2016 ANNUAL REPORT
1
FIRST QUARTER REPORT
13 WEEKS ENDING AUGUST 6, 2016
QUARTERLY REPORT TO SHAREHOLDERS
Empire Company Limited (“Empire” or the “Company”) is a Canadian company headquartered in Stellarton, Nova
Scotia. Empire’s key businesses are food retailing and related real estate. With approximately $24.6 billion in
annualized sales and $8.8 billion in assets, Empire and its subsidiaries, franchisees and affiliates employ
approximately 125,000 people.
The Company operates and reports on two business segments: (1) Food retailing and (2) Investments and other
operations. Empire’s food retailing segment is carried out through its wholly-owned subsidiary, Sobeys Inc.
(“Sobeys”), which as of August 6, 2016, owns, affiliates or franchises more than 1,500 stores in all 10 provinces
under retail banners that include Sobeys, Safeway, IGA, Foodland, FreshCo., Thrifty Foods and Lawton’s Drugs
Stores as well as more than 350 retail fuel locations. Investments and other operations segment, which as of
August 6, 2016, included: (1) a 41.5 percent (40.3 percent fully diluted) equity accounted interest in Crombie Real
Estate Investment Trust (“Crombie REIT”), an open-ended Canadian real estate investment trust. Crombie REIT
currently owns a portfolio of 283 retail and office properties across Canada, comprising approximately 19.4 million
square feet with a strategytoownandoperateaportfolioofhighqualitygroceryanddrugstoreanchoredshopping
centresandfreestandingstoresinCanada’stop36markets; and (2) various equity accounted interests in real estate
partnerships (collectively referred to as “Genstar”). Genstar is a residential property developer with operations in
select markets in Ontario, Western Canada and the United States.
Contents
•
•
•
•
Letter to Shareholders
Management’s Discussion and Analysis
Unaudited Interim Condensed Consolidated Financial Statements
• Condensed Consolidated Balance Sheets
• Condensed Consolidated Statements of Earnings
• Condensed Consolidated Statements of Comprehensive Income
• Condensed Consolidated Statements of Changes in Shareholders’ Equity
• Condensed Consolidated Statements of Cash Flows
• Notes to the Unaudited Interim Condensed Consolidated Financial Statements
Shareholder and Investor Information
Page
2
3
24
25
26
27
28
29
36
Copies of this report are available on the Company’s website (www.empireco.ca) or by contacting the Director,
Investor Relations at (902) 755-4440. A copy has also been filed on SEDAR.
The Company provided additional details concerning its first quarter results in a conference call held on Thursday,
September 15, 2016. Replay of the call is available on the Company’s website (www.empireco.ca).
Forward-Looking Statements
This document contains forward-looking statements which are presented for the purpose of assisting the reader to
contextualize the Company’s financial position and understand management’s expectations regarding the
Company’s strategic priorities, objectives and plans. These forward-looking statements may not be appropriate for
other purposes. Forward-looking statements are identified by words or phrases such as “anticipates”, “expects”,
“believes”, “estimates”, “intends”, “could”, “may”, “plans”, “predicts”, “projects”, “will”, “would”, “foresees” and other
similar expressions or the negative of these terms.
For additional information and a caution on the use of forward-looking information, see the section in the
Management’s Discussion and Analysis (“MD&A”) entitled “Forward-Looking Information”.
1
LETTER TO SHAREHOLDERS
Empire Company Reports Fiscal 2017 First Quarter Results
Empire Company Limited (“Empire” or the “Company”) (TSX: EMP.A) announced financial results for its first quarter
ended August 6, 2016. In the first quarter, the Company recorded adjusted net earnings, net of non-controlling
interest, of $73.6 million ($0.27 per diluted share) compared to $121.7 million ($0.44 per diluted share) in the first
quarter last year, a 39.5 percent decrease.
First Quarter Summary
•
•
•
Sales of $6,186.6 million, down $62.6 million or 1.0 percent.
(1)
Sobeys’ same-store sales excluding fuel decreased 1.2 percent. Excluding the negative impact of fuel sales
and the retail West business unit, same-store sales would have increased 0.6 percent.
(1)
EBITDA of $238.3 million compared to $314.1 million last year, a decrease of $75.8 million or 24.1 percent.
(1)
Adjusted EBITDA of $243.1 million compared to $325.2 million last year, down $82.1 million or 25.2 percent.
Net earnings, net of non-controlling interest, of $65.4 million compared to $108.8 million last year, a decrease
of $43.4 million or 39.9 percent.
(1)
Adjusted net earnings , net of non-controlling interest, of $73.6 million compared to $121.7 million last year, a
$48.1 million or 39.5 percent decrease.
(2)
Adjusted EPS (fully diluted) of $0.27 compared to $0.44 last year, a 38.6 percent decrease.
(1)
Free cash flow generation of $455.6 million compared to $217.5 million last year.
(1)
Funded debt to total capital ratio of 34.6 percent versus 39.5 percent at May 7, 2016.
(1)
(2)
See “Non-GAAP Financial Measures” section of this quarterly report.
Earnings per share (“EPS”).
•
•
•
•
•
•
The Board of Directors declared a quarterly dividend of $0.1025 per share on both the Non-Voting Class A shares
and the Class B common shares that will be payable on October 31, 2016 to shareholders of record on October 14,
2016. These dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and
applicable provincial legislation and, therefore, qualify for the favourable tax treatment applicable to such dividends.
The challenges that impacted our business last year, including the performance of our Western business unit,
persisted this quarter, however we continued to make important progress against a number of key structural
initiatives designed to ensure we meet the needs and expectations of our customers and see the return of longterm profitable growth for the Company.
Management intends to spend the remainder of fiscal 2017 focusing on building sales, identifying cost reductions
across the organization and improving our execution at store level.
Sincerely,
(signed) “François Vimard”
François Vimard
Interim President and Chief Executive Officer
September 15, 2016
2
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE 13 WEEKS ENDED AUGUST 6, 2016
Forward-Looking Information ....................................................................................... 4
Overview of the Business .............................................................................................. 6
Food Retailing ....................................................................................................................................... 6
Investments and Other Operations ....................................................................................................... 8
Consolidated Operating Results ................................................................................... 8
Management’s Explanation of Consolidated Operating Results ............................... 9
Sales ..................................................................................................................................................... 9
EBITDA ................................................................................................................................................. 9
Operating Income .................................................................................................................................. 9
Finance Costs ....................................................................................................................................... 9
Income Taxes ...................................................................................................................................... 10
Net Earnings ........................................................................................................................................ 10
Financial Performance by Segment............................................................................ 11
Food Retailing ..................................................................................................................................... 11
Investments and Other Operations ..................................................................................................... 13
Quarterly Results of Operations ................................................................................. 14
Liquidity and Capital Resources ................................................................................. 15
Operations ........................................................................................................................................... 15
Free Cash Flow ................................................................................................................................... 15
Investment ........................................................................................................................................... 16
Financing ............................................................................................................................................. 16
Employee Future Benefit Obligations .................................................................................................. 16
Consolidated Financial Condition .............................................................................. 17
Key Financial Condition Measures ...................................................................................................... 17
Shareholders’ Equity ........................................................................................................................... 18
Accounting Standards and Policies ........................................................................... 18
Critical Accounting Estimates .............................................................................................................. 18
Internal Control over Financial Reporting ............................................................................................ 19
Related Party Transactions ......................................................................................... 19
Contingencies ............................................................................................................... 19
Risk Management ......................................................................................................... 19
Designation for Eligible Dividends ............................................................................. 20
Non-GAAP Financial Measures & Financial Metrics ................................................. 20
Financial Measures ............................................................................................................................. 20
Financial Metrics ................................................................................................................................. 22
3
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following is Management’s Discussion and Analysis (“MD&A”) of the consolidated financial results of
Empire Company Limited (“Empire” or the “Company”) (TSX: EMP.A) and its subsidiaries, including whollyowned Sobeys Inc. (“Sobeys”) for the 13 weeks ended August 6, 2016 compared to the 13 weeks ended
August 1, 2015. It should be read in conjunction with the Company’s unaudited interim condensed
consolidated financial statements and notes thereto for the 13 weeks ended August 6, 2016 compared to the
13 weeks ended August 1, 2015 and the audited annual consolidated financial statements for the 53 weeks
ended May 7, 2016 and the related MD&A. Additional information about the Company can be found on
SEDAR at www.sedar.com or on the Company’s website at www.empireco.ca.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with
International Accounting Standard (“IAS”) 34, “Interim Financial Reporting”, as issued by the International
Accounting Standards Board (“IASB”) and are reported in Canadian dollars (“CAD”). The unaudited interim
condensed consolidated financial statements should be read in conjunction with the Company’s annual
consolidated financial statements for the year ended May 7, 2016, which have been prepared in accordance
with International Financial Reporting Standards (“IFRS”) as issued by the IASB. These unaudited interim
condensed consolidated financial statements include the accounts of Empire and its subsidiaries and
structured entities (“SEs”) which the Company is required to consolidate.
The information contained in this MD&A is current to September 15, 2016 unless otherwise noted. There
have been no material changes to disclosures as contained in the “Outlook”, “Critical Accounting Estimates”,
“Contingencies” or “Risk Management” sections of the Company’s MD&A for the 53 weeks ended May 7,
2016 other than as noted in this MD&A.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements which are presented for the purpose of assisting the
reader to contextualize the Company’s financial position and understand management’s expectations
regarding the Company’s strategic priorities, objectives and plans. These forward-looking statements may
not be appropriate for other purposes. Forward-looking statements are identified by words or phrases such
as “anticipates”, “expects”, “believes”, “estimates”, “intends”, “could”, “may”, “plans”, “predicts”, “projects”,
“will”, “would”, “foresees” and other similar expressions or the negative of these terms.
