnings (Note 2) 1,959,254 1,585,848 1,899,139
-------------------------------------------------------------------------
1,956,169 1,583,394 1,895,697
-------------------------------------------------------------------------
3,483,236 3,100,706 3,420,529
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 6,337,461 $ 5,643,438 $ 6,364,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SHOPPERS DRUG MART CORPORATION
Consolidated Statements of Cash Flows
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
12 Weeks Ended
-------------------------
March 28, March 22,
2009 2008
-------------------------------------------------------------------------
Operating activities
Net earnings (Note 2) $ 106,842 $ 100,740
Items not affecting cash
Amortization (Note 2) 54,217 44,080
Future income taxes (Note 2) 163 (2,802)
Loss on disposal of property and equipment 1,865 857
Stock-based compensation 180 342
-------------------------------------------------------------------------
163,267 143,217
Net change in non-cash working capital
Balances (Note 2) (101,530) (157,393)
Increase in other long-term liabilities 9,623 7,625
-------------------------------------------------------------------------
Cash flows from (used in) operating activities 71,360 (6,551)
-------------------------------------------------------------------------
Investing activities
Purchase of property and equipment (Note 2) (81,207) (63,407)
Proceeds from disposition of property and
equipment 5,204 5,740
Business acquisitions (Note 4) (27,280) (77,542)
Deposits 555 43,987
Purchase and development of intangible
assets (Note 2) (2,426) (6,411)
Other assets (Note 2) 242 (4,716)
-------------------------------------------------------------------------
Cash flows used in investing activities (104,912) (102,349)
-------------------------------------------------------------------------
Financing activities
Bank indebtedness, net (Note 6) 24,214 (34,070)
Commercial paper, net (47,000) 192,800
Repayment of short-term debt (Note 8) (200,000) -
Issuance of Series 3 notes (Note 8) 250,000 -
Issuance of Series 4 notes (Note 8) 250,000 -
Revolving term debt, net (200,000) -
Financing costs incurred (2,088) -
Associate interest (7,297) (8,006)
Proceeds from shares issued for stock
options exercised 1,945 888
Repayment of share purchase loans 110 170
Dividends paid (46,709) (34,686)
-------------------------------------------------------------------------
Cash flows from financing activities 23,175 117,096
-------------------------------------------------------------------------
(Decrease) increase in cash (10,377) 8,196
Cash, beginning of period 36,567 27,588
-------------------------------------------------------------------------
Cash, end of period $ 26,190 $ 35,784
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash flow information
Interest paid $ 4,880 $ 10,370
Income taxes paid $ 48,276 $ 74,435
SHOPPERS DRUG MART CORPORATION
Notes to the Consolidated Financial Statements
(unaudited)
(in thousands of dollars except per share amounts)
-------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") and follow the same accounting policies and methods
of application with those used in the preparation of the audited annual
consolidated financial statements for the 53 week period ended January 3,
2009, except as described in Note 2, Changes in Accounting Policies.
These financial statements do not contain all disclosures required by
Canadian GAAP for annual financial statements and, accordingly, should be
read in conjunction with the most recently prepared annual consolidated
financial statements and the accompanying notes included in the Company's
2008 Annual Report.
The consolidated financial statements of the Company include the accounts
of Shoppers Drug Mart Corporation, its subsidiaries and entities
considered to be variable interest entities, as defined by the Canadian
Institute of Chartered Accountants ("CICA") Accounting Guideline 15,
"Consolidation of Variable Interest Entities" ("AcG-15"). Under AcG-15,
the Company has consolidated the Associate-owned stores.
The individual Associate-owned stores that comprise the Company's store
network are variable interest entities and the Company is the primary
beneficiary. As such, the Associate-owned stores are subject to
consolidation by the Company. The Associate-owned stores remain separate
legal entities and consolidation of the Associate-owned stores has no
impact on the underlying risks facing the Company.
2. CHANGES IN ACCOUNTING POLICIES
Adoption of New Accounting Standards
Financial Statement Concepts
In February 2008, the CICA issued amendments to Section 1000, "Financial
Statement Concepts" ("Section 1000"), to clarify the criteria for
recognition of an asset and the timing of expense recognition,
specifically, deleting the guidance permitting the deferral of costs. The
new requirements are effective for interim and annual financial
statements relating to fiscal years beginning on or after October 1,
2008. The Company applied the amendments to Section 1000 at the beginning
of its current fiscal year in conjunction with Section 3064, "Goodwill
and Intangible Assets".
