Loblaw : 2024 Q1 Report(Open in a new tab)

First Quarter

Report to Shareholders

12 weeks ended March 23, 2024

2024 First Quarter Report to Shareholders

Management's Discussion and Analysis	1
Financial Results	27
Notes to the Unaudited Interim Period Condensed Consolidated Financial Statements	33

Management's Discussion and Analysis

1.	Forward-Looking Statements	2
2.	Key Financial Performance Indicators	4
3.	Consolidated Results of Operations	5
4.	Reportable Operating Segments Results of Operations	8
	4.1	Retail Segment	8
	4.2	Financial Services Segment	10
5.	Liquidity and Capital Resources	11
	5.1	Cash Flows	11
	5.2	Liquidity and Capital Structure	13
	5.3	Financial Condition	14
	5.4	Credit Ratings	14
	5.5	Dividends and Share Repurchases	14
	5.6	Off-Balance Sheet Arrangements	15
6.	Financial Derivative Instruments	15
7.	Results by Quarter	16
8.	Internal Control over Financial Reporting	17
9.	Enterprise Risks and Risk Management	17
10.	Related Party Transactions	18
11.	Future Accounting Standards	18
12.	Outlook	18
13.	Non-GAAP and Other Financial Measures	19
14.	Additional Information	26

2024 First Quarter Report Loblaw Companies Limited 1

Management's Discussion and Analysis

The following Management's Discussion and Analysis ("MD&A") for Loblaw Companies Limited and its subsidiaries (collectively, the "Company" or "Loblaw") should be read in conjunction with the Company's first quarter 2024 unaudited interim period condensed consolidated financial statements and the accompanying notes ("interim financial statements") included within the Quarterly Report, the audited annual consolidated financial statements and the accompanying notes for the year ended December 30, 2023 and the related MD&A included in the Company's 2023 Annual Report.

The Company's first quarter 2024 interim financial statements have been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IFRS Accounting Standards" or "GAAP"). These interim financial statements include the accounts of the Company and other entities that the Company controls and are reported in Canadian dollars, except when otherwise noted.

Management uses non-GAAP and other financial measures to exclude the impact of certain expenses and income that must be recognized under GAAP when analyzing consolidated and segment underlying operating performance, as the excluded items are not necessarily reflective of the Company's underlying operating performance and make comparisons of underlying financial performance between periods difficult. The Company adjusts for these items if it believes doing so would result in a more effective analysis of underlying operating performance. The exclusion of certain items does not imply that they are non-recurring. See Section 13 "Non-GAAP and Other Financial Measures" for more information on the Company's non-GAAP and other financial measures.

A glossary of terms used throughout this Quarterly Report can be found at the back of the Company's 2023 Annual Report.

Terms denoted with numerical references throughout the MD&A of this Quarterly Report are defined in the MD&A Endnotes section.

The information in this MD&A is current to April 30, 2024, unless otherwise noted.

1. Forward-Looking Statements

The 2024 Quarterly Report, including the MD&A, contains forward-looking statements about the Company's objectives, plans, goals, aspirations, strategies, financial condition, results of operations, cash flows, performance, prospects, opportunities and legal and regulatory matters. Specific forward-looking statements in this Quarterly Report include, but are not limited to, statements with respect to the Company's anticipated future results, events and plans, strategic initiatives and restructuring, regulatory changes including further healthcare reform, future liquidity, planned capital investments, and the status and impact of information technology ("IT") systems implementations. These specific forward-looking statements are contained throughout this Quarterly Report including, without limitation, Section 5 "Liquidity and Capital Resources", Section 11 "Future Accounting Standards", Section 12 "Outlook" and Section 13 "Non-GAAP and Other Financial Measures". Forward-looking statements are typically identified by words such as "expect", "anticipate", "believe", "foresee", "could", "estimate", "goal", "intend", "plan", "seek", "strive", "will", "may", "should" and similar expressions, as they relate to the Company and its management.