These forward-looking statements include, but are not limited to, the following items:
•
The Company’s expectations relating to the timing of mitigation and remediation of process
integration and reorganizational changes at Safeway, which may be delayed by further unforeseen
challenges;
•
The Company’s expectations relating to the operational challenges being faced primarily in Western
Canada, which may be impacted by a number of factors including the under performance in fiscal
2016 and the effectiveness of future mitigating strategies employed;
•
The Company’s expectations relating to the shortfall of minimum purchases required on supply
agreements that resulted from the disposal of manufacturing facilities in fiscal 2015. This could be
impacted by the success of mitigation strategies being implemented in Western Canada, changes in
actual purchase volumes and customer demand;
•
The Company’s expectations regarding the impact of organizational realignment, including expected
efficiencies, cost savings and the impact on long-term earnings which could be impacted by the
positions eliminated and the time required for employees to adapt to the changes;
•
The Company’s expectations regarding the cost savings related to the distribution centre
restructuring, which could be impacted by the final number of closures and positions eliminated;
4
•
Timing and value of expected cost savings, which may be impacted by a number of factors, including
the effectiveness of ongoing cost stewardship initiatives;
•
The Company’s expected contributions to its registered defined benefit plans, which could be
impacted by fluctuations in capital markets;
•
The Company’s expectation that its operational and capital structure is sufficient to meet its ongoing
business requirements, which could be impacted by a significant change in the current economic
environment in Canada;
•
The Company’s belief that its cash and cash equivalents on hand, unutilized credit facilities and cash
generated from operating activities will enable the Company to fund future capital investments,
pension plan contributions, working capital, current funded debt obligations and ongoing business
requirements and its belief that it has sufficient funding in place to meet these requirements and
other short-term and long-term obligations, all of which could be impacted by changes in the
economic environment; and
•
The Company’s expected use and estimated fair values of financial instruments, which could be
impacted by, among other things, changes in interest rates, foreign exchange rates and commodity
prices.
By its very nature, forward-looking information requires the Company to make assumptions and is subject to
inherent risks, uncertainties and other factors which may cause actual results to differ materially from
forward-looking statements made. For more information on risks, uncertainties and assumptions that may
impact the Company’s forward-looking statements, please refer to the Company’s materials filed with the
Canadian securities regulatory authorities, including the “Risk Management” section of this MD&A.
Although the Company believes the predictions, forecasts, expectations or conclusions reflected in the
forward-looking information are reasonable, it can give no assurance that such matters will prove to have
been correct. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating
the forward-looking information and are cautioned not to place undue reliance on such forward-looking
information. Forward-looking statements do not take into account the effect of transactions occurring after
the statements have been made on the Company’s business. The forward-looking information in this
document reflects the Company’s current expectations and is subject to change after this date. The
Company does not undertake to update any forward-looking statements that may be made by or on behalf of
the Company other than as required by applicable securities laws.
5
OVERVIEW OF THE BUSINESS
Empire’s key businesses and financial results are segmented into two separate reportable segments: (1)
Food retailing and (2) Investments and other operations. With approximately $24.6 billion in annualized
sales and $8.8 billion in assets, Empire and its subsidiaries, franchisees and affiliates employ approximately
125,000 people.
Food Retailing
Empire’s Food retailing segment is carried out through Sobeys, a wholly-owned subsidiary as of August 6,
2016. Proudly Canadian, with headquarters in Stellarton, Nova Scotia, Sobeys has been serving the food
shopping needs of Canadians since 1907. Sobeys owns, affiliates or franchises more than 1,500 stores in
all 10 provinces under retail banners that include Sobeys, Safeway, IGA, Foodland, FreshCo., Thrifty Foods
and Lawton’s Drug Stores as well as more than 350 retail fuel locations. Sobeys’ purpose is to help
Canadians Eat Better, Feel Better and Do Better.
Challenges faced in the Western business unit over the past 15 months have resulted in an erosion in sales.
Following the close of the Canada Safeway acquisition, the Company began the integration of the acquired
business with existing operations which resulted in a number of issues that have had an impact on financial
results.
These business integration challenges were coupled with increased promotional activity,
experienced during fiscal 2016 and the first quarter of fiscal 2017 negatively impacting results.
Merchandising issues such as the private label conversion along with produce supply chain issues impacted
(1)
the offerings being made to customers at store level and resulted in same-store sales for the West
business unit, excluding fuel, of (3.9) percent for the 13 weeks ended August 6, 2016.
These challenges are being aggressively addressed as mitigation plans continue to be developed and
implemented. The Company introduced major initiatives in Western Canada designed to address sales
erosion related to promotional activity and to build back customer loyalty. The Better Produce at Lower
Prices and Better Meat at Lower Prices initiatives launched in the Safeway and Sobeys banners resulted in
store pricing lowered on many items and aim to bring better quality, reduced prices and variety of choices to
customers.
In addition to the factors discussed above, a shift around price sensitivity by consumers has also led to a
downward trend in the Company’s sales. Management is focused on improving the overall value proposition
through important structural changes to the pricing model through our Simplified Buy & Sell program. This
program was introduced in April 2016 in Quebec, implemented in Western Canada in September 2016 and
will be rolling out across the country.
Cost stewardship initiatives are also underway to improve efficiencies so savings can be reinvested into
improving customer experience. Sobeys continues to focus on improving a number of core initiatives and has
a renewed focus on store execution, in support of its food-focused strategy including product and service
innovations, productivity initiatives and business process, supply chain and system upgrades.
(1)
See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
6
Significant Items
Real Estate Divestitures
On June 29, 2016, Sobeys closed an agreement with Crombie Real Estate Investment Trust (“Crombie
REIT”), an entity in which the Company has a 41.5 percent ownership, to sell and leaseback a portfolio of 19
retail properties and a 50 percent interest in each of its three automated distribution centres, as well as the
sale of two parcels of development land which were previously owned by Empire. Crombie REIT also
invested approximately $58.8 million in renovations or expansions of ten Sobeys retail locations already in
Crombie REIT’s portfolio. See the “Related Party Transactions Section” of this MD&A for further detail.
Sobeys sold two (2016 – one) properties and leased back one (2016 – one) from third parties during the first
quarter of fiscal 2017. Total proceeds from these transactions were $31.7 million (2016 – $26.0 million),
resulting in a pre-tax gain of $1.2 million (2016 – $8.9 million).
Other Items
The following list includes other significant items that have impacted the financial results of the Company for
the 13 weeks ended August 6, 2016 and their comparative periods:
•
During the fourth quarter of fiscal 2015, Sobeys completed a review of its business support functions and
identified restructuring opportunities. This organizational realignment is designed to strengthen the
support network by consolidating the majority of office functions and processes in Calgary. The
Company has completed its staff selection and transition process for those employees. For the 13
weeks ended August 6, 2016, the Company recognized $2.7 million (2016 – $6.4 million) in severance
costs associated with the organizational realignment;
•
Costs were incurred of $2.1 million for the 13 weeks ended August 6, 2016 (2016 – $4.7 million) related
to the identification of efficiencies with the distribution centre restructuring;
•
The Company disposed of certain manufacturing facilities in fiscal 2015 and as part of the asset
purchase agreement (“APA”), long-term supply agreements were entered into that contain minimum
purchase volume requirements. Under the terms of this APA, should actual purchases for the calendar
year ending 2016 differ from minimum volume requirements, the sales price is adjusted up or down
based on a volume-driven formula. Management believes that purchase volumes for the calendar year
2016 are unlikely to meet the minimum volume requirements based on operating results in the last two
quarters of fiscal 2016. During the first quarter of fiscal 2017, management reviewed its fiscal 2016
estimated adjustment to the sales price and concluded the volume purchases continue to be in line with
these expectations; therefore no further adjustment has been made. This provision will continue to be
monitored and updated for any changes to estimated calendar year 2016 purchase volumes. The actual
sales price adjustment could vary significantly from this estimate; and
•
In fiscal 2016, management determined there were indicators of impairment in the West business unit as
the result of significant negative trends in operating results of the Sobeys West operating segment and
the overall challenging economic climate mainly in the Alberta and Saskatchewan markets. The
Company recorded an impairment of long-lived assets of $148.6 million and an impairment of goodwill of
$3,027.1 million. At the end of fiscal 2016, there was no remaining goodwill within the West business
unit.
7
Investments and Other Operations
Empire’s Investments and other operations segment, as of August 6, 2016, specifically included:
1. A 41.5 percent (40.3 percent fully diluted) equity accounted interest in Crombie REIT, an open-ended
Canadian real estate investment trust. Crombie REIT currently owns a portfolio of 283 retail and
office properties across Canada, comprising approximately 19.4 million square feet with a strategy to
own and operate a portfolio of high quality grocery and drug store anchored shopping centres and
freestanding stores primarily in Canada’s top 36 markets; and
2. A 40.7 percent equity accounted interest in Genstar Development Partnership, a 48.6 percent equity
accounted interest in Genstar Development Partnership II, a 39.0 percent equity accounted interest
in GDC Investments 4, L.P., a 42.1 percent equity accounted interest in GDC Investments 6, L.P., a
39.0 percent equity accounted interest in GDC Investments 7, L.P., a 43.7 percent equity accounted
interest in GDC Investments 8, L.P. and a 49.0 percent equity accounted interest in The Fraipont
Partnership (collectively referred to as “Genstar”).
CONSOLIDATED OPERATING RESULTS
The following table is a review of Empire’s consolidated financial performance for the 13 weeks ended
August 6, 2016 compared to the 13 weeks ended August 1, 2015.
($ in millions, except per share amounts)
Sales
(1)
Gross profit
(2)
EBITDA
(2)
Adjusted EBITDA
Operating income
Finance costs, net
Income tax expense
Non-controlling interest
(3)
Net earnings
(2)(3)
Adjusted net earnings
Basic earnings per share
(3)
Net earnings
(2)(3)
Adjusted net earnings
Basic weighted average number of shares
outstanding (in millions)
Diluted earnings per share
(3)
Net earnings
(2)(3)
Adjusted net earnings
Diluted weighted average number of shares
outstanding (in millions)
Dividend per share
(% of sales)
Gross profit
EBITDA
Adjusted EBITDA
Operating income
(3)
Net earnings
(3)
Adjusted net earnings
(1)
(2)
(3)
August 6, 2016
$
6,186.6 $
1,490.8
238.3
243.1
126.6
31.2
17.8
12.2
65.4
73.6
$
$
0.24 $
0.27 $
271.7
13 Weeks Ended
August 1 2015
$ Change
6,249.2 $
(62.6)
1,516.0
(25.2)
314.1
(75.8)
325.2
(82.1)
195.5
(68.9)
32.9
(1.7)
43.5
(25.7)
10.3
1.9
108.8
(43.4)
121.7
(48.1)
0.39 $
0.44 $
% Change
(1.0)%
(1.7)%
(24.1)%
(25.2)%
(35.2)%
(5.2)%
(59.1)%
18.4%
(39.9)%
(39.5)%
(0.15)
(0.17)
277.0
$
$
0.24 $
0.27 $
0.39 $
0.44 $
$
271.7
0.1025 $
277.5
0.1000 $
(0.15)
(0.17)
13 Weeks Ended
August 6, 2016
August 1, 2015
24.1%
24.3%
3.9%
5.0%
3.9%
5.2%
2.0%
3.1%
1.1%
1.7%
1.2%
1.9%
Gross profit amounts and corresponding ratios are calculated using the Food retailing segment results.