Goodwill and Intangible Assets
In February 2008, the CICA issued a new accounting standard concerning
Goodwill and Intangible Assets ("Section 3064"), which is based on the
International Accounting Standards Board's ("IASB's") International
Accounting Standard 38, "Intangible Assets". The new section replaced the
existing guidance on goodwill and other intangible assets and research
and development costs. The objective of the new standard is to eliminate
the practice of deferring costs that do not meet the definition and
recognition criteria of assets. The standard is effective for interim and
annual financial statements for fiscal years beginning on or after
October 1, 2008. The Company applied the new accounting standard
retrospectively at the beginning of its current fiscal year, with
restatement of prior periods. Intangible assets recognized prior to the
Company's current fiscal year that no longer meet the new recognition or
measurement criteria and the definition of an asset were removed from the
consolidated balance sheets in accordance with CICA Handbook Section
1506, "Accounting Changes". The balance of any such deferred costs as at
the end of the Company's 2007 and 2008 fiscal years was reflected as a
charge to opening retained earnings.
Goodwill is recorded as the excess amount of the purchase price of an
acquired business over the fair value of the underlying net assets,
including intangible assets, at the date of acquisition. Goodwill is not
amortized but is tested for impairment at least on an annual basis. In
the event of an impairment, the excess of the carrying amount over the
fair value of goodwill would be charged to earnings.
Intangible assets are amortized on a straight-line basis over the
estimated useful lives of the assets. Intangible assets are tested for
impairment at least on an annual basis. In the event of an impairment,
the excess of the carrying amount over the fair value of intangible
assets would be charged to earnings.
Net Earnings Impact
The following table summarizes the impact of the implementation of the
new standard on the Company's consolidated statements of earnings for the
53 weeks ended January 3, 2009 and 12 weeks ended March 22, 2008,
respectively:
53 weeks ended 12 weeks ended
January 3, 2009 March 22, 2008
-------------------------------------------------------------------------
Adjustment - pre-tax $ (15,329) $ (792)
Income taxes 4,262 199
-------------------------------------------------------------------------
Net earnings impact $ (11,067) $ (593)
Net earnings per common share (diluted)
impact $ (0.05) $ (0.01)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings, as reported $ 565,212 $ 101,333
Net earnings per common share (diluted),
as reported $ 2.60 $ 0.47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings, as restated $ 554,145 $ 100,740
Net earnings per common share (diluted),
as restated $ 2.55 $ 0.46
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The adjustment relates to previously deferred costs that no longer
qualify for recognition as an asset, primarily store opening costs.
Opening Retained Earnings Adjustment
The implementation of the new standard has resulted in a reduction to the
Company's 2009 and 2008 fiscal years' opening retained earnings of
$38,884 and $27,817, respectively.
Balance Sheet Adjustments
The following paragraphs summarize the impact of the implementation of
the new standard on the Company's consolidated balance sheets as at
January 3, 2009 and March 22, 2008, respectively.
The impact on balances as at January 3, 2009 was primarily an increase in
net future income tax assets of $17,676, a decrease in prepaid expenses
and deposits of $4,727, a decrease in property and equipment of $110,772,
a decrease in deferred costs of $47,213, an increase in intangible assets
of $114,466, and a decrease in other assets of $8,328. The increase in
intangible assets and decrease in property and equipment primarily
reflects the reclassification of certain computer software costs,
previously included in property and equipment.
The impact on balances as at March 22, 2008 was primarily an increase in
net future income tax assets of $13,612, a decrease in prepaid expenses
and deposits of $7,548, a decrease in property and equipment of $81,389,
a decrease in deferred costs of $33,690, an increase in intangible assets
of $83,389, and a decrease in other assets of $2,801.
Financial Assets and Financial Liabilities
The Emerging Issues Committee ("EIC") issued a new abstract on January
20, 2009, concerning the measurement of financial assets and financial
liabilities ("EIC-173 - Credit Risk and the Fair Value of Financial
Assets and Financial Liabilities") (the "Abstract"). There has been
diversity in practice as to whether an entity's own credit risk and the
credit risk of the counterparty are taken into account in determining the
fair value of financial instruments. The Committee reached a consensus
that these risks should be taken into account in the measurement of
financial assets and financial liabilities. The Abstract is effective for
all financial assets and financial liabilities measured at fair value in
interim and annual financial statements issued for periods ending on or
after the date of issuance of the Abstract with retrospective application
without restatement of prior periods. The Company applied the new
Abstract at the beginning of its current fiscal year. The implementation
did not have a significant impact on the Company's results of operations,
financial position or disclosures.
3. INVENTORY
During the 12 weeks ended March 28, 2009, the Company recognized cost of
inventory of $1,384,322 (2008 - $1,277,596) as an expense. This expense
is included in cost of goods sold and other operating expenses in the
consolidated statements of earnings for the period.