Forward-looking statements reflect the Company's estimates, beliefs and assumptions, which are based on management's perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. The Company's estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and, as such, are subject to change. The Company can give no assurance that such estimates, beliefs and assumptions will prove to be correct.

• 2024 First Quarter Report Loblaw Companies Limited

Numerous risks and uncertainties could cause the Company's actual results to differ materially from those expressed, implied or projected in the forward-looking statements, including those described in the Company's MD&A in the 2023 Annual Report, and the Company's 2023 Annual Information Form ("AIF") for the year ended December 30, 2023. Such risks and uncertainties include:

• changes in economic conditions, including inflation, price increases from suppliers, levels of employment, costs of borrowing, household debt, political uncertainty and government regulation, the impact of natural disasters, war or acts of terrorism, pandemics, changes in interest rates, tax rates, or exchange rates, and access to consumer credit;
• inability of the Company's IT infrastructure to support the requirements of the Company's business, or the occurrence of any internal or external security breaches, denial of service attacks, viruses, worms and other known or unknown cybersecurity or data breaches;

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changes to any of the laws, rules, regulations or policies applicable to the Company's business;

inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory or control shrink;

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failure to realize benefits from investments in the Company's new IT systems and related processes;

failure to execute the Company's e-commerce initiatives or to adapt its business model to shifts in the retail landscape caused by digital advances;

• failure to attract and retain colleagues may impact the Company's ability to effectively operate and achieve financial performance goals;
• changes to the regulation of generic prescription drug prices, the reduction of reimbursements under public drug benefit plans and the elimination or reduction of professional allowances paid by drug manufacturers;
• failure to maintain an effective supply chain and consequently an appropriate assortment of available product at the store and digital retail level;
• failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements;

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•

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public health events including those related to food and drug safety;

errors made through medication dispensing or errors related to patient services or consultation;

failure to realize the anticipated benefits associated with the Company's strategic priorities and major initiatives, including revenue growth, anticipated cost savings and operating efficiencies, or organizational changes that may impact the relationships with franchisees and Shoppers Drug Mart Licensees ("Associates");

• failure to adapt to environmental and social risks, including failure to execute against the Company's climate change and social equity initiatives;
• reliance on the performance and retention of third party service providers, including those associated with the Company's supply chain and apparel business and located in both advanced and developing markets;

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adverse outcomes of legal and regulatory proceedings and related matters; and

failure to effectively respond to consumer trends or heightened competition, whether from current competitors or new entrants to the marketplace.

This is not an exhaustive list of the factors that may affect the Company's forward-looking statements. Other risks and uncertainties not presently known to the Company or that the Company presently believes are not material could also cause actual results or events to differ materially from those expressed in its forward-looking statements. Additional risks and uncertainties are discussed in the Company's materials filed with the Canadian securities regulatory authorities ("securities regulators") from time to time, including, without limitation, the section entitled "Risks" in the Company's 2023 AIF (for the year ended December 30, 2023). Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect the Company's expectations only as of the date of this MD&A. Except as required by law, the Company does not undertake to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

2024 First Quarter Report Loblaw Companies Limited 3

Management's Discussion and Analysis

2. Key Financial Performance Indicators(1)

The Company has identified key financial performance indicators to measure the progress of short and long term objectives. Certain key financial performance indicators are set out below:

