Loblaw Reports 2018 Third Quarter Results(1)

BRAMPTON, ON, Nov. 14, 2018 /CNW/ - Loblaw Companies Limited (TSX: L) ("Loblaw" or the "Company") today announced its unaudited financial results for the third quarter ended October 6, 2018. The Company's 2018 Third Quarter Report to Shareholders will be available in the Investors section of the Company's website at loblaw.ca and will be filed with SEDAR and available at sedar.com.

"We delivered strong financial results in the third quarter and we are pleased with the performance across our retail business," said Galen G. Weston, Chairman and Chief Executive Officer, Loblaw Companies Limited. "Our strategy continues to build momentum as our data-driven insights and process and efficiency initiatives enable us to make additional investments in our future."

2018 THIRD QUARTER HIGHLIGHTS

The third quarter of 2018 included the negative impacts of minimum wage increases and incremental healthcare reform. The following highlights also reflect the impact of the consolidation of franchises, the disposition of gas bar operations and the acquisition of Canadian Real Estate Investment Trust ("CREIT") by Choice Properties' Real Estate Investment Trust ("Choice Properties").

• Revenue was $14,453 million, an increase of $261 million, or 1.8%, compared to the third quarter of 2017.
• Normalized for the disposition of the gas bar operations, Retail segment sales were $14,105 million, an increase of $235 million, or 1.7%, compared to the third quarter of 2017.
• • Food retail (Loblaw) same-store sales growth was 0.9%, excluding gas bar operations.
  • Drug retail (Shoppers Drug Mart) same-store sales growth was 2.5%, with pharmacy same-store sales growth of 0.5% and front store same-store sales growth of 4.3%.
• Operating income was $797 million, a decrease of $439 million, or 35.5%, compared to the third quarter of 2017.
• Adjusted EBITDA⁽²⁾ was $1,321 million, an increase of $92 million, or 7.5%, compared to the third quarter of 2017.
• Net earnings available to common shareholders of the Company were $106 million, a decrease of $777 million, or 88.0%, compared to the third quarter of 2017. Diluted net earnings per common share were $0.28, a decrease of $1.96, or 87.5%, compared to the third quarter of 2017.
• • Net earnings available to common shareholders of the Company were negatively impacted year-over-year by the charge related to Glenhuron Bank Limited ("Glenhuron") in the third quarter of 2018 and the prior year gain on disposition of gas bars operations.
• Adjusted net earnings available to common shareholders of the Company⁽²⁾ were $562 million, an increase of $13 million or 2.4%, compared to the third quarter of 2017.
• • Normalized for the disposition of gas bar operations, adjusted net earnings available to common shareholders of the Company⁽²⁾ increased by approximately $17 million, primarily driven by the performance of the Retail segment and the impact of the decrease in the adjusted income tax rate⁽²⁾ attributable to the Company's proportionate interest in Choice Properties, which declined as a result of the acquisition of CREIT.
• Adjusted diluted net earnings per common share⁽²⁾ were $1.49, an increase of $0.10, or 7.2% compared to the third quarter of 2017.
• • Normalized for the disposition of gas bar operations, adjusted diluted net earnings per common share⁽²⁾ increased by approximately 8.0% or $0.11 per common share primarily due to the factors noted above and the favourable impact of the repurchase of common shares.
• The Company did not repurchase common shares in the third quarter of 2018.

Choice Properties completed the acquisition of CREIT in the second quarter of 2018. In the third quarter of 2018, the acquisition resulted in increases in consolidated revenue of approximately $101 million, adjusted EBITDA⁽²⁾ of approximately $73 million, adjusted net interest expense⁽²⁾ and other financing charges of approximately $68 million and adjusted net earnings available to common shareholders of the Company⁽²⁾ of $3 million. The acquisition had a nominal impact on adjusted diluted net earnings per common share⁽²⁾ in the third quarter of 2018.

The disposition of the Company's gas bar operations, in the third quarter of 2017 had a negative year-over-year impact on financial performance in the third quarter of 2018. The disposition negatively impacted Retail sales growth by $123 million, adjusted EBITDA⁽²⁾ by approximately $5 million, adjusted net earnings available to common shareholders of the Company⁽²⁾ by approximately $4 million and adjusted diluted net earnings per common share⁽²⁾ by approximately $0.01. Net earnings available to common shareholders of the Company in the third quarter of 2017 included a post-tax gain of $432 million, net of related costs from the disposition.