See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
Net of non-controlling interest.
8
MANAGEMENT’S EXPLANATION OF CONSOLIDATED OPERATING RESULTS
Sales
All sales are generated by the Food retailing segment. The decrease in sales for the 13 weeks ended August
6, 2016 was primarily the result of the following factors:
•
•
•
•
Continued negative impact of merchandising and promotional strategies in Western Canada;
Soft sales trend in most of the store network;
Economic downturn in areas that have been impacted by decreasing oil prices; and
Decline in oil prices impacting fuel sales.
This decrease was partially offset by food inflation.
During the 13 weeks ended August 6, 2016, same-store sales excluding the negative impact of fuel sales
decreased 1.2 percent from the same period last year, same-store sales overall decreased 1.8 percent.
Excluding fuel and the retail West business unit, same-store sales would have increased 0.6 percent.
Gross Profit
The decrease in gross margin during the 13 weeks ended August 6, 2016 was a result of the factors
impacting sales above. Gross margin was also impacted by the following factors:
•
•
A highly promotional environment; and
Continued competitive intensity.
EBITDA
EBITDA decreased in the 13 weeks ended August 6, 2016 mainly as a result of the previously mentioned
factors affecting sales and gross margin, as well as general increases in selling and administrative expenses.
Selling and administrative expenses as a percentage of sales has increased due to the impact of the soft
sales realized across the network.
($ in millions)
EBITDA
Adjustments:
Organizational realignment costs
Distribution centre restructuring
Adjusted EBITDA
$
13 Weeks Ended
August 6, 2016
August 1, 2015
238.3 $
314.1
$
2.7
2.1
4.8
243.1
$
6.4
4.7
11.1
325.2
$
$
Change
(75.8)
$
(6.3)
(82.1)
Operating Income
For the 13 weeks ended August 6, 2016, operating income decreased due to the factors affecting sales,
gross profit and EBITDA, as discussed previously.
Finance Costs
For the first quarter of fiscal 2017, finance costs, net of finance income remained consistent with the same
(1)
period last year. Interest coverage in the first quarter decreased to 4.9 times from 7.0 times in the first
quarter of fiscal 2016, as a result of decreased operating income.
(1)
See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
9
Income Taxes
The Company’s effective income tax rate for the first quarter was 18.7 percent compared to 26.8 percent in
the same period last year. The reduction is attributable to the tax consequences arising from the sale and
leaseback of retail properties to Crombie REIT on a tax deferred basis further described in the “Related Party
Transactions” section of this MD&A.
Net Earnings
For the 13 weeks ended August 6, 2016, net earnings, net of non-controlling interest, were primarily
impacted by the reasons noted in the sales, gross profit and EBITDA sections above.
($ in millions, except per share amounts)
(1)
Net earnings
(2)
EPS (fully diluted)
(3)
Adjustments:
Intangible amortization associated with the Canada Safeway acquisition
Organizational realignment costs
Distribution centre restructuring
(1)
Adjusted net earnings
Adjusted EPS (fully diluted)
Diluted weighted average number of shares outstanding (in millions)
(1)
(2)
(3)
13 Weeks Ended
August 6, 2016
August 1, 2015
$
65.4 $
108.8 $
0.24
0.39
$
$
4.7
2.0
1.5
8.2
73.6
0.27
271.7
$
$
4.8
4.6
3.5
12.9
121.7 $
0.44 $
277.5
$
Change
(43.4)
(0.15)
(4.7)
(48.1)
(0.17)
Net of non-controlling interest.
Earnings per share (“EPS”).
All adjustments are net of income taxes.
10
FINANCIAL PERFORMANCE BY SEGMENT
Food Retailing
The following is a review of Empire’s Food retailing segment’s financial performance for the 13 weeks ended
August 6, 2016 compared to the 13 weeks ended August 1, 2015.
The following financial information is Sobeys’ contribution to Empire as the amounts are net of consolidation
adjustments, which include a purchase price allocation from the privatization of Sobeys.
($ in millions)
Sales
Gross profit
EBITDA
Adjusted EBITDA
Operating income
(1)
Net earnings
(1)
Adjusted net earnings
(1)
13 Weeks Ended
August 6, 2016
August 1, 2015
$ Change
$
6,186.6 $
6,249.2 $
(62.6)
1,490.8
1,516.0
(25.2)
223.4
303.1
(79.7)
228.2
314.2
(86.0)
111.8
184.6
(72.8)
56.6
101.4
(44.8)
64.8
114.3
(49.5)
% Change
(1.0)%
(1.7)%
(26.3)%
(27.4)%
(39.4)%
(44.2)%
(43.3)%
Net of non-controlling interest.
Sales
The decrease in sales for the 13 weeks ended August 6, 2016 was primarily the result of the following
factors:
•
•
•
•
Continued negative impact of merchandising and promotional strategies in Western Canada;
Soft sales trend in most of the store network;
Economic downturn in areas that have been impacted by decreasing oil prices; and
Decline in oil prices impacting fuel sales.
This decrease was partially offset by food inflation.
During the 13 weeks ended August 6, 2016, same-store sales excluding the negative impact of fuel sales
decreased 1.2 percent from the same period last year, same-store sales overall decreased 1.8 percent.
Excluding fuel and the retail West business unit, same-store sales would have increased 0.6 percent.
Gross Profit
The decrease in gross margin during the 13 weeks ended August 6, 2016 was a result of the factors
impacting sales above. Gross margin was also impacted by the following factors:
•
•
A highly promotional environment; and
Continued competitive intensity.
11
EBITDA
EBITDA decreased in the 13 weeks ended August 6, 2016 mainly as a result of the previously mentioned
factors affecting sales and gross margin, as well as general increases in selling and administrative expenses.
Selling and administrative expenses as a percentage of sales has increased due to the impact of the soft
sales realized across the network.
($ in millions)
EBITDA
Adjustments:
Organizational realignment costs
Distribution cenre restructuring
$
13 Weeks Ended
August 6, 2016
August 1, 2015
223.4 $
303.1
2.7
2.1
4.8
228.2
$
Adjusted EBITDA
6.4
4.7
11.1
314.2
$
$
$
Change
(79.7)
$
(6.3)
(86.0)
Operating Income
For the 13 weeks ended August 6, 2016, operating income decreased due to the factors affecting sales,
gross profit and EBITDA, as discussed previously.
Net Earnings
For the 13 weeks ended August 6, 2016, net earnings, net of non-controlling interest, were primarily
impacted by the reasons noted in the sales, gross profit and EBITDA sections above.
($ in millions)
(1)
Net earnings
(2)
Adjustments:
Intangible amortization associated with the Canada Safeway acquisition
Organizational realignment costs
Distribution centre restructuring
Adjusted net earnings
(1)
(2)
(1)
13 Weeks Ended
August 6, 2016
August 1, 2015
$
56.6 $
101.4 $
$
4.7
2.0
1.5
8.2
64.8
$
4.8
4.6
3.5
12.9
114.3 $
$
Change
(44.8)
(4.7)
(49.5)
Net of non-controlling interest.
All adjustments are net of income taxes.
12
Investments and Other Operations
13 Weeks Ended
August 6, 2016
($ in millions)
Operating income
(1)
Crombie REIT
(2)
Real estate partnerships
Other operations, net of corporate expenses
(1)
(2)
$
11.2 $
5.7
(2.1)
14.8 $
$
$
Change
August 1, 2015
7.4 $
4.9
(1.4)
10.9 $
3.8
0.8
(0.7)
3.9
41.5 percent equity accounted interest in Crombie REIT (August 1, 2015 – 41.5 percent interest).
Interests in Genstar.
Operating Income
For the 13 weeks ended August 6, 2016, the increase in operating income from Investments and other
operations can be attributed to stronger operating results by Crombie REIT combined with reduced
impairment charges compared to the same quarter last year.
Investment Portfolio
At August 6, 2016, Empire’s investment portfolio, including equity accounted investments in Crombie REIT
and Genstar, consisted of:
($ in millions)
Investment in associates
Crombie REIT(1)
Canadian real estate partnerships(2)
U.S. real estate partnerships(2)
Investment in joint ventures
Canadian Digital Cinema Partnership(2)
Fair
Value
$
$
(1)
(2)
August 6, 2016
Carrying
Value
937.5
151.9
47.0
9.4
1,145.8
$
$
460.2
151.9
47.0
9.4
668.5
Unrealized
Gain
$
$
477.3
477.3
Fair
Value
$
$
786.0
148.5
50.2
9.4
994.1
May 7, 2016
Carrying
Value
$
$
366.8
148.5
50.2
9.4
574.9
Unrealized
Gain
$
$
419.2
419.2
Fair
Value
$
$
687.8
141.8
54.3
9.4
893.3
August 1, 2015
Carrying
Value
$
$
362.1
141.8
54.3
9.4
567.6
Unrealized
Gain
$
$
Fair value is calculated based on the closing price of Crombie REIT units traded on the Toronto Stock Exchange as of August 5,
2016.
Assumes fair value equals carrying value.
13
325.7
325.7
QUARTERLY RESULTS OF OPERATIONS
The following table is a summary of selected financial information from the Company’s unaudited interim
condensed consolidated financial statements for each of the eight most recently completed quarters:
($ in millions, except
per share amounts)
Sales
EBITDA(2)
Operating income (loss)
Net earnings (loss)(3)
Per share information, basic
Net earnings (loss)(3)(4)
Basic weighted average number
of shares outstanding (in millions)
Per share information, diluted
Net earnings (loss)(3)(4)
Diluted weighted average number
of shares outstanding (in millions)
(1)
(2)
(3)
(4)
Fiscal 2017
Q1
(13 Weeks)
Aug. 6, 2016
$
6,186.6
238.3
126.6
$
65.4
$
0.24
$
$
$
271.7
$
0.24
271.7
Fiscal 2016
Q4
Q3
Q2
(14 Weeks)
(13 Weeks)
(13 Weeks)
May 7, 2016 Jan. 31, 2016 Oct. 31, 2015
6,283.2 $
6,027.2 $
6,059.2
(1,047.2)
(1,467.9)
256.3
(1,160.2)
(1,589.8)
136.0
(942.6) $
(1,365.7) $
68.5
(3.47)
$
271.7
$
(3.47)
(5.03)
$
271.7
$
271.7
(5.03)
271.8
0.25
Q1
(13 Weeks)
Aug. 1, 2015
$
6,249.2
314.1
195.5
$
108.8
Fiscal 2015(1)
Q4
Q3
(13 Weeks)
(13 Weeks)
May 2, 2015 Jan. 31, 2015
$
5,770.5 $
5,940.5
236.3
322.3
115.9
203.4
$
55.4 $
123.6
Q2
(13 Weeks)
Nov. 1, 2014
$
5,995.1
323.8
203.7
$
116.9
$
$
$
275.2
$
0.25
275.5
0.39
277.0
$
0.39
277.5
0.20
$
277.0
$
0.20
277.5
0.45
277.0
$
0.45
0.42
277.0
$
277.2
0.42
277.0
Amounts have been reclassified to correspond to the current period presentation on the condensed consolidated statement of
earnings.