As at or for the periods ended March 23, 2024 and March 25, 2023		2024		2023
(millions of Canadian dollars except where otherwise indicated)		(12 weeks)		(12 weeks)
Consolidated:
Revenue growth		4.5 %		6.0 %
Operating income	$	861		$	769
Adjusted EBITDA(2)		1,544			1,448
Adjusted EBITDA margin(2)		11.4 %		11.1 %
Net earnings	$	489		$	437
Net earnings attributable to shareholders of the Company		462			421
Net earnings available to common shareholders of the Company(i)		459			418
Adjusted net earnings available to common shareholders of the Company(2)		537			505
Diluted net earnings per common share ($)	$	1.47		$	1.29
Adjusted diluted net earnings per common share(2) ($)	$	1.72		$	1.55
Cash and cash equivalents and short term investments	$	1,609		$	1,710
Cash flows from operating activities		856			915
Capital investments(ii)		387			315
Free cash flow(2)		2			147
Financial Measures:
Retail debt to rolling year retail adjusted EBITDA(2)		2.3	x		2.4	x
Rolling year adjusted return on equity(2)		22.6 %		20.4 %
Rolling year adjusted return on capital(2)		11.6 %		10.9 %
Retail Segment:
Food retail same-store sales growth		3.4 %		3.1 %
Drug retail same-store sales growth		4.0 %		7.4 %
Operating income	$	782		$	726
Gross profit		4,204			3,980
Gross profit %		31.6 %		31.3 %
Adjusted EBITDA(2)	$	1,452		$	1,390
Adjusted EBITDA margin(2)		10.9 %		10.9 %
Financial Services Segment:
Earnings before income taxes	$	44		$	12
Annualized yield on average quarterly gross credit card receivables		14.8 %		13.7 %
Annualized credit loss rate on average quarterly gross credit card receivables		4.7 %		3.7 %

1. Net earnings available to common shareholders of the Company are net earnings attributable to shareholders of the Company net of dividends declared on the Company's Second Preferred Shares, Series B.
2. Capital investments are the sum of fixed asset purchases and intangible asset additions as presented in the Company's Condensed Consolidated Statements of Cash Flows, and prepayments transferred to fixed assets in the current period.

• 2024 First Quarter Report Loblaw Companies Limited

3. Consolidated Results of Operations

For the periods ended March 23, 2024 and March 25, 2023		2024		2023
(millions of Canadian dollars except where otherwise indicated)	(12 weeks)	(12 weeks)	$	Change	% Change
Revenue	$	13,581	$	12,995	$	586	4.5 %
Operating income		861		769		92	12.0 %
Adjusted EBITDA(2)		1,544		1,448		96	6.6 %
Adjusted EBITDA margin(2)		11.4 %		11.1 %
Depreciation and amortization	$	690	$	675	$	15	2.2 %
Net interest expense and other financing charges		194		181		13	7.2 %
Income taxes		178		151		27	17.9 %
Adjusted income taxes(2)		207		182		25	13.7 %
Effective tax rate		26.7 %		25.7 %
Adjusted effective tax rate(2)		26.7 %		25.8 %
Net earnings attributable to non-controlling interests	$	27	$	16	$	11	68.8 %
Net earnings attributable to shareholders of the Company	$	462	$	421	$	41	9.7 %
Net earnings available to common shareholders of the Company(i)		459		418		41	9.8 %
Adjusted net earnings available to common shareholders of
the Company(2)		537		505		32	6.3 %
Diluted net earnings per common share ($)	$	1.47	$	1.29	$	0.18	14.0 %
Adjusted diluted net earnings per common share(2) ($)	$	1.72	$	1.55	$	0.17	11.0 %
Diluted weighted average common shares outstanding (in millions)		311.9		324.8

1. Net earnings available to common shareholders of the Company are net earnings attributable to shareholders of the Company net of dividends declared on the Company's Second Preferred Shares, Series B.

Loblaw began 2024 with another quarter of strong operational and financial results. The focus on retail excellence continued across the Company's businesses driving sales growth, reductions in shrink, and earnings growth. The Company's market leading discount banners, private label brands, and personalized PC Optimum™ offers resonated with customers. This resulted in higher store traffic, strong market share gains in Food Retail, and revenue growth that stands out against lower internal inflation. An increase in Drug Retail sales reflected continued strength in front store beauty and cough and cold products. Canada's Consumer Price Index ("CPI") for Food Purchased From Stores in March was 1.9%, the lowest level recorded in more than two years and was below the headline CPI in the first quarter of 2024. The Company's internal food inflation remained below Canada's CPI for Food Purchased From Stores again this quarter.