See "News Release Endnotes" at the end of this News Release.

CONSOLIDATED RESULTS OF OPERATIONS

Net earnings available to common shareholders of the Company in the third quarter of 2018 were $106 million ($0.28 per common share), a decrease of $777 million ($1.96 per common share) compared to the third quarter of 2017. The decrease included the improvement in underlying operating performance of approximately $17 million, excluding the unfavourable impact of the disposition of gas bar operations of approximately $4 million, and the unfavourable year-over-year net impact of adjusting items totaling $790 million, as described below:

• the improvement in underlying operating performance of $13 million ($0.03 per common share) was primarily due to the following:
• • Retail segment (excluding the impact of the consolidation of franchises) driven by an increase in adjusted gross profit⁽²⁾, partially offset by an increase in selling, general and administrative expenses ("SG&A") and depreciation and amortization and the unfavourable impact of the disposition of gas bar operations of approximately $4 million; and
  • a decrease in the adjusted income tax rate⁽²⁾ attributable to the Company's proportionate interest in Choice Properties, which declined as a result of the acquisition of CREIT.
• the unfavourable year-over-year net impact of adjusting items totaling $790 million ($2.06 per common share) was primarily due to the following:
• • the prior year gain on the disposition of gas bars operations of $432 million ($1.10 per common share);
  • the charge related to Glenhuron of $367 million ($0.98 per common share); and
  • the unfavourable change in fair value adjustment to investment properties of $29 million ($0.08 per common share);

partially offset by,

• • the favourable change in fair value adjustment to the Trust Unit Liability of $29 million ($0.08 per common share)
  • the favourable change in fair value adjustment on fuel and foreign currency contracts of $14 million ($0.03 per common share).
• the decrease in diluted net earnings per common share also included the favourable impact of the repurchase of common shares over the last 12 months ($0.07 per common share).

The Choice Properties segment included the positive adjusted EBITDA⁽²⁾ contribution from the acquisition of CREIT of $73 million, which was offset by a $68 million increase in adjusted net interest expense and other financing charges⁽²⁾ related to the acquisition. The acquisition also resulted in an increase in adjusted net earnings available to common shareholders of the Company⁽²⁾ of $3 million and it had a nominal impact on adjusted diluted net earnings per common share⁽²⁾.

Adjusted net earnings available to common shareholders of the Company⁽²⁾ in the third quarter of 2018 were $562 million ($1.49 per common share), an increase of $13 million ($0.10 per common share), compared to the third quarter of 2017. Normalized for the disposition of gas bar operations, adjusted net earnings available to common shareholders of the Company⁽²⁾ increased by approximately $17 million, as described above. Adjusted diluted net earnings per common share⁽²⁾ also included the favourable impact of the repurchase of common shares over the last 12 months ($0.07 per common share). Normalized for the disposition of gas bar operations, adjusted diluted net earnings per common share⁽²⁾ increased by approximately 8.0%.

Other Business Matters

Charge related to Glenhuron On September 7, 2018, the Tax Court of Canada ("Tax Court") released its decision relating to Glenhuron, a wholly-owned Barbadian subsidiary of the Company that was wound up in 2013. The Tax Court ruled that certain income earned by Glenhuron should be taxed in Canada based on a technical interpretation of the applicable legislation.

On October 4, 2018, the Company filed a Notice of Appeal with the Federal Court of Appeal. Although the Company believes in the merits of its position, it recorded a charge during the third quarter of 2018 of $367 million, of which $176 million was recorded in interest and $191 million was recorded in income taxes. The Company believes that this provision will be sufficient to cover its ultimate liability if the appeal is unsuccessful.

In the third quarter of 2018, the Company made a cash payment of $235 million to fund the tax and interest owing in light of the decision of the Tax Court.

Spin-out of Choice Properties On November 1, 2018, the Company and its parent George Weston Limited ("Weston") completed a reorganization under which the Company distributed its approximate 61.6% effective interest in Choice Properties to Weston on a tax-free basis to the Company and its Canadian shareholders. In connection with the reorganization, the common shareholders of the Company, other than Weston and its subsidiaries, received 0.135 of a common share of Weston for each common share of the Company held, which was equivalent to the market value of their pro rata interest in Choice Properties as at the announcement date of the spin-out, and Weston received the Company's approximate 61.6% effective interest in Choice Properties.