EBITDA is reconciled to net earnings (loss), net of non-controlling interest, for the current and comparable period in the “NonGAAP Financial Measures & Financial Metrics” section of this MD&A.
Net of non-controlling interest.
The weighted average number of shares used for the purpose of basic and diluted loss per share is equal, as the impact of all
potential common shares would be anti-dilutive.
When reviewing financial results for comparable periods:
•
The results of the first quarter for fiscal 2017 compared to the same period in fiscal 2016 were lower
due to a number of factors including challenges faced in the West business unit and soft sales trends
in most of the store network.
•
The results of the second quarter of fiscal 2016 show increased sales, but a decrease in operating
income and net earnings, net of non-controlling interest, when compared to the same quarter in fiscal
2015. This was the result of the significant challenges for the organization to adapt to the pervasive
changes from the integration of Safeway operations, the continued negative impact of merchandising
and promotional strategies for the West business unit and the provision recorded in the second
quarter for manufacturing sales agreements as previously mentioned.
•
The results of the third and fourth quarters of fiscal 2016 show increased sales, but an operating loss
and a net loss, net of non-controlling interest, when compared to the same quarters in fiscal 2015.
This was the result of the impairment charges the Company recorded in each quarter totalling $148.6
million for long-lived assets and $3,027.1 million for goodwill, representing the write-down of certain
store assets in the Sobeys West operating segment and related goodwill to their recoverable
amount. Results for the fourth quarter of 2016 were positively impacted by an additional week of
operations. Results for the fourth quarter of 2015 were impacted by the network rationalization,
downward pressure on fuel sales from declining oil prices and Competition Bureau imposed
divestitures associated with the Canada Safeway acquisition.
Management has recognized the significant operational challenges faced during fiscal 2016 and their
remediation continues to be a top priority for fiscal 2017. Strategies continue to be deployed in order to
optimize the execution of our store level offerings, to realize the benefits and efficiencies from our distribution
centre restructuring and through continued work on reduction of the Company’s cost structure.
14
Sales include fluctuations in quarter-to-quarter inflationary and deflationary market pressures. The Company
does experience some seasonality, as evidenced in the results presented above, in particular during the
summer months and over the holidays. The sales, EBITDA, operating income (loss) and net earnings (loss),
net of non-controlling interest, have been influenced by impairments recorded, Safeway operations, one-time
adjustments, other investing activities, the competitive environment, cost management initiatives, food price
and general industry trends and by other risk factors as outlined in the “Risk Management” section of the
fiscal 2016 annual MD&A.
LIQUIDITY AND CAPITAL RESOURCES
The table below highlights the major cash flow components for the Company for the relevant periods.
13 Weeks Ended
(1)
August 6, 2016
August 1, 2015
$
239.3
$
316.5
257.8
(163.0)
(481.7)
(65.4)
$
15.4
$
88.1
($ in millions)
Cash flows from operating activities
Cash flows from (used in) investing activities
Cash flows used in financing activities
Increase in cash and cash equivalents
(1)
$
$
$
Change
(77.2)
420.8
(416.3)
(72.7)
Amounts have been reclassified to correspond to the current period presentation on the condensed consolidated statement of cash
flows.
Operations
The decrease in cash flows from operating activities for the 13 weeks ended August 6, 2016 was primarily
the result of a decline in net earnings as previously discussed.
Free Cash Flow
(1)
Management uses free cash flow as a measure to assess the amount of cash available for debt
repayment, dividend payments and other investing and financing activities.
($ in millions)
Cash flows from operating activities
Add: proceeds on disposal of property, equipment and investment
Less:
property, equipment and investment property purchases
property
Free cash flow
$
$
13 Weeks Ended
(2)
August 6, 2016
August 1, 2015
239.3 $
316.5 $
342.6
43.9
(126.3)
(142.9)
455.6 $
217.5 $
$
Change
(77.2)
298.7
16.6
238.1
The increase in free cash flow for the 13 weeks ended August 6, 2016 was the result of an increase in
proceeds on disposal of property, equipment and investment property primarily due to the agreement
entered into with Crombie REIT as previously discussed.
(1)
(2)
See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
Amounts have been reclassified to correspond to the current period presentation on the condensed consolidated statement of cash
flows.
15
Investment
The increase in cash from investing activities in the 13 weeks ended August 6, 2016 was mainly due to a
sale leaseback agreement entered into with Crombie REIT as previously discussed. This increased cash
proceeds on disposal of property, equipment and investment property and tenant inducements from Crombie
REIT.
The table below outlines the number of stores Sobeys invested in during the 13 weeks ended August 6, 2016
compared to the 13 weeks ended August 1, 2015.
# of stores
Opened/relocated/acquired
Expanded
Rebannered/redeveloped
Closed – normal course of operations
13 Weeks Ended
August 6, 2016
August 1, 2015
14
17
5
5
12
11
12
7
The following table shows Sobeys’ square footage changes for the 13 and 53 weeks ended August 6, 2016
by type:
Square feet (in thousands)
Opened
Relocated
Acquired
Expanded
Closed – normal course of operations
Net change before the impact of the network rationalization
Closed – network rationalization
Net change with the impact of the network rationalization
13 Weeks Ended
August 6, 2016
38
52
38
20
(128)
20
20
53 Weeks Ended
August 6, 2016
813
214
158
98
(385)
898
(93)
805
At August 6, 2016, Sobeys’ square footage totalled 38.6 million, a 2.1 percent increase over the 37.8 million
square feet operated at August 1, 2015.
Financing
The cash used in financing activities during the 13 weeks ended August 6, 2016 increased from the same
period of fiscal 2016, primarily due to the repayment of $355.0 million on the Sobeys’ revolving long-term
credit facility (“RT Facility”) and the repayment of $300.0 million on the senior unsecured notes. This was
partially offset by $155.0 million drawn on the RT Facility and $96.0 million drawn on the Company’s credit
facility.
Employee Future Benefit Obligations
For the 13 weeks ended August 6, 2016, the Company contributed $2.2 million (2016 – $2.4 million) to its
registered defined benefit pension plans. The Company expects to contribute approximately $10.0 million in
fiscal 2017 to these plans. The Company continues to assess the impact of the capital markets on its
funding requirement.
16
CONSOLIDATED FINANCIAL CONDITION
Key Financial Condition Measures
($ in millions, except per share and ratio calculations)
Shareholders’ equity, net of non-controlling interest
(2)
Book value per common share
Long-term debt, including current portion
(2)
Funded debt to total capital
(2)
Net funded debt to net total capital
(2)(3)
Funded debt to adjusted EBITDA
(2)(4)
Adjusted EBITDA to interest expense
Current assets to current liabilities
Total assets
Total non-current financial liabilities
(1)
(2)
(3)
(4)
$
$
$
$
$
August 6, 2016
3,661.8
13.48
1,936.9
34.6%
31.2%
1.8x
9.6x
0.9x
8,842.5
2,630.2
(1)
$
$
$
$
$
May 7, 2016
3,621.0
13.33
2,367.4
39.5%
36.7%
2.0x
10.2x
1.0x
9,102.0
2,702.3
$
$
$
$
$
August 1, 2015
6,078.1
21.94
2,272.0
27.2%
23.7%
1.7x
10.4x
0.8x
11,632.3
2,653.5
Amounts have been reclassified to correspond to the current period presentation on the condensed consolidated balance sheets.
See “Non-GAAP Financial Measures & Financial Metrics” section of this MD&A.
Calculation uses trailing four-quarter adjusted EBITDA.
Calculation uses trailing four-quarter adjusted EBITDA and interest expense.
The ratio of funded debt to total capital decreased to 34.6 percent at August 6, 2016 from 39.5 percent at
May 7, 2016.
The funded debt to adjusted EBITDA ratio decreased to 1.8 times compared to 2.0 times at May 7, 2016.
The decrease in the adjusted EBITDA to interest expense coverage ratio (9.6 times versus 10.2 times at May
7, 2016) was the result of lower trailing 12-month interest expense ($112.3 million versus $114.0 million at
May 7, 2016) and a lower trailing 12-month adjusted EBITDA ($1,079.3 million versus $1,164.4 million at
May 7, 2016).
The Company’s ratio of current assets to current liabilities decreased to 0.9 times from 1.0 times at May 7,
2016.
Sobeys’ current credit ratings are BBB (low) with a stable trend from Dominion Bond Rating Service
(“DBRS”) and BBB- with a negative outlook from Standard and Poor’s (“S&P”).
The Company believes that its cash and cash equivalents on hand, unutilized bank credit facilities and cash
generated from operating activities will enable the Company to fund future capital investments, pension plan
contributions, working capital, current funded debt obligations and ongoing business requirements. The
Company also believes it has sufficient funding in place to meet these requirements and other short-term
and long-term financial obligations. The Company mitigates potential liquidity risk by ensuring various
sources of funds are diversified by term to maturity and source of credit.
The Company has provided covenants to its lenders in support of various financing facilities. All covenants
were complied with for the 13 weeks ended August 6, 2016.