2024 First Quarter Report Loblaw Companies Limited 5

Management's Discussion and Analysis

Net Earnings Available to Common Shareholders of the Company and Diluted Net Earnings Per Common Share Net earnings available to common shareholders of the Company in the first quarter of 2024 were $459 million ($1.47 per common share). When compared to the first quarter of 2023, this was an increase of $41 million ($0.18 per common share). The increase included an improvement in the underlying operating performance of $32 million, and a favourable change in adjusting items totaling $9 million as described below:

• the improvement in underlying operating performance of $32 million ($0.10 per common share) was primarily due to the following:
• • an improvement in the underlying operating performance in the Retail segment driven by an increase in gross profit, partially offset by an increase in selling, general and administrative expenses ("SG&A") and depreciation and amortization; and
  • an improvement in the underlying operating performance in the Financial Services segment.
• the favourable change in adjusting items totaling $9 million ($0.01 per common share) was primarily due to the following:
• • the year-over-year favourable change in fair value adjustment on fuel and foreign currency contracts of $8 million ($0.02 per common share).
• diluted net earnings per common share also included the favourable impact from the repurchase of common shares over the last 12 months ($0.07 per common share).

Adjusted net earnings available to common shareholders of the Company(2) were $537 million, an increase of $32 million or 6.3% compared to the first quarter of 2023. Adjusted net earnings per common share(2) were $1.72, an increase of $0.17 or 11.0%. The increase includes the favourable impact from the repurchase of common shares.

Revenue

For the periods ended March 23, 2024 and March 25, 2023		2024		2023
(millions of Canadian dollars except where otherwise indicated)		(12 weeks)		(12 weeks)	$	Change	% Change
Retail	$	13,290	$	12,735	$	555	4.4 %
Financial Services		361		326		35	10.7 %
Eliminations		(70)		(66)		(4)	(6.1)%
Revenue	$	13,581	$	12,995	$	586	4.5 %

Revenue was $13,581 million in the first quarter of 2024. When compared to the first quarter of 2023, this was an increase of $586 million, or 4.5%. The increase was primarily driven by an increase in Retail segment sales of $555 million due to positive same-store sales growth. There was also an increase in Financial Services segment sales of $35 million.

Operating Income Operating income was $861 million in the first quarter of 2024. When compared to the first quarter of 2023, this was an increase of $92 million, or 12.0%. The increase was driven by an improvement in underlying operating performance of $81 million, and a favourable change in adjusting items totaling $11 million as described below:

• the improvement in underlying operating performance of $81 million was primarily due to the following:
• • an improvement in the underlying operating performance of the Retail Segment due to an increase in gross profit, partially offset by an increase in SG&A and depreciation and amortization; and
  • an improvement in the underlying operating performance in the Financial Services segment.
• the favourable change in adjusting items totaling $11 million was primarily due to the following:
• • the year-over-year favourable change in fair value adjustments on fuel and foreign currency contracts of $10 million.

• 2024 First Quarter Report Loblaw Companies Limited

Adjusted EBITDA(2)

For the periods ended March 23, 2024 and March 25, 2023		2024		2023
(millions of Canadian dollars except where otherwise indicated)		(12 weeks)		(12 weeks)	$	Change	% Change
Retail	$	1,452	$	1,390	$	62	4.5 %
Financial Services		92		58		34	58.6 %
Adjusted EBITDA(2)	$	1,544	$	1,448	$	96	6.6 %

Adjusted EBITDA(2) was $1,544 million in the first quarter of 2024. When compared to the first quarter of 2023, this was an increase of $96 million or 6.6%, driven by an increase in the Retail segment of $62 million, and an increase in the Financial Services segment of $34 million.

