Shoppers Drug Mart Corporation announces fourth quarter and full year results
- CONTINUED GROWTH IN SALES AND NET EARNINGS
- ANNUAL DIVIDEND INCREASED BY 5 PERCENT TO
Fourth Quarter Results (12 Weeks Compared to 13 Weeks in Fiscal 2008)
The Company recorded sales of
On a comparable 12 week basis, prescription sales increased 8.0% in the fourth quarter to
On a comparable 12 week basis, front store sales increased 6.5% to
Fourth quarter net earnings increased to
Commenting on the results, Jürgen Schreiber, President and CEO stated: "We are pleased with our performance in the fourth quarter and are proud of what we accomplished in 2009. Together with our Associate-owners and their teams, we continued to execute on our strategic priorities and initiatives and managed to grow the business in what was a challenging economic environment. On behalf of our shareholders and the Board of Directors, I would like to personally thank our employees, Associate-owners and their teams for their efforts and contributions to our success in 2009."
In reference to the dividend increase,
Fiscal 2009 Results (52 Weeks Compared to 53 Weeks in Fiscal 2008)
Sales in 2009 were
Prescription sales were
Front store sales were
Net earnings were
Store Network Development
During the fourth quarter of 2009, 10 drug stores were opened or acquired, three of which were relocations. The Company also added two Murale luxury beauty stores to its network during the quarter. For the fiscal year ended
Fiscal 2010 Outlook (52 Weeks Ending
The Company expects total sales to increase by between 6.0% and 7.0% in 2010. This expectation is underpinned by anticipated same-store sales growth of between 4.0% and 5.0% in pharmacy and 2.75% to 4.25% in the front of the store. In pharmacy, it is expected that prescription sales growth will continue to be driven by strong growth in prescription counts, offset somewhat by an anticipated decrease in average value, as generic prescription utilization rates are expected to rise at an increasing rate. As generic prescription utilization rates increase, the Company intends to pursue alternative sourcing and procurement models for generic drug products, including contracting for the fabrication of generic molecules to be offered on a private label basis. The Company believes that these alternative sourcing and procurement arrangements will improve service levels, through enhanced supply chain management, and promote further increases in generic prescription utilization rates. The Company specifically cautions that its prescription sales growth estimates are based on what it believes to be a reasonable set of assumptions with respect to matters such as the cost of prescription drugs, drug pricing and pharmacy reimbursement regulation and programs, among others, however potential changes to the Ontario drug system may differ materially from the Company's assumptions. In the front of the store, it is the Company's expectation that sustained investments in pricing and promotional activities will be required throughout 2010 in order to drive the anticipated rate of sales growth.
In fiscal 2010, the Company plans to allocate approximately
2009 Annual Report
The Company's audited consolidated financial statements for the year ended
Other Information
The Company will hold an analyst call at
About Shoppers Drug Mart Corporation
Shoppers Drug Mart Corporation is one of the most recognized and trusted names in Canadian retailing. The Company is the licensor of full-service retail drug stores operating under the name Shoppers Drug Mart (Pharmaprix in Québec). With more than 1,170 Shoppers Drug Mart and Pharmaprix stores operating in prime locations in each province and two territories, the Company is one of the most convenient retailers in
For more information, visit www.shoppersdrugmart.ca.
Forward-looking Information and Statements
This news release contains forward-looking information and statements which constitute "forward-looking information" under Canadian securities law and which may be material, regarding, among other things, the Company's beliefs, plans, objectives, estimates, intentions and expectations. Forward-looking information and statements are typically identified by words such as "anticipate", "believe", "expect", "estimate", "forecast", "goal", "intend", "plan", "will", "may", "should", "could" and similar expressions. Specific forward-looking information in this news release includes, but is not limited to, statements with respect to the Company's operating and financial results, its capital expenditure plans and dividend policy, the ability to execute on its future operating, financing and investing strategies and the impact on the Company's financial results of the potential changes to the Ontario drug system.
The forward-looking information and statements contained herein are based on certain factors and assumptions, certain of which appear proximate to the applicable forward-looking information and statements contained herein. Inherent in the forward-looking information and statements are known and unknown risks, uncertainties and other factors beyond the Company's ability to control or predict, which give rise to the possibility that the Company's predictions, forecasts, expectations or conclusions will not prove to be accurate, that its assumptions may not be correct and that the Company's plans, objectives and statements will not be achieved. Actual results or developments may differ materially from those contemplated by the forward-looking information and statements.