Following the transaction, the Company no longer retains its interest in Choice Properties and will cease to consolidate its equity interest in Choice Properties from its consolidated financial statements. The transaction has no impact on the ongoing operating relationship between the Company and Choice Properties and all current agreements and arrangements, including The Strategic Alliance Agreement and leases, remain in place. The Company continues to be Choice Properties' largest tenant.

Based on pro forma year ended December 30, 2017 financial results adjusted to reflect the impact of the transaction, the reorganization will reduce adjusted EBITDA⁽²⁾ by approximately $575 million and adjusted diluted net earnings per share⁽²⁾ by approximately $0.60. The impacts are primarily driven by the Company no longer eliminating its rent paid to Choice Properties and no longer consolidating Choice Properties' rent received from third party tenants. Adjusted diluted net earnings per share⁽²⁾ also includes the favourable impacts of lower depreciation due to the deconsolidation of properties owned by Choice Properties and lower interest expenses due to the removal of interest expense related to trust unit distributions to third parties and the removal of Choice Properties' debt. Choice Properties will also be deconsolidated from the Company's balance sheet, which will result in a reduction in total assets and liabilities of approximately $5.0 billion and $4.5 billion, respectively.

Subsequent to the announcement of the spin out of Choice Properties, Standard & Poor's and Dominion Bond Rating Service reaffirmed the credit ratings and outlook of the Company, and as expected there were no changes to the ratings as a result of the spin-out.

The Company has recorded $6 million in spin-out related costs, in SG&A, in the third quarter of 2018.

REPORTABLE OPERATING SEGMENTS
As at the end of the third quarter of 2018, the Company has three 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, which includes in-store pharmacies and other health and beauty products, apparel and other general merchandise, and provides the PC Optimum program. 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. Prior to July 17, 2017, the Retail segment also included gas bar operations.
• The Financial Services segment provides credit card services, the PC Optimum program, insurance brokerage services, Guaranteed Investment Certificates and telecommunication services. As a result of the wind-down of PC Financial banking services, the Financial Services segment no longer offers personal banking services.
• Choice Properties owns, manages and develops a high-quality portfolio of commercial retail, industrial, office and residential properties across Canada. The Choice Properties segment information presented below reflects the accounting policies of Choice Properties, which may differ from those of the consolidated Company. Differences in policies are eliminated in Consolidation and Eliminations. As of May 4, 2018, the Choice Properties segment includes the acquisition of CREIT.

Subsequent to the completion of the spin-out of Choice Properties on November 1, 2018, the Company has two reportable operating segments: the Retail segment and the Financial Services segment.

Retail Segment

Sales, operating income, adjusted gross profit⁽²⁾, adjusted gross profit percentage⁽²⁾, adjusted EBITDA⁽²⁾, adjusted EBITDA margin⁽²⁾ and depreciation and amortization include the impacts of the consolidation of franchises and disposition of gas bar operations.

Sales Retail segment sales in the third quarter of 2018 were $14,105 million, an increase of $112 million, or 0.8%, compared to the third quarter of 2017. Excluding the consolidation of franchises, Retail segment sales increased by $9 million, or 0.1%, primarily driven by the following factors:

• Food retail same-store sales growth was 0.9% (2017 – growth of 1.4%) for the quarter. Gas bar operations had no impact on same-store sales in the third quarter of 2018 and 2017.
• The Company's Food retail average quarterly internal food price index-declined and was marginally lower than (2017 – marginally higher than) the average quarterly national food price inflation of 0.3% (2017 – inflation of 0.3%), as measured by The Consumer Price Index for Food Purchased from Stores ("CPI"). CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in the Company's stores.
• Drug retail same-store sales growth was 2.5% (2017 – 3.3%) and was comprised of pharmacy same-store sales growth of 0.5% (2017 – 3.9%) and front store same-store sales growth of 4.3% (2017 – 2.8%).
• 12 food and drug stores were opened and 24 food and drug stores were closed in the last 12 months with Retail square footage remaining flat;

partially offset by,

• The impact of the disposition of gas bar operations of $123 million; and
• The impact of incremental healthcare reform on Drug retail.

The redemption of Loblaw Cards resulted in the delivery of approximately $17 million of free products to customers in the third quarter of 2018 and $70 million year-to-date, which was provided for in the fourth quarter of 2017. The redemptions did not benefit sales or the Company's financial performance and Management does not believe it had a significant impact on Food retail same-store sales.