17
Shareholders’ Equity
The Company’s share capital was comprised of the following on August 6, 2016:
2002 Preferred shares, par value of $25 each,
issuable in series
Non-Voting Class A shares, without par value
Class B common shares, without par value, voting
Authorized
Authorized Number of
of Shares
991,980,000
768,105,849
122,400,000
Issued and Outstanding
Number of Shares
173,537,901
98,138,079
-
$ in Millions
$
$
2,037.8
7.3
2,045.1
-
The decrease in shareholders’ equity, net of non-controlling interest, of $2,416.3 million from fiscal 2016
primarily reflects the decrease in retained earnings from the impairments of goodwill and long-lived assets
recorded, along with the Non-Voting Class A share repurchases under the normal course issuer bid of
$148.1 million and dividends paid of $109.5 million. Book value per common share was $13.48 at August 6,
2016 compared to $21.94 at August 1, 2015.
The Company’s share capital on August 6, 2016 compared to the same period in the last fiscal year is shown
in the table below.
(Number of Shares)
Non-Voting Class A shares
Issued and outstanding, beginning of period
Issued during period
Issued and outstanding, end of period
Class B common shares
Issued and outstanding, beginning of period
Issued during period
Total Issued and outstanding, end of period
13 Weeks Ended
August 6, 2016
August 1, 2015
173,537,901
173,537,901
178,862,211
39,294
178,901,505
98,138,079
98,138,079
98,138,079
98,138,079
During the first quarter of fiscal 2017, the Company paid common dividends of $27.8 million (2016 – $27.7
million) to its equity holders. This represents a payment of $0.1025 per share (2016 – $0.1000 per share) for
common share holders.
As at September 15, 2016, the Company had Non-Voting Class A and Class B common shares outstanding
of 173,537,901 and 98,138,079, respectively, as well as 5,198,063 options to acquire in aggregate 5,198,063
Non-Voting Class A shares.
ACCOUNTING STANDARDS AND POLICIES
These unaudited interim condensed consolidated financial statements were prepared using the same
accounting policies as disclosed in the Company’s annual consolidated financial statements for the year
ended May 7, 2016.
Critical Accounting Estimates
Critical accounting estimates used by the Company’s management are discussed in detail in the fiscal 2016
annual MD&A.
18
Internal Control over Financial Reporting
Management of the Company, which includes the Interim President & Chief Executive Officer and Interim
Chief Financial Officer, is responsible for establishing and maintaining Internal Control over Financial
Reporting (“ICFR”), as that term is defined in National Instrument 52-109, “Certification of Disclosure in
Issuers’ Annual and Interim Filings”. The control framework management used to design and assess the
effectiveness of ICFR is “The Internal Control Integrated Framework (2013)” published by the Committee of
Sponsoring Organizations of the Treadway Commission.
There have been no changes in the Company’s ICFR during the period beginning May 8, 2016 and ended
August 6, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s
ICFR.
RELATED PARTY TRANSACTIONS
The related party transactions between the Company and Crombie REIT, including ongoing leases, are
discussed in detail in the fiscal 2016 annual MD&A. There have been no material changes to the specified
contractual obligations between the Company and Crombie REIT during the first quarter of fiscal 2016, other
than as described below.
On June 29, 2016, Sobeys and its wholly-owned subsidiaries closed an agreement with Crombie REIT to sell
and leaseback a portfolio of 19 retail properties and a 50 percent interest in each of its three automated
distribution centres, as well as the sale of two parcels of development land which were previously owned by
Empire. Crombie REIT also invested approximately $58.8 million in renovations or expansions of ten
Sobeys retail locations already in Crombie REIT’s portfolio. In addition to cash, Crombie REIT issued to a
subsidiary of Sobeys $93.4 million in value of Class B LP units and attached special voting units of Crombie
REIT at a price of $14.70 per unit. The subsidiary of Sobeys subsequently sold its Class B LP units to
Empire on a tax deferred basis. Total net cash proceeds to the Company and its wholly-owned subsidiaries
from these transactions with Crombie REIT were $323.8 million, resulting in a pre-tax loss of $0.8 million
which has been recognized in the condensed consolidated statements of earnings. Proceeds from the
transactions were used to repay the senior unsecured notes.
On July 29, 2016, Sobeys, through a wholly-owned subsidiary, sold and leased back an additional property
from Crombie REIT for cash consideration of $26.4 million. This resulted in a pre-tax gain of $2.1 million,
which has been recognized in the condensed consolidated statements of earnings. Sobeys also purchased
one property from Crombie REIT for $9.1 million.
CONTINGENCIES
There are various claims and litigation, with which the Company is involved, arising out of the ordinary
course of business operations. The Company’s management does not consider the exposure to such
litigation to be material, although this cannot be predicted with certainty.
In the ordinary course of business, the Company is subject to ongoing audits by tax authorities. While the
Company believes that its tax filing positions are appropriate and supportable, from time to time certain
matters are reviewed and challenged by the tax authorities.
RISK MANAGEMENT
Risk and uncertainties related to economic and industry factors and the Company’s management of risk are
discussed in detail in the fiscal 2016 annual MD&A.
19
DESIGNATION FOR ELIGIBLE DIVIDENDS
“Eligible dividends” receive favourable treatment for income tax purposes. To be considered an eligible
dividend, a dividend must be designated as such at the time of payment.
Empire has, in accordance with the administrative position of CRA, included the appropriate language on its
website to designate the dividends paid by Empire as eligible dividends unless otherwise designated.
NON-GAAP FINANCIAL MEASURES & FINANCIAL METRICS
There are measures and metrics included in this MD&A that do not have a standardized meaning under
GAAP and therefore may not be comparable to similarly titled measures presented by other publicly traded
companies. Management believes that certain of these measures and metrics, including gross profit and
EBITDA, are important indicators of Empire’s ability to generate liquidity through operating cash flow to fund
future working capital requirements, service outstanding debt and fund future capital expenditures and uses
these metrics for these purposes.
In addition, management adjusts measures and metrics, including EBITDA and net earnings in an effort to
provide investors and analysts with a more comparable year-over-year performance metric than the basic
measure, by excluding certain items. These items could impact the analysis of trends in performance and
affect the comparability of our financial results. By excluding these items, management is not implying they
are non-recurring.
Financial Measures
The intent of Non-GAAP Financial Measures is to provide additional useful information to investors and
analysts. Non-GAAP Financial Measures should not be considered in isolation or used as a substitute for
measures of performance prepared in accordance with GAAP. The Company’s definitions of the non-GAAP
terms included in this MD&A are as follows:
•
Gross profit is calculated as sales less cost of sales.
•
Earnings before interest, taxes, depreciation and amortization (“EBITDA”), is calculated as net
earnings, before finance costs (net of finance income), income tax expense, depreciation and
amortization of intangibles. The exclusion of depreciation and amortization of intangibles partially
eliminates the non-cash impact from operating income.
The following table reconciles GAAP measures to EBITDA:
($ in millions)
Net earnings
Income taxes expense
Finance costs, net
Operating income
Depreciation
Amortization of intangibles
EBITDA
•
$
$
13 Weeks Ended
August 6, 2016
77.6
$
17.8
31.2
126.6
89.1
22.6
238.3
$
August 1, 2015
119.1
43.5
32.9
195.5
96.7
21.9
314.1
Adjusted EBITDA is EBITDA excluding certain items to better analyze trends in performance. These
adjustments result in a truer economic representation on a comparative basis. The Company no
longer adjusts for items that are insignificant to current period results or the comparative period.
Adjusted EBITDA is reconciled to EBITDA in its respective subsection of the “Management’s
Explanation of Consolidated Operating Results”, “Food Retailing” and “Investments and Other
Operations” sections of this MD&A.
20
•
Interest expense is calculated as interest expense on financial liabilities measured at amortized cost
plus losses on cash flow hedges reclassified from other comprehensive income. Management
believes that interest expense represents a true measure of the Company’s debt service expense,
without the offsetting total finance income.
The following table reconciles GAAP measures to interest expense:
($ in millions)
Finance costs, net
Plus: finance income
Less: net pension finance costs
Less: accretion expense on provisions
Interest expense
$
$
13 Weeks Ended
August 6, 2016
August 1, 2015
31.2 $
32.9
1.6
1.1
(2.9)
(3.0)
(3.8)
(3.2)
26.1 $
27.8
Interest expense on financial liabilities measured at amortized cost
Losses on cash flow hedges reclassified reclassified from other comprehensive income
$
26.1 $
-
27.7
0.1
Interest expense
$
26.1 $
27.8
•
Adjusted net earnings are net earnings, net of non-controlling interest, excluding certain items to
better analyze trends in performance and financial results. These adjustments result in a truer
economic representation of the underlying business on a comparative basis. The Company no
longer adjusts for items that are insignificant to current period results or the comparative period.
Adjusted net earnings is reconciled in its respective subsection of the “Management’s Explanation of
Consolidated Operating Results”, “Food Retailing” and “Investments and Other Operations” sections
of this MD&A.
•
Free cash flow is calculated as cash flows from operating activities, plus proceeds on disposal of
property, equipment and investment property, less property, equipment and investment property
purchases. Management uses free cash flow as a measure to assess the amount of cash available
for debt repayment, dividend payments and other investing and financing activities. Free cash flow
is reconciled to GAAP measures as reported on the condensed consolidated statements of cash
flows in the “Free Cash Flow” section of this MD&A.
•
Funded debt is all interest bearing debt, which includes bank loans, bankers’ acceptances and longterm debt. Management believes that funded debt represents the best indicator of the Company’s
total financial obligations on which interest payments are made.
•
Net funded debt is calculated as funded debt less cash and cash equivalents. Management believes
that the deduction of cash and cash equivalents from funded debt represents a more accurate
measure of the Company’s financial obligations after 100 percent of cash and cash equivalents are
applied against the total obligation.
•
Total capital is calculated as funded debt plus shareholders’ equity, net of non-controlling interest.
•
Net total capital is total capital less cash and cash equivalents.
21
The following tables reconcile the Company’s funded debt, net funded debt, net total capital and total capital
to GAAP measures as reported on the balance sheets as at August 6, 2016, May 7, 2016 and August 1,
2015, respectively:
($ in millions)
Long-term debt due within one year
Long-term debt
Funded debt
Less: cash and cash equivalents
Net funded debt
Total shareholders’ equity, net of non-controlling interest
Net total capital
($ in millions)
Funded debt
Total shareholders’ equity, net of non-controlling interest
Total capital
(1)
(1)
August 6, 2016
57.8 $
1,879.1
1,936.9
(280.1)
1,656.8
3,661.8
$
5,318.6 $
May 7, 2016
350.4 $
2,017.0
2,367.4
(264.7)
2,102.7
3,621.0
5,723.7 $
August 6, 2016
1,936.9
3,661.8
$
5,598.7
May 7, 2016
2,367.4
3,621.0
5,988.4
$
$
(1)
$
$
$
$
August 1, 2015
333.2
1,938.8
2,272.0
(384.0)
1,888.0
6,078.1
7,966.1
August 1, 2015
2,272.0
6,078.1
8,350.1
Amounts have been reclassified to correspond to the current period presentation in the condensed consolidated balance sheets.