The material risk factors that could cause actual results to differ materially from the forward-looking information and statements contained herein include, without limitation: the risk of adverse changes to laws and regulations relating to prescription drugs and their sale, including pharmacy reimbursement programs and the availability of manufacturer allowances, or changes to such laws and regulations that increase compliance costs; the risk of adverse changes in economic and financial conditions in
This is not an exhaustive list of the factors that may affect any of the Company's forward-looking information and statements. Investors and others should carefully consider these and other risk factors and not place undue reliance on the forward-looking information and statements. Further information regarding these and other risk factors is included in the Company's public filings with provincial securities regulatory authorities including, without limitation, the sections entitled "Risks and Risk Management" and "Risks Associated with Financial Instruments" in the Company's Management's Discussion and Analysis for the 53 week period ended
Additional information about the Company, including the Annual Information Form, can be found at www.sedar.com.
SHOPPERS DRUG MART CORPORATION
Consolidated Statements of Earnings
(unaudited)
(in thousands of dollars except per share amounts)
-------------------------------------------------------------------------
12 Weeks 13 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
------------------------------------------------------
January 2, January 3, January 2, January 3,
2010 2009 2010 2009
-------------------------------------------------------------------------
Sales $ 2,488,544 $ 2,496,799 $ 9,985,600 $ 9,422,911
Operating expenses
Cost of goods
sold and other
operating
expenses (Notes
2 and 3) 2,174,809 2,190,321 8,841,170 8,350,367
Amortization 58,343 50,477 248,794 205,371
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Operating income 255,392 256,001 895,636 867,173
Interest expense
(Note 5) 11,768 15,940 58,215 63,952
-------------------------------------------------------------------------
Earnings before
income taxes 243,624 240,061 837,421 803,221
Income taxes
(Note 2)
Current 67,092 64,809 249,776 254,159
Future 5,472 8,716 2,737 (5,083)
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72,564 73,525 252,513 249,076
-------------------------------------------------------------------------
Net earnings
(Note 2) $ 171,060 $ 166,536 $ 584,908 $ 554,145
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per
common share
(Note 2):
Basic $ 0.79 $ 0.77 $ 2.69 $ 2.55
Diluted $ 0.79 $ 0.77 $ 2.69 $ 2.55
Weighted average
common shares
outstanding
- Basic
(millions) 217.4 217.1 217.4 217.0
- Diluted
(millions) 217.5 217.4 217.5 217.5
Actual common
shares out-
standing
(millions) 217.4 217.3 217.4 217.3
SHOPPERS DRUG MART CORPORATION
Consolidated Statements of Retained Earnings
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
52 Weeks 53 Weeks
Ended Ended
---------------------------
January 2, January 3,
2010 2009
-------------------------------------------------------------------------
Retained earnings, beginning of period
as reported $ 1,938,023 $ 1,559,551
Impact of the adoption of new accounting
standard, Handbook Section 3064, Goodwill
and Intangible Assets (Note 2) (38,884) (27,817)
-------------------------------------------------------------------------
Retained earnings, beginning of period as
restated 1,899,139 1,531,734
Net earnings 584,908 554,145
Dividends (186,956) (186,679)
Premium on share capital purchased for
cancellation - (61)
-------------------------------------------------------------------------
Retained earnings, end of period $ 2,297,091 $ 1,899,139
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-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income and Accumulated
Other Comprehensive Loss
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
12 Weeks 13 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
------------------------------------------------------
January 2, January 3, January 2, January 3,
2010 2009 2010 2009
-------------------------------------------------------------------------
Net earnings $ 171,060 $ 166,536 $ 584,908 $ 554,145
Other comprehensive
income (loss), net
of tax Change in
unrealized loss/
gain on interest
rate derivatives
(net of tax of
$204 and $1,035
(2008 - $634 and
$1,605)) 437 (1,176) 1,967 (3,148)
Change in unrealized
loss on equity
forward derivatives
(net of tax of $44
and $22 (2008 - $93
and $167)) 119 (186) 56 (337)
Amount of previously
unrealized loss/gain
recognized in
earnings during
the period (net of
tax of $30 and $117
(2008 - $143 and