Operating Income Operating income in the third quarter of 2018 was $703 million, a decrease of $465 million compared to the third quarter of 2017. The decrease in operating income included an improvement in underlying operating performance of $18 million and the unfavourable year-over-year net impact of adjusting items totaling $483 million, as described below:

• the improvement in underlying operating performance of $18 million, including the unfavourable impact of the disposition of gas bar operations, was driven by an increase in adjusted gross profit⁽²⁾ offset by an increase in SG&A and depreciation and amortization. The improvement in underlying operating performance also included the unfavourable year-over-year contribution from the consolidation of franchises of $1 million; and
• the unfavourable year-over-year net impact of adjusting items totaling $483 million was primarily due to the prior year gain on the disposition of gas bars operations of $501 million, partially offset by, the favourable change in fair value adjustment on fuel and foreign currency contracts of $20 million.

Adjusted Gross Profit⁽²⁾ Adjusted gross profit⁽²⁾ in the third quarter of 2018 was $4,099 million, an increase of $155 million compared to the third quarter of 2017. Adjusted gross profit percentage⁽²⁾ of 29.1% increased by 90 basis points compared to the third quarter of 2017. Excluding the consolidation of franchises, adjusted gross profit⁽²⁾ increased by $46 million. Adjusted gross profit percentage⁽²⁾, excluding the consolidation of franchises, was 27.3%, an increase of 30 basis points compared to the third quarter of 2017. The increase in adjusted gross profit percentage⁽²⁾ was primarily due to the favourable impact from the disposition of gas bar operations of approximately 20 basis points. Margins were positively impacted by Food retail and negatively impacted by healthcare reform.

Adjusted EBITDA⁽²⁾ Adjusted EBITDA⁽²⁾ in the third quarter of 2018 was $1,189 million, an increase of $30 million compared to the third quarter of 2017 and included the favourable impact of the consolidation of franchises of $5 million and the unfavourable impact of the disposition of gas bar operations of approximately $5 million. The increase in adjusted EBITDA⁽²⁾ of $30 million was driven by an increase in adjusted gross profit⁽²⁾ as described above, partially offset by an increase in SG&A of $125 million. SG&A as a percentage of sales was 20.6%, an increase of 70 basis points compared to the third quarter of 2017. Excluding the consolidation of franchises, SG&A increased $21 million. SG&A as a percentage of sales, excluding the consolidation of franchises, was 18.8%, an increase of 10 basis points compared to the third quarter of 2017 primarily driven by:

• the unfavourable impact from the disposition of gas bar operations of approximately 10 basis points;
• higher store costs driven by minimum wage increases; and
• the unfavourable year-over-year impact of foreign exchange;

partially offset by,

• cost saving initiatives.

Depreciation and Amortization Depreciation and amortization in the third quarter of 2018 was $479 million, an increase of $12 million compared to the third quarter of 2017 primarily driven by the consolidation of franchises and an increase in information technology ("IT") assets. Included in depreciation and amortization was the amortization of intangible assets related to the acquisition of Shoppers Drug Mart Corporation ("Shoppers Drug Mart") of $161 million (2017 – $161 million).

Other Retail Business Matters

Consolidation of Franchises The Company has more than 500 franchise food retail stores in its network. As at the end of the third quarter of 2018, 379 of these stores were consolidated for accounting purposes under a new, simplified franchise agreement ("Franchise Agreement") implemented in 2015.

The Company will convert the remaining franchises to the Franchise Agreement as existing agreements expire, at the end of which all franchises will be consolidated for accounting purposes. The following table provides the total impact of the consolidation of franchises included in the consolidated results of the Company:

Operating income included in the table above does not significantly impact net earnings available to common shareholders of the Company as the related income is largely attributable to non-controlling interests. 

Financial Services Segment

Earnings Before Income Taxes Earnings before income taxes in the third quarter of 2018 were $22 million, a decrease of $21 million compared to the third quarter of 2017, primarily driven by:

• increased provision for credit losses as a result of the application of the expected credit loss model under IFRS 9, "Financial Instruments" ("IFRS 9");
• higher operating costs including costs due to investments in digital strategy;
• prior year income of $7 million, net of certain costs incurred, relating to President's Choice Bank's ("PC Bank's") agreement to end its business relationship with a major Canadian chartered bank, which provided the personal banking services offered under the PC Financial brand; and
• lower core banking income attributable to the discontinuation of the services offered under the PC Financial brand. Normal operating income from the same personal banking services ended in April 2018;
  partially offset by,
• higher net interest and net interchange income attributable to the growth in the credit card portfolio.