Financial Metrics
The intent of the following Non-GAAP Financial Metrics is to provide additional useful information to investors
and analysts. Management uses financial metrics for decision making, internal reporting, budgeting and
forecasting. The Company’s definitions of the metrics included in this MD&A are as follows:
•
Same-store sales are sales from stores in the same location in both reporting periods.
•
Gross margin is gross profit divided by sales. Management believes that gross margin is an
important indicator of cost control and can help management, analysts and investors assess the
competitive landscape and promotional environment of the industry in which the Company operates.
An increasing percentage indicates lower cost of sales as a percentage of sales.
•
Interest coverage is calculated as operating income divided by interest expense.
•
Funded debt to total capital ratio is funded debt divided by total capital.
•
Net funded debt to net total capital ratio is net funded debt divided by net total capital. Management
believes that funded debt to total capital ratio and net funded debt to net total capital ratios represent
measures upon which the Company’s changing capital structure can be analyzed over time.
Increasing ratios would indicate that the Company is using an increasing amount of debt in its capital
structure to fund its operations.
•
Funded debt to adjusted EBITDA ratio is funded debt divided by trailing four-quarter adjusted
EBITDA. Management uses this ratio to partially assess the financial condition of the Company. An
increasing ratio would indicate that the Company is utilizing more debt per dollar of adjusted EBITDA
generated.
•
Adjusted EBITDA to interest expense ratio is trailing four-quarter adjusted EBITDA divided by trailing
four-quarter interest expense. Management uses this ratio to partially assess the coverage of its
interest expense on financial obligations. An increasing ratio would indicate that the Company is
generating more adjusted EBITDA per dollar of interest expense, resulting in greater interest
coverage.
•
Book value per common share is shareholders’ equity, net of non-controlling interest, divided by total
common shares outstanding.
22
The following table shows the calculation of Empire’s book value per common share as at August 6, 2016,
May 7, 2016 and August 1, 2015.
($ in millions, except per share information)
Shareholders’ equity, net of non-controlling interest
Shares outstanding (basic)
Book value per common share
August 6, 2016
3,661.8
271.7
$
13.48
$
$
$
May 7, 2016
3,621.0
271.7
13.33
$
$
August 1, 2015
6,078.1
277.0
21.94
Additional financial information relating to Empire, including the Company’s Annual Information Form, can be
found on the Company’s website www.empireco.ca or on the SEDAR website for Canadian regulatory filings
at www.sedar.com.
Approved by Board of Directors: September 15, 2016
Stellarton, Nova Scotia, Canada
23
Empire Company Limited
Condensed Consolidated Balance Sheets
As At
Unaudited (in millions of Canadian dollars)
ASSETS
Current
Cash and cash equivalents
Receivables
Inventories (Note 4)
Prepaid expenses
Loans and other receivables
Income taxes receivable
Assets held for sale (Note 5)
August 6
2016
$
Loans and other receivables
Investments
Investments, at equity (Note 6)
Other assets
Property and equipment
Investment property
Intangibles
Goodwill
Deferred tax assets
LIABILITIES
Current
Accounts payable and accrued liabilities
Income taxes payable
Provisions (Note 7)
Long-term debt due within one year (Note 8)
280.1
453.8
1,290.8
155.1
22.7
19.3
39.7
May 7
2016
$
August 1
2015
264.7
489.4
1,287.3
117.3
26.4
11.9
407.1
$
384.0
489.6
1,331.2
141.7
24.1
14.7
23.7
2,261.5
2,604.1
2,409.0
89.8
25.1
668.5
57.5
3,124.9
82.4
900.0
964.7
668.1
93.5
24.7
574.9
57.3
3,144.7
82.9
911.5
962.2
646.2
95.0
25.2
567.6
45.3
3,540.9
108.6
937.1
3,812.9
90.7
$
8,842.5
$
9,102.0
$
11,632.3
$
2,231.1
21.9
174.5
57.8
$
2,173.1
21.2
174.9
350.4
$
2,365.1
34.2
109.6
333.2
Provisions (Note 7)
Long-term debt (Note 8)
Other long-term liabilities
Employee future benefits
Deferred tax liabilities
SHAREHOLDERS’ EQUITY
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Non-controlling interest
$
2,485.3
2,719.6
2,842.1
123.7
1,879.1
167.9
341.6
117.9
131.7
2,017.0
108.7
336.8
108.1
153.2
1,938.8
105.9
342.1
113.5
5,115.5
5,421.9
5,495.6
2,045.1
25.4
1,580.3
11.0
2,045.1
22.5
1,543.5
9.9
2,109.8
9.3
3,949.4
9.6
3,661.8
3,621.0
6,078.1
65.2
59.1
58.6
3,727.0
3,680.1
6,136.7
8,842.5
$
9,102.0
$
11,632.3
See accompanying notes to the unaudited interim condensed consolidated financial statements.
On Behalf of the Board
(signed) “Rob Dexter”
Director
(signed) “François Vimard”
Director
24
Empire Company Limited
Condensed Consolidated Statements of Earnings
Unaudited (in millions of Canadian dollars, except
per share amounts)
Sales
Other income (Note 9)
Share of earnings from investments, at equity
13 Weeks Ended
August 6
August 1
2016
2015
$
Operating expenses
Cost of sales
Selling and administrative expenses
6,186.6
12.8
17.1
$
6,249.2
15.5
12.4
4,695.8
1,394.1
4,733.2
1,348.4
126.6
195.5
Finance costs, net (Note 10)
31.2
32.9
Earnings before income taxes
95.4
162.6
Income tax expense
17.8
43.5
Operating income
Net earnings
$
77.6
$
119.1
Earnings for the period attributable to:
Non-controlling interest
Owners of the Company
$
12.2
65.4
$
10.3
108.8
$
77.6
$
119.1
$
$
0.24
0.24
$
$
0.39
0.39
Earnings per share (Note 11)
Basic
Diluted
Weighted average number of common shares outstanding,
in millions (Note 11)
Basic
Diluted
271.7
271.7
277.0
277.5
See accompanying notes to the unaudited interim condensed consolidated financial statements.
25
Empire Company Limited
Condensed Consolidated Statements of Comprehensive Income
Unaudited (in millions of Canadian dollars)
Net earnings
13 Weeks Ended
August 6
August 1
2016
2015
$
77.6
$
119.1
Other comprehensive income
Items that will be reclassified subsequently to net earnings
Unrealized (losses) gains on derivatives designated as cash flow
hedges (net of taxes of $0.1 (2015 - $(1.4)))
Reclassification of losses on derivatives designated as cash flow
hedges to earnings (net of taxes of $ nil (2015 - $ nil))
Unrealized gains on available for sale financial assets
(net of taxes of $(0.1) (2015 - $ nil))
Share of other comprehensive income of investments, at equity
(net of taxes of $(0.1) (2015 - $(0.1)))
Exchange differences on translation of foreign operations
(net of taxes of $0.9 (2015 - $ nil))
(0.1)
Items that will not be reclassified subsequently to net earnings
Actuarial (losses) gains on defined benefit plans (net of taxes of
$0.2 (2015 - $(2.5)))
3.7
-
0.1
0.3
0.1
0.2
0.2
0.7
1.1
(0.8)
3.3
(0.8)
8.4
Total comprehensive income
$
77.9
$
130.8
Total comprehensive income for the period attributable to:
Non-controlling interest
Owners of the Company
$
12.2
65.7
$
10.3
120.5
$
77.9
$
130.8
See accompanying notes to the unaudited interim condensed consolidated financial statements.
26
See accompanying notes to the unaudited interim condensed consolidated financial statements.
25.4
$
2,045.1
Total comprehensive income for the period
$
-
Balance at August 6, 2016
2.9
22.5
2.9
-
8.2
1.1
1.1
9.3
-
$
$
$
-
2,045.1
-
2,109.4
0.4
0.4
2,109.8
Net earnings
Other comprehensive income
$
$
$
Capital
Stock
$
$
$
$
11.0
1.1
1.1
-
9.9
-
6.3
3.3
3.3
9.6
Accumulated
Other
Contributed Comprehensive
Surplus
Income
Transactions with owners
Balance at May 7, 2016
Dividends declared on common shares
Equity based compensation, net
Capital transactions with structured entities
Balance at May 2, 2015
Dividends declared on common shares
Equity based compensation, net
Capital transactions with structured entities
Transactions with owners
Net earnings
Other comprehensive income
Total comprehensive income for the period
Balance at August 1, 2015
Empire Company Limited
Condensed Consolidated Statements of Changes
in Shareholders’ Equity
Unaudited (in millions of Canadian dollars)
27
$
$
$
$
1,580.3
64.6
65.4
(0.8)
(27.8)
$
1,543.5 $
(27.8)
-
3,859.9 $
(27.7)
(27.7)
108.8
8.4
117.2
3,949.4 $
Retained
Earnings
3,661.8
65.7
65.4
0.3
(24.9)
$
3,621.0 $
(27.8)
2.9
-
65.2
12.2
12.2
-
(6.1)
$
59.1 $
(6.1)
53.1 $
(4.8)
(4.8)
10.3
10.3
58.6 $
Noncontrolling
Interest
5,983.8 $
(27.7)
1.5
(26.2)
108.8
11.7
120.5
6,078.1 $
Total
Attributable
to Owners of
the Company
3,727.0
77.9
77.6
0.3
(31.0)
3,680.1
(27.8)
2.9
(6.1)
6,036.9
(27.7)
1.5
(4.8)
(31.0)
119.1
11.7
130.8
6,136.7
Total
Equity
Empire Company Limited
Condensed Consolidated Statements of Cash Flows
Unaudited (in millions of Canadian dollars)
Operations
Net earnings
Adjustments for:
Depreciation
Income taxes
Finance costs, net (Note 10)
Amortization of intangibles
Net gain on disposal of assets
Impairment of non-financial assets, net
Amortization of deferred items
Equity in earnings of other entities, net of distributions received
Employee future benefits obligation
Increase in long-term lease obligation
(Decrease) increase in long-term provisions
Equity based compensation
Net change in non-cash working capital
Income taxes paid, net
13 Weeks Ended
August 6
August 1
2016
2015
$
77.6
$
119.1
89.1
17.8
31.2
22.6
(5.5)
9.1
3.2
(1.6)
3.8
1.0
(11.8)
2.9
35.5
(35.6)
96.7
43.5
32.9
21.9
(8.0)
4.4
3.1
12.7
1.8
1.9
6.6
1.1
6.0
(27.2)
239.3
316.5
(126.3)
(3.0)
(142.9)
342.6
(8.7)
7.4
58.8
(3.3)
(13.1)
0.4
43.9
(19.9)
(5.8)
9.7
(45.5)
0.5
257.8
(163.0)
Financing
Issue of long-term debt
Repayment of long-term debt
Interest paid
Dividends paid, common shares
Non-controlling interest
270.8
(708.9)
(9.7)
(27.8)
(6.1)
28.6
(51.8)
(9.7)
(27.7)
(4.8)
Cash flows used in financing activities
(481.7)
(65.4)
Increase in cash and cash equivalents
15.4
88.1
264.7
295.9
Cash flows from operating activities
Investment
Increase in investments
Property, equipment and investment property purchases
Proceeds on disposal of property, equipment and
investment property
Additions to intangibles
Loans and other receivables
Tenant inducements
Other assets and other long-term liabilities
Business acquisitions (Note 13)
Interest received
Cash flows from (used in) investing activities
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
280.1
$
384.0
See accompanying notes to the unaudited interim condensed consolidated financial statements.