$145)) 45 (200) 294 (204)
-------------------------------------------------------------------------
Other comprehensive
income (loss) 601 (1,562) 2,317 (3,689)
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Comprehensive
income $ 171,661 $ 164,974 $ 587,225 $ 550,456
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other
comprehensive
(loss) income,
beginning of
period $ (3,442) $ 247
Other comprehensive
income (loss) 2,317 (3,689)
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Accumulated other
comprehensive loss,
end of period $ (1,125) $ (3,442)
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-------------------------------------------------------------------------
SHOPPERS DRUG MART CORPORATION
Consolidated Balance Sheets
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
January 2, January 3,
2010 2009
-------------------------------------------------------------------------
Assets
Current
Cash $ 44,391 $ 36,567
Accounts receivable 471,029 448,476
Inventory (Note 3) 1,852,441 1,743,253
Income taxes recoverable - 8,835
Future income taxes (Note 2) 86,161 84,770
Prepaid expenses and deposits (Note 2) 75,573 59,327
-------------------------------------------------------------------------
2,529,595 2,381,228
Property and equipment (Note 2) 1,566,024 1,331,363
Goodwill (Note 2) 2,481,353 2,427,239
Intangible assets (Note 2) 258,766 212,279
Other assets (Note 2) 16,716 12,114
-------------------------------------------------------------------------
Total assets $ 6,852,454 $ 6,364,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current
Bank indebtedness (Note 6) $ 270,332 $ 240,844
Commercial paper 260,386 339,943
Short-term debt (Note 8) - 197,845
Accounts payable and accrued liabilities 964,736 1,018,505
Income taxes payable 17,046 -
Dividends payable 46,748 46,709
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1,559,248 1,843,846
Long-term debt (Note 8) 946,098 647,250
Other long-term liabilities 347,951 303,117
Future income taxes 42,858 30,803
-------------------------------------------------------------------------
2,896,155 2,825,016
Associate interest 130,189 118,678
Shareholders' equity
Share capital 1,519,870 1,514,207
Contributed surplus 10,274 10,625
Accumulated other comprehensive loss (1,125) (3,442)
Retained earnings (Note 2) 2,297,091 1,899,139
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2,295,966 1,895,697
-------------------------------------------------------------------------
3,826,110 3,420,529
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 6,852,454 $ 6,364,223
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-------------------------------------------------------------------------
SHOPPERS DRUG MART CORPORATION
Consolidated Statements of Cash Flows
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
12 Weeks 13 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
------------------------------------------------------
January 2, January 3, January 2, January 3,
2010 2009 2010 2009
-------------------------------------------------------------------------
Operating
activities
Net earnings
(Note 2) $ 171,060 $ 166,536 $ 584,908 $ 554,145
Items not affect-
ing cash
Amortization
(Note 2) 61,951 51,903 250,202 204,533
Future income
taxes (Note 2) 5,472 8,716 2,737 (5,083)
(Gain) loss on
disposal of
property and
equipment (7,365) 253 (3,456) 3,436
Stock-based
compensation 112 186 694 1,498
-------------------------------------------------------------------------
231,230 227,594 835,085 758,529
Net change in non-
cash working
capital balances
(Note 2) (59,495) (80,118) (177,724) (328,806)
Increase in
other long-term
liabilities 143 9,658 35,757 45,609
-------------------------------------------------------------------------
Cash flows from
operating activities 171,878 157,134 693,118 475,332
-------------------------------------------------------------------------
Investing activities
Purchase of prop-
erty and equip-
ment (Note 2) (154,598) (182,444) (461,438) (476,315)
Proceeds from dis-
position of prop-
erty and equipment 5,107 6,096 30,106 24,690
Business acqui-
sitions (Note 4) (5,265) (46,196) (97,100) (243,901)
Deposits (1,187) 28,804 3,527 88,522
Purchase and dev-
elopment of in-
tangible assets
(Note 2) (14,832) (23,670) (33,989) (48,650)
Other assets
(Note 2) 322 318 (4,310) (5,255)
-------------------------------------------------------------------------
Cash flows used
in investing
activities (170,453) (217,092) (563,204) (660,909)
-------------------------------------------------------------------------
Financing activities
Bank indebtedness,
net (Note 6) 7,430 (18,550) 29,488 15,692
Commercial paper,
net 7,000 (4,000) (80,000) (203,350)
Issuance of short-
term debt - 200,000 - 200,000
Repayment of short-