During the 12 weeks ended March 28, 2009 and March 22, 2008, there were
no significant write-downs of inventory as a result of net realizable
values being lower than cost and no inventory write-downs recognized in
previous years were reversed.
4. ACQUISITIONS
During the 12 weeks ended March 28, 2009, the Company acquired the assets
or shares of a number of pharmacies, each of which is individually
immaterial to the Company's total acquisitions. The total cost of
acquisitions of $27,280 (2008 - $77,542), including costs incurred in
connection with the acquisitions, is allocated primarily to goodwill and
other intangible assets based on their fair values. Certain purchase
price allocations are preliminary and may change. The operations of the
acquired pharmacies have been included in the Company's results of
operations from the date of acquisition.
5. INTEREST EXPENSE
The components of the Company's interest expense are as follows:
12 Weeks Ended
-------------------------
March 28, March 22,
2009 2008
-------------------------------------------------------------------------
Interest on bank indebtedness $ 1,534 $ 2,726
Interest on commercial paper 2,000 7,742
Interest on short-term debt 504 -
Interest on long-term debt 10,468 3,292
-------------------------------------------------------------------------
$ 14,506 $ 13,760
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. BANK INDEBTEDNESS
Bank indebtedness is comprised of lines of credit borrowings by both the
Company and the Associate-owned stores. The Associate-owned stores borrow
under agreements guaranteed by the Company. The Company has entered into
agreements with banks to guarantee a total of $425,000 (2008 - $415,000)
of lines of credit. As at March 28, 2009, the Associate-owned stores have
utilized $278,444 (2008 - $217,627) of the available lines of credit.
7. EMPLOYEE FUTURE BENEFITS
The net benefit expense included in the results for the 12 weeks ended
March 28, 2009, for benefits provided under pension plans was $1,082
(2008 - $1,356), and for benefits provided under other benefit plans was
$23 (2008 - $23).
8. DEBT REFINANCING
On January 20, 2009, the Company issued $250,000 of three-year medium-
term notes maturing January 20, 2012, which bear interest at a fixed rate
of 4.80% (the "Series 3 notes") and $250,000 of five-year medium-term
notes maturing January 20, 2014, which bear interest at a fixed rate of
5.19% (the "Series 4 notes"). The Series 3 notes and the Series 4 notes
were issued pursuant to the Company's shelf prospectus, as supplemented
by pricing supplements dated January 14, 2009.
The net proceeds from the issuance of the Series 3 notes and the Series 4
notes were used to refinance existing indebtedness, including repayment
of all amounts outstanding under the Company's senior unsecured 364-day
bank credit facility ("short-term debt"). The Company's senior unsecured
364-day bank credit facility was terminated on January 20, 2009.
9. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES RELATED TO
FINANCIAL INSTRUMENTS
In the normal course of business, the Company is exposed to financial
risks that have the potential to negatively impact its financial
performance. The Company may use derivative financial instruments to
manage certain of these risks. The Company does not use derivative
financial instruments for trading or speculative purposes. These risks
are discussed in more detail below:
Interest Rate Risk
Interest rate risk is the risk that fair value or future cash flows
associated with the Company's financial assets or liabilities will
fluctuate due to changes in market interest rates.
The Company, including its Associate-owned store network, is exposed to
fluctuations in interest rates by virtue of its borrowings under its bank
credit facilities, commercial paper program and financing programs
available to its Associates. Increases or decreases in interest rates
will positively or negatively impact the financial performance of the
Company.
The Company uses interest rate derivatives to manage this exposure and
monitors market conditions and the impact of interest rate fluctuations
on its fixed and floating rate debt instruments on an ongoing basis. The
Company has interest rate derivative agreements converting an aggregate
notional principal amount of $100,000 of floating rate commercial paper
debt into fixed rate debt.
As at March 28, 2009, the Company had $472,444 (2008 - $677,775) of
unhedged floating rate debt. During the 12 weeks ended March 28, 2009,
the Company's average outstanding unhedged floating rate debt was
$670,969 (2008 - $750,437). Had interest rates been higher or lower by 50
basis points during the 12 weeks ended March 28, 2009, net earnings would
have decreased or increased, respectively, by approximately $537 (2008 -
$594) as a result of the Company's exposure to interest rate fluctuations
on its unhedged floating rate debt.
Furthermore, the Company may be exposed to losses should any counterparty
to its derivative agreements fail to fulfill its obligations. The Company
has sought to minimize counterparty risk by transacting with
counterparties that are large financial institutions. As at March 28,
2009 and March 22, 2008, there are no net exposures, as the interest rate
derivative agreements are in a liability position.