28
Empire Company Limited
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
August 6, 2016
(in millions of Canadian dollars, except per share amounts)
1.
Reporting entity
Empire Company Limited (“Empire” or the “Company”) is a Canadian company whose key businesses are food
retailing and related real estate. The Company is incorporated in Canada and the address of its registered office of
business is 115 King Street, Stellarton, Nova Scotia, B0K 1S0, Canada. The unaudited interim condensed
consolidated financial statements for the period ended August 6, 2016 include the accounts of Empire, all subsidiary
companies, including 100 percent owned Sobeys Inc. (“Sobeys”), and certain enterprises considered structured
entities (“SEs”), where control is achieved on a basis other than through ownership of a majority of voting rights.
Investments in which the Company has significant influence and its joint ventures are accounted for using the equity
method. The Company’s business operations are conducted through its two reportable segments: Food retailing and
Investments and other operations, as further described in Note 12, Segmented Information. The Company’s Food
retailing business is affected by seasonality and the timing of holidays. Retail sales are traditionally higher in the
Company’s first quarter. The Company's fiscal year ends on the first Saturday in May. As a result, the fiscal year is
usually 52 weeks but results in a duration of 53 weeks every five to six years.
2.
Basis of preparation
Statement of compliance
The unaudited interim condensed consolidated financial statements have been prepared in accordance with
International Accounting Standard (“IAS”) 34, “Interim Financial Reporting”, as issued by the International Accounting
Standards Board (“IASB”). Accordingly, certain information and note disclosures normally included in annual
consolidated financial statements have been omitted or condensed. The unaudited interim condensed consolidated
financial statements should be read in conjunction with the Company’s annual consolidated financial statements for
the year ended May 7, 2016, which have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the IASB.
The unaudited interim condensed consolidated financial statements were authorized for issue by the Board of
Directors on September 15, 2016.
Basis of measurement
The unaudited interim condensed consolidated financial statements are prepared on the historical cost basis, except
the following assets and liabilities which are stated at their fair value: financial instruments (including derivatives) at
fair value through profit and loss, financial instruments classified as available for sale and cash settled stock-based
compensation plans. Assets held for sale are stated at the lower of their carrying amount and fair value less costs to
sell.
Use of estimates and judgments
The preparation of the unaudited interim condensed consolidated financial statements requires management to make
judgments, estimates and assumptions that affect the amounts reported in the condensed consolidated financial
statements and accompanying notes. The use of estimates, judgments and assumptions are interrelated. Estimates
and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in
the period in which the estimates are revised and in any future periods affected.
Estimates, judgments and assumptions that could have a significant impact on the amounts recognized in the
unaudited interim condensed consolidated financial statements are summarized in the Company’s annual
consolidated financial statements for the year ended May 7, 2016 and remain unchanged for the period ended
August 6, 2016.
3.
Summary of significant accounting policies
These unaudited interim condensed consolidated financial statements were prepared using the same accounting
policies as disclosed in the Company’s annual consolidated financial statements for the year ended May 7, 2016.
Accounting policy adopted during fiscal 2017
Presentation of financial statements
In December 2014, the IASB amended IAS 1, “Presentation of Financial Statements”, providing clarifying guidance
on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure
of accounting policies. The amendments became effective during the first quarter of fiscal 2017 and had no material
impact on the Company’s unaudited interim condensed consolidated financial statements.
29
Empire Company Limited
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
August 6, 2016
(in millions of Canadian dollars, except per share amounts)
4.
Inventories
The cost of inventories recognized as an expense during the 13 weeks ended August 6, 2016 was $4,695.8 (August
1, 2015 - $4,733.2). The Company has recorded $3.0 (August 1, 2015 - $1.9) as an expense for the write-down of
inventories below cost to net realizable value for inventories on hand as at August 6, 2016. There were no reversals
of inventories written down previously (August 1, 2015 - $ nil).
5.
Assets held for sale
On June 29, 2016, Sobeys closed an agreement with Crombie Real Estate Investment Trust (“Crombie REIT”), an
entity in which the Company has a 41.5 percent ownership, to sell and leaseback a portfolio of 19 retail properties
and a 50 percent interest in each of its three automated distribution centres, as well as the sale of two parcels of
development land which were previously owned by Empire. Assets related to this transaction of $358.0 were
included in assets held for sale as at May 7, 2016 (Note 16).
Sobeys sold two properties and leased back one from third parties during the first quarter of fiscal 2017. The
properties were classified as assets held for sale as at May 7, 2016. Total proceeds from these transactions were
$31.7, resulting in a pre-tax gain of $1.2 which has been recognized in the condensed consolidated statements of
earnings.
As at August 6, 2016, assets held for sale relates to land and buildings expected to be sold in the next twelve months.
6.
Investments, at equity
Investment in associates
Crombie REIT
Canadian real estate partnerships
U.S. real estate partnerships
Investment in joint ventures
Canadian Digital Cinema Partnership (“CDCP”)
Total
August 6
2016
$
$
460.2
151.9
47.0
9.4
668.5
August 1
2015
$
$
362.1
141.8
54.3
9.4
567.6
The fair values of the investments based on a stock exchange are as follows:
Crombie REIT
August 6
2016
$
937.5
August 1
2015
$
687.8
The Canadian and U.S. real estate partnerships and CDCP are not publicly listed on a stock exchange and hence
published price quotes are not available.
30
Empire Company Limited
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
August 6, 2016
(in millions of Canadian dollars, except per share amounts)
7.
Provisions
August 6, 2016
Opening balance
Provisions made
Provisions used
Provisions reversed
Change due to discounting
Closing balance
Current
Non-current
Total
8.
Lease
Sales Price
Contracts
Legal
Environmental Restructuring Adjustment
$
24.8 $
7.7 $
51.4 $
150.5 $
72.2 $
1.8
1.6
3.7
(2.7)
(1.3)
(0.2)
(14.3)
(0.3)
(0.5)
0.3
0.4
1.9
1.2
$
23.9 $
7.5 $
51.6 $
141.8 $
73.4 $
$
$
11.6 $
12.3
23.9 $
7.5 $
7.5 $
2.1 $
49.5
51.6 $
79.9 $
61.9
141.8 $
73.4 $
73.4 $
Total
306.6
7.1
(18.5)
(0.8)
3.8
298.2
174.5
123.7
298.2
Long-term debt
During the first quarter of fiscal 2017, $96.0 was drawn and $23.0 repaid on the Company’s $250.0 credit facility,
resulting in a $163.0 balance outstanding as at August 6, 2016. Interest payable on the credit facility fluctuates with
changes in the bankers’ acceptance rate or Canadian prime rate or the London Interbank Offered Rate (“LIBOR”) and
the credit facility matures on November 4, 2020.
During the first quarter of fiscal 2017, $155.0 was drawn and $355.0 repaid on Sobeys’ $650.0 revolving term credit
facility (“RT Facility”), resulting in a $ nil balance outstanding as at August 6, 2016. Interest payable on the RT
Facility fluctuates with changes in the bankers’ acceptance rate or Canadian prime rate or LIBOR and the RT Facility
matures on November 4, 2020.
Sobeys completed a private placement of $300.0 aggregate principal amount of floating rate senior unsecured notes
in fiscal 2015. On July 14, 2016 the senior unsecured notes matured and were repaid.
9.
Other income
Net gain on disposal of assets
Lease revenue from owned property
Total
13 Weeks Ended
August 6
August 1
2016
2015
$
5.5
$
8.0
7.3
7.5
$
12.8
$
15.5
31
Empire Company Limited
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
August 6, 2016
(in millions of Canadian dollars, except per share amounts)
10. Finance costs, net
Finance income
Interest income from cash and cash equivalents
Fair value gains on forward contracts
Investment income
Total finance income
13 Weeks Ended
August 6
August 1
2016
2015
$
Finance costs
Interest expense on financial liabilities measured at amortized cost
Losses on cash flow hedges reclassified from other comprehensive income
Net pension finance costs
Accretion expense on provisions
Total finance costs
Finance costs, net
0.4
0.9
0.3
1.6
$
26.1
2.9
3.8
32.8
$
31.2
0.5
0.3
0.3
1.1
27.7
0.1
3.0
3.2
34.0
$
32.9
11. Earnings per share
Weighted average number of shares used in basic earnings per share
Shares deemed to be issued for no consideration in respect of
stock-based payments
Weighted average number of shares used in diluted earnings per share
13 Weeks Ended
August 6
August 1
2016
2015
271,675,980
277,013,526
6,216
271,682,196
440,901
277,454,427
12. Segmented information
The Board of Directors has determined that its reportable segments are Food retailing and Investments and other
operations, which is based on the Company’s management and internal reporting structure. The Food retailing
segment is comprised of five operating segments: Sobeys West, Sobeys Ontario, Sobeys Quebec, Sobeys Atlantic,
and Sobeys Pharmacy Group. These operating segments have been aggregated into one reportable segment, “Food
retailing”, as they all share similar economic characteristics such as: product offerings, customer base and distribution
methods. The Investments and other operations segment principally consists of investments, at equity in Crombie
REIT, real estate partnerships, and various other corporate operations.