term debt (Note 8) - - (200,000) -
Issuance of Series
2 notes - - - 450,000
Issuance of Series
3 notes (Note 8) - - 250,000 -
Issuance of Series
4 notes (Note 8) - - 250,000 -
Revolving term debt,
net 1,298 200,000 (198,702) 200,000
Repayment of Series
1 notes - (300,000) - (300,000)
Financing costs
incurred - (2,550) (2,088) (6,050)
Associate interest 14,995 16,064 11,511 5,559
Proceeds from shares
issued for stock
options exercised 497 2,388 4,481 7,144
Repayment of share
purchase loans - 69 137 288
Repurchase of
share capital - (36) - (71)
Dividends paid (46,742) (46,677) (186,917) (174,656)
-------------------------------------------------------------------------
Cash flows (used in)
from financing
activities (15,522) 46,708 (122,090) 194,556
-------------------------------------------------------------------------
(Decrease) increase
in cash (14,097) (13,250) 7,824 8,979
Cash, beginning of
period 58,488 49,817 36,567 27,588
-------------------------------------------------------------------------
Cash, end of
period $ 44,391 $ 36,567 $ 44,391 $ 36,567
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash
flow information
Interest paid $ 11,457 $ 26,224 $ 44,818 $ 63,893
Income taxes paid $ 28,580 $ 55,720 $ 223,296 $ 327,184
SHOPPERS DRUG MART CORPORATION
Notes to the Consolidated Financial Statements
(unaudited)
(in thousands of dollars except per share amounts)
-------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") and follow the same accounting policies and methods
of application with those used in the preparation of the audited annual
consolidated financial statements for the 53 week period ended January 3,
2009, except as described in Note 2, Changes in Accounting Policies.
These financial statements do not contain all disclosures required by
Canadian GAAP for annual financial statements and, accordingly, should be
read in conjunction with the most recently prepared annual consolidated
financial statements and the accompanying notes included in the Company's
2008 Annual Report.
The consolidated financial statements of the Company include the accounts
of Shoppers Drug Mart Corporation, its subsidiaries and entities
considered to be variable interest entities, as defined by the Canadian
Institute of Chartered Accountants ("CICA") Accounting Guideline 15,
"Consolidation of Variable Interest Entities" ("AcG-15"). Under AcG-15,
the Company has consolidated the Associate-owned stores.
The individual Associate-owned stores that comprise the Company's store
network are variable interest entities and the Company is the primary
beneficiary. As such, the Associate-owned stores are subject to
consolidation by the Company. The Associate-owned stores remain separate
legal entities and consolidation of the Associate-owned stores has no
impact on the underlying risks facing the Company.
2. CHANGES IN ACCOUNTING POLICIES
Adoption of New Accounting Standards
Financial Statement Concepts
In February 2008, the CICA issued amendments to Section 1000, "Financial
Statement Concepts" ("Section 1000"), to clarify the criteria for
recognition of an asset and the timing of expense recognition,
specifically, deleting the guidance permitting the deferral of costs. The
new requirements were effective for interim and annual financial
statements relating to fiscal years beginning on or after October 1,
2008. The Company adopted the amendments to Section 1000 at the beginning
of its current fiscal year in conjunction with Section 3064, "Goodwill
and Intangible Assets".
Goodwill and Intangible Assets
In February 2008, the CICA issued a new accounting standard concerning
Goodwill and Intangible Assets ("Section 3064"), which was based on the
International Accounting Standards Board's ("IASB") International
Accounting Standard 38, "Intangible Assets". The new section replaced the
existing guidance on goodwill and other intangible assets and research
and development costs. The objective of Section 3064 was to eliminate the
practice of deferring costs that do not meet the definition and
recognition criteria of assets. Section 3064 was effective for interim
and annual financial statements for fiscal years beginning on or after
October 1, 2008. The Company adopted Section 3064 retrospectively at the
beginning of its current fiscal year, with restatement of prior periods.
Intangible assets recognized prior to the Company's current fiscal year
that no longer met the new recognition or measurement criteria and the
definition of an asset were removed from the consolidated balance sheets
in accordance with CICA Handbook Section 1506, "Accounting Changes". The
balance of any such deferred costs as at the end of the Company's 2007
and 2008 fiscal years was reflected as a charge to opening retained
earnings.