Credit Risk
Credit risk is the risk that the Company's counterparties will fail to
meet their financial obligations to the Company causing a financial loss.
Accounts receivable arise primarily in respect of prescription sales
billed to governments and third-party drug plans and, as a result,
collection risk is low. There is no concentration of balances with
debtors in the remaining accounts receivable. The Company does not
consider its exposure to credit risk to be material.
Liquidity Risk
Liquidity risk is the risk that the Company will be unable to meet its
obligations relating to its financial liabilities.
The Company prepares cash flow budgets and forecasts to ensure that it
has sufficient funds through operations, access to bank facilities and
access to debt and capital markets to meet its financial obligations,
capital investment program and fund new investment opportunities or other
unanticipated requirements as they arise. The Company manages its
liquidity risk as it relates to financial liabilities by monitoring its
cash flow from operating activities to meet its short-term financial
liability obligations and planning for the repayment of its long-term
financial liability obligations through cash flow from operating
activities and/or the issuance of new debt.
The contractual maturities of the Company's financial liabilities as at
March 28, 2009, are as follows:
Payments Payments
due due
Payments between between
due in the 90 days and 1 year and Payments
next less than less than due after
$000's 90 days a year 2 years 2 years Total
-------------------------------------------------------------------------
Bank indebt-
edness $ 265,058 $ - $ - $ - $ 265,058
Commercial
paper 294,000 - - - 294,000
Accounts
payable 786,599 40,522 - - 827,121
Dividends
payable 46,727 - - - 46,727
Medium-term
notes - - - 950,000 950,000
Other long-
term
liabilities - - 12,973 13,438 26,411
-------------------------------------------------------------------------
Total $1,392,384 $ 40,522 $ 12,973 $ 963,438 $2,409,317
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There is no difference between the carrying value of bank indebtedness
and the amount the Company is required to pay. The accounts payable and
other long-term liabilities amounts exclude certain liabilities that are
not considered financial liabilities.
10. FINANCIAL INSTRUMENTS
Interest Rate Derivatives
The Company has interest rate derivative agreements converting an
aggregate notional principal amount of $100,000 of floating rate
commercial paper debt into fixed rate debt. The fixed rates payable by
the Company under the derivative agreements ranged from 4.11% to 4.18%.
The agreements mature as follows: $50,000 with a fixed rate payable of
4.11% in December 2009 and $50,000 with a fixed rate payable of 4.18% in
December 2010, with reset terms of one month.
Based on market values of the interest rate derivative agreements at
March 28, 2009, the Company recognized a liability of $4,268 (2008 -
$3,151), of which $1,318 (2008 - $1,025) is presented in accounts payable
and accrued liabilities and $2,950 (2008 - $2,126) is presented in other
long-term liabilities. During the 12 weeks ended March 28, 2009 and
March 22, 2008, the Company assessed that the interest rate derivatives
were an effective hedge for the floating interest rates on the associated
commercial paper debt. Market values were determined based on information
received from the Company's counterparties to these agreements.
Equity Forward Derivatives
The Company uses cash-settled equity forward agreements to limit its
exposure to future price changes in the Company's share price for share
unit awards under the Company's long-term incentive plan. The income or
expense arising from the use of these instruments is included in cost of
goods sold and other operating expenses for the year.
Based on market values of the equity forward agreements at March 28,
2009, the Company recognized a liability of $2,334, of which $1,145 is
presented in accounts payable and accrued liabilities and $1,189 is
presented in other long-term liabilities. Based on market values of
equity forward agreements at March 22, 2008, the Company recognized a net
liability of $767, of which $127 was presented in accounts receivable and
$894 was presented in other long-term liabilities. During the 12 weeks
ended March 28, 2009 and March 22, 2008, the Company assessed that the
percentage of the equity forward derivatives related to unearned units
under the LTIP were an effective hedge for the common share price of the
unearned units. Market values were determined based on information
received from the Company's counterparties to these agreements.
During the 12 weeks ended March 28, 2009, an amount previously recorded
in accumulated other comprehensive loss of $91 (2008 - $nil) was
recognized in earnings.
Fair Value of Financial Instruments
The fair value of a financial instrument is the estimated amount that the
Company would receive or pay to settle the financial assets and financial
liabilities as at the reporting date.
The fair values of cash, accounts receivable, deposits, bank
indebtedness, commercial paper, short-term debt, accounts payable and
dividends payable approximate their carrying values given their short-
term maturities. The fair values of long-term receivables, long-term debt
and other long-term liabilities approximate their carrying values given
the current market rates associated with these instruments.
