D.

CapabilitytoDeliverResults
1.LeadershipandKeyIndividuals0/3
InLoblaws2014AnnualReport,theInnovation&ExecutionReportthatcomes
beforetheManagementDiscussionandAnalysisistheonlysectionthatintroducesthesenior
leadersatLoblawsandexplainswhatisexpectedoftheboardofdirectors.Thereportlightly
touchesontheindependenceofdirectorsanddescribeswhatboardleadership,
responsibilitiesanddutiesare.Wearegivenalistofthenamesontheboardofdirectorswho
activelydemonstrateLoblawscommitmenttotheprinciplesoftransparency,accountability
andsoundcorporategovernance.Unfortunately,theonlynewchangementionedtheboard
leadershipsectionistheappointmentofanewindependentdirector,ThomasONeilltoserve
asleaddirectorandotherchangessuchasCOOandCAOswitchingtitlesandtheformer
ChiefMerchandisingOfficerbecomingthePresidentofShoppersDrugMartarenot
included.Mostoftheinformationaboutchangesintheexecutiverolesandnewappointments
in2014arepresentinthenewsreleasesbeforeandafterthequarterlyreports,butLoblaws
MD&Ashouldhaveelaboratedonthestructuralchangetheywentthroughespeciallydueto
theacquisitionofShoppersDrugMartandtheimplicationsofthesechangesforthefirm
cultureandoperations.Furthermorethereisnodisclosureaboutthecompensationofthe
managementanddirectors,thereforenotgivingtheinvestorachancetoseeifthe
compensationisalignedappropriatewiththeachievementofresultsandifitisinthe
appropriateamount.
Loblawsshouldhavedisclosedtheirmanagementsknowledgeofthefood,retailand
pharmaceuticalindustryaswellastheirexpertiseintherelatedfields.Investorshavea
naturalrighttobeexposedtowhatLoblawskeymanagementiscapableofachievinginthe
longtermaswellasshortterm,thereforethereportshouldhaveprovidedawholesometrack

recordofpreviousyearstodisplayastrongandcompetentleadershipteam.Asidefromthe
managementandtheboard,Loblawsdoesnotprovideinformationabouttheirworkforceat
thestorelevel.Investorswantassurancethattheworkersatalllevelsarerepresentativeofthe
companyvaluesandcompetentintheirownfields.Asummaryofthesizeoftheemployee
hub,trainingandthesetoftheskillstheLoblawscommunitycarrywouldbeappreciated.
Loblawsreceivesascoreof0onthissection,becauseofthelackofinformationon
progressionofthemanagementandtheboard,compensationplansanddemonstrationof
seniorleaderscapabilitytodeliverresults.
2.FinancingStrategyandLiquidity2/3
Loblawsmakesits2015financingstrategyclearbystatingthatthecashandcash
equivalents,shortterminvestment,futureoperatingcashflowsandthecredittheycan
withdrawaregoingtoenabletheCompanytofinanceitscapitalinvestmentsprogramand
funditsongoingbusinessrequirements,includingworkingcapital,pensionplanfunding
requirements,financialobligationsanddebtreductioncommitments.
Loblawsprovidesatableonthecashflowsfromoperating,investingandfinancing
activitieswhereonecanclearlyseethe$5,684millionusedininvesting(202%changefrom
thepreviousyear)intheacquisitionofShoppersDrugMart.Investingactivitiesalsoincluded
fixedassetspurchases,storedevelopments,expansionsandlandandinfrastructure
investments.Thereaderisprovidedwithabreakdownofthecapitalinvestmentsandstore
activitythatshows129%growthinthenumberofstores23.8%increaseincapital
investments.ThefactthattheCompanydisclosesthenetissuancesoflongtermdebtand
proceedsfromtheissuanceofcommonsharesusedforfinancingactivitiesearnsthempoints
towardsreliability.OntheotherhandeventhoughLoblawsstatesthattheCompanyexpects
toinvestapproximately$1,200millionincapitalinvestmentsin2015andwherethefunds

willbededicated(IT,supplychain,retail,infrastructure),itdoesnotdisclosehowitplansto
generatethesefundsandfromwhichstreams.
Loblawsstatestheirgoalintermsofdebtandequityastargetingleverageratios
consistentwiththoseofinvestmentgraderatings.The0.1increaseinadjusteddebtto
adjustedEBITDAratiofrom2013isexplainedby$3500millionunsecuredtermloanfacility
usedtopartiallyfundthecashportionoftheShoppersDrugMartAcquisitionandthedebt
waspartiallyoffsetbythedebtreductionprogresssincetheacquisition.Thereaderisableto
seethecreditratingsofBBBreceivedovertheyearsandthestabletrendisrelevanttothe
investorsdecision.Loblawsalsoprovidesatableofthecontractualobligationsasof
January3,2015brokendowntolongtermdebt,operatingleases,purchasesofinvestment
projectsandpurchaseobligations,butdoesnotgiveaclearpictureofthelongtermfinancing
ofthesecontractualobligations.Theinvestorhasarighttoknowiftheseobligationscanbe
metandifsohow,becausedespitethefactthatlastyearsbreakdownisrelevanttheinvestor
cannotprojectthefuturebasedon2014sdata.
Loblawshasalsoincludedanoffbalancesheettransactionssection,whichgives
themcreditforcompleteness.Theuserscanfindasummaryofguaranteesinadditiontothe
lettersofcredit,whichincludeobligationstoindemnifythirdpartiesinconnectionwith
leases,businessdispositionsandothertransactioninthenormalcourseofbusiness.The
implicationsofthesearrangementsforthefutureshouldbeclarified.Lastly,Loblawsis
missinganimportantcomponentthatisfuturetargets,whichwouldenabletheinvestorto
viewthecompanythroughtheeyesofthemanagementasincludedinthebaselineprinciples.
Inorderforthereporttobeforwardlooking,usefulandrepresentativeofthestrategy
perspectiveLoblawsmusthaveincorporatedtheirfutureprojections,thereforetheirscore

willbe2/3forthissectionconsideringthefactthattheywereclear,detailorientedontheir
financialdata.