Goodwill is recorded as the excess amount of the purchase price of an
acquired business over the fair value of the underlying net assets,
including intangible assets, at the date of acquisition. Goodwill is not
amortized but is tested for impairment at least on an annual basis. In
the event of an impairment, the excess of the carrying amount over the
fair value of goodwill would be charged to earnings.
Net Earnings Impact
The following table summarizes the impact of the implementation of
Section 3064 on the Company's consolidated statements of earnings for the
13 and 53 weeks ended January 3, 2009, respectively:
13 weeks 53 weeks
ended ended
January 3, January 3,
2009 2009
-------------------------------------------------------------------------
Adjustment - pre-tax $ (8,932) $ (15,329)
Income taxes 2,417 4,262
-------------------------------------------------------------------------
Net earnings impact $ (6,515) $ (11,067)
Net earnings per common share (diluted) impact $ (0.03) $ (0.05)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings, as reported $ 173,051 $ 565,212
Net earnings per common share (diluted),
as reported $ 0.80 $ 2.60
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings, as restated $ 166,536 $ 554,145
Net earnings per common share (diluted),
as restated $ 0.77 $ 2.55
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The adjustment relates to previously deferred costs, primarily store
opening costs, that no longer qualify for recognition as an asset.
Opening Retained Earnings Adjustment
The implementation of Section 3064 has resulted in a reduction to the
Company's 2009 and 2008 fiscal years' opening retained earnings of
$38,884 and $27,817, respectively.
Balance Sheet Adjustments
The following paragraphs summarize the impact of the implementation of
Section 3064 on the Company's consolidated balance sheets as at
January 3, 2009.
The impact on balances as at January 3, 2009 was primarily an increase in
net future income tax assets of $17,676, a decrease in prepaid expenses
and deposits of $4,727, a decrease in property and equipment of $110,772,
a decrease in deferred costs of $47,213, an increase in intangible assets
of $114,466, and a decrease in other assets of $8,328. The increase in
intangible assets and decrease in property and equipment primarily
reflects the reclassification of certain computer software costs,
previously included in property and equipment.
Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
In January 2009, the Emerging Issues Committee ("EIC") issued a new
abstract concerning the measurement of financial assets and financial
liabilities, EIC-173 "Credit Risk and the Fair Value of Financial Assets
and Financial Liabilities" ("EIC-173"). There had been diversity in
practice as to whether an entity's own credit risk and the credit risk of
the counterparty are taken into account in determining the fair value of
financial instruments. The EIC reached a consensus that these risks
should be taken into account in the measurement of financial assets and
financial liabilities. EIC-173 was effective for all financial assets and
financial liabilities measured at fair value in interim and annual
financial statements issued for periods ending on or after the date of
issuance of EIC-173 with retrospective application without restatement of
prior periods. The Company adopted EIC-173 at the beginning of its
current fiscal year. The implementation did not have a significant impact
on the Company's results of operations, financial position or
disclosures.
Financial Instruments - Recognition and Measurement
In August 2009, the CICA made amendments to Section 3855, "Financial
Instruments - Recognition and Measurement" ("Section 3855"), adding and
amending paragraphs regarding financial asset measurement categories and
impairment as well as providing specific transitional guidance. The
Company adopted the amendments to Section 3855 in its 2009 third and
fourth quarter interim financial statements. The implementation did not
have a significant impact on the Company's results of operations,
financial position or disclosures.
Future Accounting Standards
Financial Instruments - Recognition and Measurement
In April 2009, the CICA amended Section 3855, "Financial Instruments -
Recognition and Measurement" ("Section 3855"), adding and amending
paragraphs regarding the application of the effective interest method to
previously impaired financial assets and embedded prepayment options. The
amendments are effective for interim and annual financial statements
relating to fiscal years beginning on or after January 1, 2011, with
early adoption permitted. The Company will adopt the amendments to
Section 3855 in its 2011 fiscal year. The amendments are not expected to
have a significant impact on the Company's accounting for its financial
instruments.
Financial Instruments - Disclosures
In June 2009, the CICA amended Section 3862, "Financial Instruments -
Disclosures" ("Section 3862"), to adopt the amendments recently issued by
the IASB to International Financial Reporting Standard 7, "Financial
Instruments: Disclosures" ("IFRS 7"), in March 2009. These amendments are
applicable to publicly accountable enterprises and those private
enterprises, co-operative business enterprises, rate-regulated
enterprises and not-for-profit organizations that choose to adopt Section
3862. The amendments were made to enhance disclosures about fair value
measurements, including the relative reliability of the inputs used in
those measurements, and about the liquidity risk of financial
instruments.