Credit Card Receivables As at October 6, 2018, credit card receivables were $3,102 million, an increase of $184 million compared to October 7, 2017. This increase was primarily driven by growth in the average customer balance and active customer base as a result of continued investments in customer acquisition, marketing and product initiatives, partially offset by an increase in allowances due to the adoption of IFRS 9. As at October 6, 2018, the allowance for credit card receivables was $163 million, an increase of $117 million compared to October 7, 2017, primarily due to the adoption of IFRS 9.

Choice Properties Segment

Net income (loss) Net income in the third quarter of 2018 was $62 million, a decrease of $241 million compared to the third quarter of 2017, primarily driven by:

• the unfavourable change in fair value adjustment to investment properties of $112 million;
• an increase in net interest expense and other financing charges; and
• acquisition and other costs related to the acquisition of CREIT of $10 million;

partially offset by,

• an increase in net operating income from investment properties acquired as part of the acquisition of CREIT;
• additional net operating income generated from acquisitions and tenant openings in newly developed leasable space; and
• an increase in net operating income from existing properties.

Funds from operations⁽²⁾ Funds from operations⁽²⁾ in the third quarter of 2018 were $170 million, an increase of $61 million compared to the third quarter of 2017, primarily driven by additional property operating income attributable to the acquired portfolio, partially offset by higher interest expense due to the acquisition of CREIT.

Other Choice Properties' Business Matters

Acquisition of Investment Properties In the third quarter of 2018, Choice Properties acquired a 75% interest in one investment property from the Company for an aggregate purchase price of $2 million, which was fully settled in cash.

Choice Properties' Acquisition of CREIT On May 4, 2018, Choice Properties acquired all the assets and assumed all the liabilities, including outstanding debt, of CREIT for total consideration of $3,708 million. The consideration was comprised of $1,652 million of cash and the issuance of 182,836,481 new Trust Units.

The following table provides the impacts of the acquisition of CREIT on the Choice Properties segment in the third quarter of 2018:

On a year-to-date pro forma basis, the impact of the CREIT acquisition on Choice Properties segment revenue and net income in 2018 would have amounted to approximately $315 million and $190 million, respectively, excluding the impact of acquisition transaction costs and any adjustment to the fair value of the investment properties acquired. This pro forma information incorporates the effect of the preliminary purchase equation as if the acquisition had been effective December 31, 2017.

The following table provides the impacts of the acquisition of CREIT on the consolidated results of the Company in the third quarter of 2018:

DECLARATION OF DIVIDENDS
Subsequent to the end of the third quarter of 2018, the Board of Directors declared a quarterly dividend on Common Shares and Second Preferred Shares, Series B.

OUTLOOK⁽³⁾
Loblaw is focused on its strategic framework, delivering best in food and health and beauty, using data driven insights underpinned by process and efficiency excellence. This framework is supported by the Company's financial plan of maintaining a stable trading environment that targets positive same-store sales and stable gross margin, creating efficiencies to deliver operating leverage, investing for the future and returning capital to shareholders.

Headwinds from minimum wage increases and healthcare reform continue to negatively impact the Company's financial performance in 2018. The first half of the year was characterized by incremental cost headwinds and a very competitive retail market. In the second half, the Company is experiencing increased cost pressures, including from the surtax imposed on certain US imports. Management continues to focus on overcoming these headwinds.

In 2018, on a full-year comparative basis, normalized for the disposition of the gas bar business, the impact of the CREIT acquisition and spin-out of Choice Properties in the fourth quarter, the Company expects to:

• deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive market;
• deliver essentially flat adjusted net earnings growth with positive adjusted earnings per share growth based on our share buyback program;
• invest approximately $1.3 billion in capital expenditures, including $1.0 billion in its Retail segment; and
• return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.

NON-GAAP FINANCIAL MEASURES
The Company uses the following non-GAAP financial measures: Retail segment gross profit; Retail segment adjusted gross profit; Retail segment adjusted gross profit percentage; adjusted earnings before income taxes, net interest expense and other financing charges and depreciation and amortization ("adjusted EBITDA"); adjusted EBITDA margin; adjusted operating income; adjusted net interest expense and other financing charges; adjusted income taxes; adjusted income tax rate; adjusted net earnings available to common shareholders; adjusted diluted net earnings per common share; and with respect to Choice Properties: funds from operations. The Company believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the Company for the reasons outlined below.