3.ProductiveCapacity2/3
ProductivecapacityisthemaximumpossibleoutputcreatedfromtheCompanys
capitalresources,thereforetheuserofthisMD&Aexpectsanoutlineofthecapitalasset
expendituresanddetailedinformationonchangesincapitalassets.Underthefinancial
reviewsection,LoblawsprovidesatablethatreconcilesChoicePropertiesadjustedfunds
fromoperationstoGAAPmeasuresforperiodsendedJanuary3,2015andDecember2014
whichhelpstheuserevaluatetheCompanyseconomicperformance.Loblawsexplainsthat
fundsfromoperationsof74$millioninthefourthquarterof2014hadanincreaseby$9
millionduetoincreaseinnetpropertyincomeanddecreaseinsustainingpropertyandleasing
capitalexpenditures.Theonlyforwardlookingstatementoncapitalexpendituresistheir
targetof$1200for2015ofwhich22%willbededicatedtoITandsupplychainprojects,
57%toretailoperations,14%toChoicePropertiesdevelopmentprojectsand7%to
infrastructureprojects.Loblawsalsoincludesalistofthechangesincapitalassetsresulting
fromtheirtransactionswithChoicePropertiessuchasthesaleofawarehouseandaparcelof
land.
TheacquisitionofShoppersDrugMartcosttheCompany$12,273millionand
approximately$6,600millionwasfinancedfromcash,thereforetheuserhasarighttoknow
howthecashportionwasfinanceandLoblawsisverythoroughinexplainingtheirsources.
Theusercanalsofindanassessmentofnettangibleassets,goodwillandintangibleassets
acquiredthroughShoppersDrugMart,whichcontributestotheclarityandmaterialityofthe

reports.Loblawsalsodisclosesinformationontheclassificationandfairvalueofits
financialinstruments.Theymentiontheirfairvaluegainof$76millionontheswapsin2013
andthesettlementofUSD$300millionUSPPcrosscurrencyswapsinconjunctionwiththe
settlementoftheunderlyingUSD$300milionUSPPdebt.Thisinformationbecomesuseful
whentheygivethetablethatshowsthefairvalueloss(gain)relatedtoswapsandtranslation
(loss)gainrelatedtounderlyingexposures.

ThefactthattheLoblawssettleditsnotional$150millionininterestrateswapsand
recognizeda$5millionfairvaluegaininoperatingincomerelatedtotheseswapsshowsthat
theCompanyisabletoutilizeinterestrateswapstohedgeagainstthevariabilityofinterest
ratesrelatedtothetheirfinancingarrangements.
Onanothernoteproductivecapacitymustincludediscussionofspeedto
production/marketandLoblawsaccesstoservicesandworkforce.Especiallyafterthe
acquisitionofShoppersDrugMart,theinvestorhasarighttoknowwhetherLoblawsis
capableofbringingthenewestpharmaceuticalproductsandmedicationstotheirmarketona
timelybasis.InvestorswanttoknowifLoblawshasthenecessaryservicesandskilled
workforcetoachieveitsstrategicgoalsandwhattheCompanyisdoingtomaintaintheir

servicesandworkforce.ThereforethelackofdiscussiononthesetopicslosesLoblawsone
pointinthissectionandtheirscoreforProductiveCapacitycomesdownto2/3.

To further improve the Capability to Deliver Results section of the MD&A, Loblaws
should discuss leadership and their key people play a role in the overall strategy of the firm.
Loblaws is able to provide detailed historical data that is very relevant but not so reliable,
therefore they could have explained the implication of their contractual obligations and longterm debts for the future as well as giving a timeline for the capital expenditures. Forwardlooking orientation and letting the user to see the Company through the eyes of the
management are as important as staying true to financial statements and Loblaws would
have received a higher score if they had incorporated these principles into their MD&A.

Questions
Wherehasthecompanyobtaineditscash?
Hasituseditscash?
Whatcashwillbeneededtoimplementbusinessstrategies?
Whatisthebudgetforcapitalexpenditures?
Whatshareholderdistributionsareexpected?
Willthecompanybeabletomeetitscurrentandfuturecashandworkingcapitalneedsandif
how?
Isthereanyriskofdefaultondebtinstruments?
Whatisthecompanyscurrentandplanneddebt/equitymix?

Howwilldebtbemanagede.g.willitberepaidandifsohoworwillitberolledover
Arethereanyrelatedartytransactionsorpayments?Whydotheseexistandisthere
flexibilityregardingthesepaymentsintheeventofacashcrunch?
Applicationof6principles:
1Enablesreaderstoviewcompanythroughtheeyesofmanagement
2Integrationwithfinancialstatements
3Completenessandmateriality
4Forwardlookingorientation
5Strategicperspective
6Usefulness

Slide1KeyLeadership/People

Slide2LiquidityandCapitalResources

Slide3Assets(Tangibleandintangible,acquisitionsanddisposals)