The amendments are effective for annual financial statements for fiscal
years ending after September 30, 2009, with early adoption permitted. To
provide relief for preparers, and consistent with IFRS 7, the CICA
decided that an entity need not provide comparative information for the
disclosures required by the amendments in the first year of application.
The Company will adopt these amendments in its 2009 annual consolidated
financial statements. The impact of the amendments to the fair value
measurement and liquidity risk disclosure requirements of the Company is
not expected to be significant.
Multiple Deliverable Revenue Arrangements
In December 2009, the EIC issued a new abstract concerning multiple
deliverable revenue arrangements, EIC 175 "Multiple Deliverable Revenue
Arrangements" ("EIC 175"), which amended EIC 142 "Revenue Arrangements
with Multiple Deliverables" ("EIC 142"). The objective of issuing this
Abstract is to harmonize EIC 142 with amendments made to U.S. generally
accepted accounting principles. These amendments require a vendor to
allocate arrangement consideration at the inception of the arrangement to
all deliverables using the relative selling price method, thereby
eliminating the use of the residual value method. The amendments also
change the level of evidence of the standalone selling price required to
separate deliverables when more objective evidence of the selling price
is not available. EIC 175 should be adopted prospectively to revenue
arrangements entered into or materially modified in the first annual
fiscal period beginning on or after January 1, 2011, with early adoption
permitted. EIC 142 continues to be effective until that date.
3. INVENTORY
During the 12 and 52 weeks ended January 2, 2010, the Company recognized
cost of inventory of $1,521,818 and $6,238,239 (2008 - $1,558,194 and
$5,944,249), respectively, as an expense. This expense is included in
cost of goods sold and other operating expenses in the consolidated
statements of earnings for the period.
During the 12 and 52 weeks ended January 2, 2010 and the 13 and 53 weeks
ended January 3, 2009, there were no significant write-downs of inventory
as a result of net realizable values being lower than cost and no
inventory write-downs recognized in previous years were reversed.
4. ACQUISITIONS
HealthAccess and Information Healthcare Marketing Corp.
On July 2, 2008, the Company acquired the specialty drug assets of the
HealthAccess business of Calea Ltd. and 100% of the shares of Calea
Ltd.'s wholly owned subsidiary, Information Healthcare Marketing Corp.,
which operates a related call centre business. The acquired business is
based in Mississauga, Ontario, operates as Shoppers Drug Mart Specialty
Health Network Inc. and provides comprehensive patient support services
for specialty pharmaceutical needs. The assets acquired are composed
primarily of goodwill, intangible assets and leasehold improvements at
two locations. The operations of the acquired assets and business have
been included in the Company's results of operations from the date of
acquisition.
The total cost of the acquisition in cash, including costs incurred in
connection with the acquisition, was $88,742. The cost of the acquisition
was allocated to the assets acquired on the basis of their fair values as
follows:
Net working capital $ 3,841
Property and equipment 162
Goodwill 70,739
Customer relationships(1) 14,000
-------------------------------------------------------------------------
Purchase price $ 88,742
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The carrying value of the Company's customer relationships is
included in intangible assets in the consolidated balance sheets.
Other Business Acquisitions
During the 12 and 53 weeks ended January 2, 2010, the Company acquired
the assets or shares of a number of pharmacies, each of which is
individually immaterial to the Company's total acquisitions. The total
cost of acquisitions of $5,265 and $97,100 (2008 - $45,617 and $154,824),
respectively, including costs incurred in connection with the
acquisitions, is allocated primarily to goodwill and intangible assets
based on their fair values. Certain purchase price allocations are
preliminary and may change. The operations of the acquired pharmacies
have been included in the Company's results of operations from the date
of acquisition.