Management uses these and other non-GAAP financial measures to exclude the impact of certain expenses and income that must be recognized under GAAP when analyzing underlying consolidated and segment 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 excludes additional 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.

These measures do not have a standardized meaning prescribed by GAAP and therefore they may not be comparable to similarly titled measures presented by other publicly traded companies and should not be construed as an alternative to other financial measures determined in accordance with GAAP.

For details on the nature of items excluded in the calculation of any of the non-GAAP financial measures detailed below see the "Non-GAAP Financial Measures" section of the Company's 2018 Third Quarter Report to Shareholders.

Retail Segment Gross Profit, Retail Segment Adjusted Gross Profit and Retail Segment Adjusted Gross Profit Percentage The following tables reconcile adjusted gross profit by segment to gross profit by segment, which is reconciled to revenue and cost of merchandise inventories sold measures as reported in the condensed consolidated statements of earnings for the periods ended as indicated. The Company believes that Retail segment gross profit and Retail segment adjusted gross profit are useful in assessing the Retail segment's underlying operating performance and in making decisions regarding the ongoing operations of the business.

Retail segment adjusted gross profit percentage is calculated as Retail segment adjusted gross profit divided by Retail segment revenue.

Adjusted Operating Income, Adjusted EBITDA and Adjusted EBITDA Margin The following tables reconcile adjusted operating income and adjusted EBITDA to operating income, which is reconciled to net earnings attributable to shareholders of the Company as reported in the condensed consolidated statements of earnings for the periods ended as indicated. The Company believes that adjusted EBITDA is useful in assessing the performance of its ongoing operations and its ability to generate cash flows to fund its cash requirements, including the Company's capital investment program.

Adjusted EBITDA margin is calculated as adjusted EBITDA divided by revenue.

Adjusted EBITDA was impacted by the following new adjusting item in the third quarter of 2018:

Spin-out of Choice Properties In the third quarter of 2018, the Company recorded transaction and other related costs in connection with the spin-out of its interest in Choice Properties.

Gain on sale of air rights In the third quarter of 2018, a joint venture owned by Choice Properties completed the sale of air rights on one of its properties. The Company recorded a gain of $13 million in the third quarter related to the sale.

Adjusted Net Interest Expense and Other Financing Charges The following table reconciles adjusted net interest expense and other financing charges to net interest expense and other financing charges as reported in the condensed consolidated statements of earnings for the periods ended as indicated. The Company believes that adjusted net interest expense and other financing charges is useful in assessing the Company's underlying financial performance and in making decisions regarding the financial operations of the business.

Adjusted net interest expense and other financing charges was impacted by the following new adjusting item in the third quarter of 2018:

Charge related to Glenhuron In the third quarter of 2018, the Company recorded a charge of $367 million related to the Tax Court of Canada's decision on Glenhuron. Of the total charge, $176 million was recorded in net interest and other financing charges and $191 million was recorded in income taxes.

Adjusted Income Taxes and Adjusted Income Tax Rate The following table reconciles adjusted income taxes to income taxes as reported in the condensed consolidated statements of earnings for the periods ended as indicated. The Company believes that adjusted income taxes is useful in assessing the Company's underlying operating performance and in making decisions regarding the ongoing operations of its business. 

Adjusted income tax rate is calculated as adjusted income taxes divided by the sum of adjusted operating income less adjusted net interest expense and other financing charges.

Adjusted income tax expense and other financing charges was impacted by the following new adjusting item in the third quarter of 2018:

Charge related to Glenhuron In the third quarter of 2018, the Company recorded a charge of $367 million related to the Tax Court of Canada's decision on Glenhuron. Of the total charge, $176 million was recorded in net interest and other financing charges and $191 million was recorded in income taxes.

Adjusted Net Earnings Available to Common Shareholders and Adjusted Diluted Net Earnings Per Common Share The following table reconciles adjusted net earnings available to common shareholders of the Company and adjusted net earnings attributable to shareholders of the Company to net earnings attributable to shareholders of the Company and then to net earnings available to common shareholders of the Company for the periods ended as indicated. The Company believes that adjusted net earnings available to common shareholders and adjusted diluted net earnings per common share are useful in assessing the Company's underlying operating performance and in making decisions regarding the ongoing operations of its business.