Depreciation and Amortization Depreciation and amortization was $690 million, an increase of $15 million or 2.2% compared to the first quarter of 2023. The increase in depreciation and amortization in the first quarter of 2024 was primarily driven by an increase in depreciation of leased assets and IT assets, and an increase in depreciation of fixed assets related to conversions of retail locations, partially offset by the impact of prior year accelerated depreciation due to the reassessment of the estimated useful life of certain IT assets.

Depreciation and amortization in the first quarter of 2024 included the amortization of intangible assets related to the acquisitions of Shoppers Drug Mart Corporation ("Shoppers Drug Mart") and Lifemark Health Group ("Lifemark") of $114 million (2023 - $114 million).

Net Interest Expense and Other Financing Charges Net interest expense and other financing charges were $194 million, an increase of $13 million or 7.2% compared to the first quarter of 2023. The increase was primarily driven by an increase in interest expense from lease liabilities.

Income Taxes Income tax expense in the first quarter of 2024 was $178 million (2023 - $151 million) and the effective tax rate was 26.7% (2023 - 25.7%). The increase in the effective tax rate was primarily attributable to the non-taxable portion of the gain from real estate dispositions during the first quarter of 2023.

Adjusted income tax expense(2) in the first quarter of 2024 was $207 million (2023 - $182 million) and the adjusted effective tax rate(2) was 26.7% (2023 - 25.8%). The increase in the adjusted effective tax rate(2) was primarily attributable to the non-taxable portion of the gain from real estate dispositions during the first quarter of 2023.

Net Earnings Attributable To Non-Controlling Interests Net earnings attributable to non-controllinginterests were $27 million, an increase of $11 million or 68.8% compared to the first quarter of 2023, primarily driven by an increase in franchisee earnings after profit sharing. Non-controllinginterests represent the share of earnings that relates to the Company's Food Retail franchisees and is impacted by the timing of when profit sharing with franchisees is agreed and finalized under the terms of the agreements.

2024 First Quarter Report Loblaw Companies Limited 7

Management's Discussion and Analysis

4. Reportable Operating Segments Results of Operations

The Company has two reportable operating segments, with all material operations carried out in Canada:

• the Retail segment consists primarily of corporate and franchise-owned retail food and Associate-owned drug stores, and includes in-store pharmacies, health care services, other health and beauty products, apparel and other general merchandise. This segment is comprised of several operating segments that are aggregated primarily due to similarities in the nature of products and services offered for sale in the retail operations and the customer base; and
• the Financial Services segment provides credit card and everyday banking services, the PC Optimum loyalty program, insurance brokerage services, and telecommunication services.

4.1 Retail Segment

For the periods ended March 23, 2024 and March 25, 2023		2024		2023
(millions of Canadian dollars except where otherwise indicated)		(12 weeks)		(12 weeks)	$	Change	% Change
Sales	$	13,290	$	12,735	$	555	4.4 %
Operating income		782		726		56	7.7 %
Gross profit		4,204		3,980		224	5.6 %
Gross profit %		31.6 %		31.3 %
Adjusted EBITDA(2)	$	1,452	$	1,390	$	62	4.5 %
Adjusted EBITDA margin(2)		10.9 %		10.9 %
Depreciation and amortization	$	677	$	660	$	17	2.6 %

The following table provides a breakdown of the Company's total and same-store sales for the Retail segment.

For the periods ended March 23, 2024 and March 25, 2023		2024			2023
(millions of Canadian dollars except where otherwise indicated)		(12 weeks)			(12 weeks)
		Same-store			Same-store
	Sales	sales		Sales	sales
Food retail	$ 9,409	3.4 %	$	9,011	3.1 %
Drug retail	3,881	4.0 %		3,724	7.4 %
Pharmacy and healthcare services	2,059	7.3 %		1,924	4.7 %
Front store	1,822	0.7 %		1,800	10.3 %

• 2024 First Quarter Report Loblaw Companies Limited