The interest rate and equity forward derivatives are recognized at fair
value, which is determined based on current market rates and on
information received from the Company's counterparties to these
agreements.
11. CAPITAL MANAGEMENT
The Company's primary objectives when managing capital are to profitably
grow its business while maintaining adequate financing flexibility to
fund attractive new investment opportunities and other unanticipated
requirements or opportunities that may arise. Profitable growth is
defined as earnings growth commensurate with the additional capital being
invested in the business in order that the Company earns an attractive
rate of return on that capital. The primary investments undertaken by the
Company to drive profitable growth include additions to the selling
square footage of its store network via the construction of new,
relocated and expanded stores, including related leasehold improvements
and fixtures, the purchase of sites for future store construction, as
well as through the acquisition of independent drug stores or their
prescription files. In addition, the Company makes capital investments in
information technology and its distribution capabilities to support an
expanding store network. The Company also provides working capital to its
Associates via loans and/or loan guarantees. The Company largely relies
on its cash flow from operations to fund its capital investment program
and dividend distributions to its shareholders. This cash flow is
supplemented, when necessary, through the borrowing of additional debt.
No changes were made to these objectives during the period.
The Company considers its total capitalization to be bank indebtedness,
commercial paper, short-term debt, long-term debt (including the current
portion thereof) and shareholders' equity, net of cash. The Company also
gives consideration to its obligations under operating leases when
assessing its total capitalization. The Company manages its capital
structure with a view to maintaining investment grade credit ratings from
two credit rating agencies. In order to maintain its desired capital
structure, the Company may adjust the level of dividends paid to
shareholders, issue additional equity, repurchase shares for cancellation
or issue or repay indebtedness. The Company has certain debt covenants
and is in compliance with those covenants.
The Company monitors its capital structure principally through measuring
its net debt to shareholders' equity and net debt to total capitalization
ratios, and ensures its ability to service its debt and meet other fixed
obligations by tracking its interest and other fixed charges coverage
ratios.
The following table provides a summary of certain information with
respect to the Company's capital structure and financial position as at
the dates indicated.
March 28, March 22, January 3,
2009 2008 2009
-------------------------------------------------------------------------
Cash $ (26,190) $ (35,784) $ (36,567)
Bank indebtedness 265,058 191,082 240,844
Commercial paper 293,045 736,676 339,943
Short-term debt - - 197,845
Current portion of long-term debt - 299,107 -
Long-term debt 943,384 - 647,250
--------------------------------------
Net debt 1,475,297 1,191,081 1,389,315
Shareholders' equity 3,483,236 3,100,706 3,420,529
--------------------------------------
Total capitalization $ 4,958,533 $ 4,291,787 $ 4,809,844
--------------------------------------
--------------------------------------
Net debt:Shareholders' equity 0.42:1 0.38:1 0.41:1
Net debt:Total capitalization 0.30:1 0.28:1 0.29:1
EBITDA:Cash interest expense(1)(2) 17.39:1 18.09:1 17.21:1
(1) For purposes of calculating the ratios, EBITDA is comprised of EBITDA
for the 53 week and 52 week periods then ended, as appropriate.
EBITDA (earnings before interest, taxes, depreciation and
amortization) is a non-GAAP financial measure. Non-GAAP financial
measures do not have standardized meanings prescribed by GAAP and
therefore may not be comparable to similar measures presented by
other reporting issuers.
(2) Cash interest expense is also a non-GAAP measure and is comprised of
interest expense for the 53 week and 52 week periods then ended, as
appropriate, and exclude the amortization of deferred financing
costs.
As measured by the ratios set out above, the Company maintained its
desired capital structure and financial position during the period.
The following table provides a summary of the Company's credit ratings at
March 28, 2009:
Dominion
Standard & Bond Rating
Poor's Service
-------------------------
Corporate credit rating BBB+ -
Senior unsecured debt BBB+ A (low)
Commercial paper - R-1 (low)
There were no changes to the Company's credit ratings during the 12 weeks
ended March 28, 2009.
Earnings Coverage Exhibit to the Consolidated Financial Statements
53 Weeks Ended March 28, 2009
-------------------------------------------------------------------------
Earnings coverage on long-term debt obligations 25.20 times
-------------------------------------------------------------------------
The earnings coverage ratio on long-term debt (including any current
portion) is equal to earnings (before interest and income taxes) divided
by interest expense on long-term debt (including any current portion).
Interest expense excludes any amounts in respect of amortization and
includes amounts capitalized to property and equipment that were included
in and excluded from, respectively, interest expense as shown in the
consolidated statement of earnings of the Company for the period.
%SEDAR: 00016987EF