The following table reconciles adjusted net earnings available to common shareholders of the Company and adjusted diluted net earnings per common share to net earnings available to common shareholders of the Company and diluted net earnings per common share for the periods ended as indicated.

Choice Properties' Funds from Operations The following table reconciles Choice Properties' Funds from Operations to net income for the periods ended as indicated. Choice Properties considers Funds from Operations to be a useful measure of operating performance as it adjusts for items included in net income that do not arise from operating activities or do not necessarily provide an accurate depiction of the Trust's performance.

SEGMENT INFORMATION
The Company has three reportable operating segments with all material operations carried out in Canada. The Company's chief operating decision maker evaluates segment performance on the basis of adjusted EBITDA⁽²⁾ and adjusted operating income⁽²⁾, as reported to internal management, on a periodic basis.

Information for each reportable operating segment is included below:

FORWARD-LOOKING STATEMENTS
This News Release 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 News Release 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 minimum wage increases and further healthcare reform, future liquidity, planned capital investments, and the status and impact of IT systems implementations. These specific forward-looking statements are contained throughout this News Release including, without limitation, in the "Outlook", "Choice Properties Segment" and "Non-GAAP Financial Measures" sections of this News Release. 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 expectation of operating and financial performance in 2018 is based on certain assumptions including assumptions about anticipated minimum wage increases, healthcare reform impacts, cost savings, operating efficiencies and anticipated benefits from strategic initiatives. 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.

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 Section 12 "Enterprise Risks and Risk Management" of the Management Discussion and Analysis in the 2017 Annual Report and the Company's 2017 Annual Information Form ("AIF") (for the year ended December 30, 2017). Such risks and uncertainties include:

• 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 effectively manage the Company's loyalty program;
• the 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;
• failure to execute the Company's e-commerce initiative or to adapt its business model to the shifts in the retail landscape caused by digital advances;
• failure to realize benefits from investments in the Company's new IT systems;
• failure to effectively respond to consumer trends or heightened competition, whether from current competitors or new entrants to the marketplace;
• changes to any of the laws, rules, regulations or policies applicable to the Company's business, including increases to minimum wage;
• public health events including those related to food and drug safety;
• failure to realize the anticipated benefits, including revenue growth, anticipated cost savings or operating efficiencies, associated with the Company's investment in major initiatives that support its strategic priorities, including the failure by the Company to realize the anticipated benefits from the Company's spin-out of Choice Properties;
• adverse outcomes of legal and regulatory proceedings and related matters;
• reliance on the performance and retention of third party service providers, including those associated with the Company's supply chain and apparel business, including issues with vendors in both advanced and developing markets;
• failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements;
• the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink; and
• changes in economic conditions, including economic recession or changes in the rate of inflation or deflation, employment rates and household debt, political uncertainty, tariff disputes, which may include newly imposed surtaxes, interest rates, currency exchange rates or derivative and commodity prices.

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 2017 AIF (for the year ended December 30, 2017). 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 News Release. 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.

CORPORATE PROFILE

2017 Annual Report and 2018 Third Quarter Report to Shareholders

The Company's 2017 Annual Report and 2018 Third Quarter Report to Shareholders is available in the "Investors" section of the Company's website at loblaw.ca and on sedar.com.

Additional financial information has been filed electronically with various securities regulators in Canada through the System for Electronic Document Analysis and Retrieval (SEDAR) and with the Office of the Superintendent of Financial Institutions (OSFI) as the primary regulator for the Company's subsidiary, PC Bank. The Company holds an analyst call shortly following the release of its quarterly results. These calls are archived in the "Investors" section of the Company's website at loblaw.ca.

Conference Call and Webcast

Loblaw Companies Limited will host a conference call as well as an audio webcast on November 14, 2018 at 10:00 a.m. (ET).

To access via tele-conference, please dial (647) 427-7450 or (888) 231-8191. The playback will be made available approximately two hours after the event at (416) 849-0833 or (855) 859-2056, access code: 4278725. To access via audio webcast, please go to the "Investors" section of loblaw.ca. Pre-registration will be available.

Full details about the conference call and webcast are available on the Loblaw Companies Limited website at loblaw.ca.

 

SOURCE Loblaw Companies Limited

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