Segment results and assets include items directly attributable to a segment as well as those that can be allocated on
a reasonable basis.
Each of these operating segments is managed separately as each of these segments requires different technologies
and other resources as well as marketing approaches. All inter-segment transfers are carried out at arm's length
prices. The measurement policies the Company uses for segment reporting under IFRS 8, “Operating Segments”,
are the same as those used in its consolidated financial statements.
No asymmetrical allocations have been applied between segments.
32
Empire Company Limited
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
August 6, 2016
(in millions of Canadian dollars, except per share amounts)
All sales are generated by the Food retailing segment. Operating income generated by each of the Company's
business segments is summarized as follows:
Segmented operating income
Food retailing
Investments and other operations
Crombie REIT
Real estate partnerships
Other operations, net of corporate expenses
Total
13 Weeks Ended
August 6
August 1
2016
2015
$
111.8
$
11.2
5.7
(2.1)
14.8
126.6
$
184.6
$
7.4
4.9
(1.4)
10.9
195.5
Segment operating income can be reconciled to the Company’s earnings before income taxes as follows:
Total operating income
Finance costs, net
Total
Total assets by segment
Food retailing
Investments and other operations
Total
13 Weeks Ended
August 6
August 1
2016
2015
$
126.6
$
195.5
31.2
32.9
$
95.4
$
162.6
August 6
2016
$
$
8,080.3
762.2
8,842.5
August 1
2015
$
$
10,956.9
675.4
11,632.3
13. Business acquisitions
The Company acquires franchise and non-franchise stores, retail gas locations and prescription files. The results of
these acquisitions have been included in the consolidated financial results of the Company since their acquisition
dates and were accounted for through the use of the acquisition method. Goodwill recorded on the acquisitions of
franchise and non-franchise stores and retail gas locations relate to the acquired work force and customer base of the
existing store location along with the synergies expected from combining the efforts of the acquired stores with
existing stores.
The following table represents the amounts of identifiable assets from resulting acquisitions for the 13 weeks ended
August 6, 2016:
Stores and retail gas locations
Inventories
Property and equipment
Intangibles
Goodwill
Prescription files
Intangibles
Cash consideration
$
$
2.9
5.0
2.0
2.8
12.7
0.4
13.1
From the date of acquisition, the businesses acquired contributed sales of $7.8 and net earnings of $0.1 for the 13
weeks ended August 6, 2016.
33
Empire Company Limited
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
August 6, 2016
(in millions of Canadian dollars, except per share amounts)
14. Financial instruments
The carrying amount of the Company’s financial instruments approximates their fair values with the following
exception:
Long-term debt
Total carrying amount
Total fair value
August 6, 2016
$
1,936.9
$
1,995.4
$
$
May 7, 2016
2,367.4
2,489.4
August 1, 2015
$
2,272.0
$
2,453.1
15. Stock-based compensation
Performance share unit plan
The Company awarded certain employees a target number of performance share units (“PSUs”) that track the
Company’s Non-Voting Class A share prices over a three-year period. The number of PSUs that vest under an
award, for the most part, is dependent on time and the achievement of specific performance measures. Upon vesting
each employee is entitled to receive the Company’s Non-Voting Class A shares equal to the number of their vested
PSUs. The weighted average fair value of $20.28 per PSU issued in the current period was determined using the
Black Scholes model with the following weighted average assumptions:
Share price
Expected life
Risk-free interest rate
Expected volatility
Dividend yield
$20.68
0.95 years
0.65%
19.09%
1.98%
At August 6, 2016, there were 983,767 (August 1, 2015 - 1,043,193) PSUs outstanding. The compensation expense
relating to the 13 weeks ended August 6, 2016 was $1.9 (August 1, 2015 - $4.1) with the amortization of the cost over
the vesting period of three years. The total increase in contributed surplus during the 13 weeks ended August 6,
2016 was $1.9 (August 1, 2015 - $4.1) for the units issued during the period.
Stock option plan
During fiscal 2017, the Company granted an additional 1,542,741 options under the stock option plan for employees
of the Company whereby options are granted to purchase Non-Voting Class A shares. On September 28, 2015, the
Company completed a three-for-one share split. The number of options, weighted average fair value of options, and
share price have been restated to reflect the three-for-one share split. The weighted average fair value of $2.95 per
option issued in the current period was determined using the Black Scholes model with the following weighted
average assumptions:
Share price
Expected life
Risk-free interest rate
Expected volatility
Dividend yield
$20.68
7.76 years
0.65%
19.09%
1.98%
The compensation cost relating to the 13 weeks ended August 6, 2016 was $1.0 (August 1, 2015 - $1.1) with
amortization of the cost over the vesting period of four years. The total increase in contributed surplus in relation to
the stock option compensation cost was $1.0 (August 1, 2015 - $1.1) for options issued during the period.
Deferred stock unit plan
In the first quarter of fiscal 2017, the Company implemented a new employee deferred stock unit (“DSU”) plan. The
number of DSUs that vest is dependent on the time and the achievement of specific performance measures. At
August 6, 2016 there were 610,397 (August 1, 2015 - nil) DSUs outstanding related to this plan and the total carrying
amount of the liability was $1.0 (August 1, 2015 - $ nil). The compensation expense relating to the 13 weeks ended
August 6, 2016 was $1.0 (August 1, 2015 - $ nil) with the amortization of the cost over the vesting period of three
years.
34
Empire Company Limited
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
August 6, 2016
(in millions of Canadian dollars, except per share amounts)
Members of the Board of Directors may elect to receive all or any portion of their fees in DSUs in lieu of cash. The
number of DSUs received is determined by the market value of the Company’s Non-Voting Class A shares on each
directors’ or employees’ fee payment date. Additional DSUs are received as dividend equivalents. At August 6, 2016
there were 447,558 (August 1, 2015 - 457,702) DSUs outstanding and the total carrying amount of the liability was
$9.4 (August 1, 2015 - $11.6). During the 13 weeks ended August 6, 2016, the compensation expense was $0.4
(August 1, 2015 - $0.6).
Under both plans, vested DSUs cannot be redeemed until the holder is no longer a director of the Company or the
employee has retired. The redemption value of a DSU equals the market value of an Empire Non-Voting Class A
share at the time of redemption. On an ongoing basis, the Company values the DSU obligation at the current market
value of a corresponding number of Non-Voting Class A shares and records any increase or decrease in the DSU
obligation as selling and administrative expenses on the consolidated statement of earnings.
16. Related party transactions
The Company has related party transactions with Crombie REIT. The Company holds a 41.5 percent ownership
interest in Crombie REIT and accounts for its investment using the equity method.
On June 29, 2016, Sobeys and its wholly-owned subsidiaries closed an agreement with Crombie REIT to sell and
leaseback a portfolio of 19 retail properties and a 50 percent interest in each of its three automated distribution
centres, as well as the sale of two parcels of development land which were previously owned by Empire. Crombie
REIT also invested approximately $58.8 in renovations or expansions of ten Sobeys retail locations already in
Crombie REIT’s portfolio. In addition to cash, Crombie REIT issued to a subsidiary of Sobeys $93.4 in value of Class
B LP units and attached special voting units of Crombie REIT at a price of $14.70 per unit. The subsidiary of Sobeys
subsequently sold its Class B LP units to Empire on a tax deferred basis. Total net cash proceeds to the Company
and its wholly-owned subsidiaries from these transactions with Crombie REIT were $323.8, resulting in a pre-tax loss
of $0.8 which has been recognized in the condensed consolidated statements of earnings. Proceeds from the
transactions were used to repay the senior unsecured notes.
On July 29, 2016, Sobeys, through a wholly-owned subsidiary, sold and leased back an additional property from
Crombie REIT for cash consideration of $26.4. This resulted in a pre-tax gain of $2.1, which has been recognized in
the condensed consolidated statements of earnings. Sobeys also purchased one property from Crombie REIT for
$9.1.
17. Employee future benefits
During the first quarter of fiscal 2017, the net employee future benefits expense reported in net earnings was $16.0
(August 1, 2015 - $13.7). Actuarial (losses) gains before taxes on defined benefit pension plans for the 13 weeks
ended August 6, 2016 were $(1.0) (August 1, 2015 - $10.9). These (losses) gains have been recognized in other
comprehensive income.
35
SHAREHOLDER AND INVESTOR INFORMATION
Empire Company Limited
115 King Street
Stellarton, Nova Scotia
B0K 1S0
Telephone: (902) 755-4440
Fax: (902) 755-6477
www.empireco.ca
Dividend Record and Payment Dates for Fiscal 2017
Investor Relations and Inquiries
Shareholders, analysts and investors should direct their
financial inquiries or requests to:
* Subject to approval by the Board of Directors
E-mail: [email protected]
As at September 15, 2016
Communication regarding investor records including
changes of address or ownership, lost certificates or tax
forms, should be directed to the Company’s transfer agent
and registrar, CST Trust Company.
Non-Voting Class A shares
Class B common shares, voting
Affiliated Company Web Addresses
www.sobeyscorporate.com
Transfer Agent
CST Trust Company
Investor Correspondence
P.O. Box 700, Station B
Montreal, Québec
H3B 3K3
Telephone: 1 800 387-0825
E-mail: [email protected]
Multiple Mailings
If you have more than one account, you may receive a
separate mailing for each. If this occurs, please contact CST
Trust Company at 1-800-387-0825 to eliminate the multiple
mailings.
Record Date
Payment Date
July 15, 2016
October 14, 2016
January 13, 2017*
April 13, 2017*
July 29, 2016
October 31, 2016
January 31, 2017*
April 28, 2017*
Outstanding Shares
173,537,901
98,138,079
Stock Exchange Listing
The Toronto Stock Exchange
Stock Symbol
Non-Voting Class A shares – EMP.A
Average Daily Trading Volume (TSX: EMP.A)
728,603
Bankers
The Bank of Nova Scotia
Bank of Montreal
Bank of Tokyo Mitsubishi UFJ (Canada)
Canadian Imperial Bank of Commerce
National Bank of Canada
Rabobank Nederland
Royal Bank of Canada
The Toronto-Dominion Bank
Caisse Centrale Desjardins
Solicitors
Stewart McKelvey
Halifax, Nova Scotia
Auditors
PricewaterhouseCoopers, LLP
Halifax, Nova Scotia
36
www.empireco.ca