5. INTEREST EXPENSE
The components of the Company's interest expense are as follows:
12 Weeks 13 Weeks 52 Weeks 53 Weeks
Ended Ended Ended Ended
------------------------------------------------------
January 2, January 3, January 2, January 3,
2010 2009 2010 2009
-------------------------------------------------------------------------
Interest on bank
indebtedness $ 1,150 $ 2,266 $ 5,378 $ 10,584
Interest on
commercial paper 1,161 3,809 6,231 23,689
Interest on short-
term debt - 2,292 504 2,292
Interest on long-
term debt 9,457 7,573 46,102 27,387
-------------------------------------------------------------------------
$ 11,768 $ 15,940 $ 58,215 $ 63,952
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. BANK INDEBTEDNESS
Bank indebtedness is comprised of lines of credit borrowings by both the
Company and the Associate-owned stores. The Associate-owned stores borrow
under agreements guaranteed by the Company. The Company has entered into
agreements with banks to guarantee a total of $520,000 (2008 - $425,000)
of lines of credit. As at January 2, 2010, the Associate-owned stores
have utilized $254,332 (2008 - $263,830) of the available lines of
credit.
7. EMPLOYEE FUTURE BENEFITS
The net benefit expense included in the results for the 12 and 52 weeks
ended January 2, 2010, for benefits provided under pension plans was
$1,082 and $4,688 (2008 - $1,355 and $5,874), respectively, and for
benefits provided under other benefit plans was $1,012 and $1,089 (2008 -
$632 and $709), respectively.
8. DEBT REFINANCING
On January 20, 2009, the Company issued $250,000 of three-year
medium-term notes maturing January 20, 2012, which bear interest at a
fixed rate of 4.80% (the "Series 3 notes") and $250,000 of five-year
medium-term notes maturing January 20, 2014, which bear interest at a
fixed rate of 5.19% (the "Series 4 notes"). The Series 3 notes and the
Series 4 notes were issued pursuant to the Company's shelf prospectus, as
supplemented by pricing supplements dated January 14, 2009.
The net proceeds from the issuance of the Series 3 notes and the Series 4
notes were used to refinance existing indebtedness, including repayment
of all amounts outstanding under the Company's senior unsecured 364-day
bank credit facility ("short-term debt"). The Company's senior unsecured
364-day bank credit facility was terminated on January 20, 2009.
On June 22, 2009, the Company filed with the securities regulators in
each of the provinces of Canada an amendment to its short form base shelf
prospectus dated May 22, 2008 (the "Amended Prospectus") to increase the
aggregate principal amount of medium-term notes to be issued from
$1,000,000 to $1,500,000. Subject to the requirements of applicable law,
the Company may issue medium-term notes under the Amended Prospectus for
up to 25 months from May 22, 2008.
As at January 2, 2010, the Company can issue an additional $500,000 of
medium-term notes under its Amended Prospectus.
9. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES RELATED TO
FINANCIAL INSTRUMENTS
In the normal course of business, the Company is exposed to financial
risks that have the potential to negatively impact its financial
performance. The Company may use derivative financial instruments to
manage certain of these risks. The Company does not use derivative
financial instruments for trading or speculative purposes. These risks
are discussed in more detail below:
Interest Rate Risk
Interest rate risk is the risk that fair value or future cash flows
associated with the Company's financial assets or liabilities will
fluctuate due to changes in market interest rates.
The Company, including its Associate-owned store network, is exposed to
fluctuations in interest rates by virtue of its borrowings under its bank
credit facilities, commercial paper program and financing programs
available to its Associates. Increases or decreases in interest rates
will negatively or positively impact the financial performance of the
Company.
The Company uses interest rate derivatives to manage this exposure and
monitors market conditions and the impact of interest rate fluctuations
on its fixed and floating rate debt instruments on an ongoing basis. The
Company has interest rate derivative agreements converting an aggregate
notional principal amount of $100,000 of floating rate commercial paper
debt into fixed rate debt.
As at January 2, 2010, the Company had $466,630 (2008 - $904,830) of
unhedged floating rate debt. During the 12 and 52 weeks ended January 2,
2010, the Company's average outstanding unhedged floating rate debt was
$584,631 and $600,562 (2008 - $822,983 and $671,423), respectively. Had
interest rates been higher or lower by 50 basis points during the 12 and
52 weeks ended January 2, 2010, net earnings would have decreased or
increased, respectively, by approximately $464 and $2,066 (2008 - $708
and $2,365), respectively, as a result of the Company's exposure to
interest rate fluctuations on its unhedged floating rate debt.
Furthermore, the Company may be exposed to losses should any counterparty
to its derivative agreements fail to fulfill its obligations. The Company
has sought to minimize counterparty risk by transacting with
counterparties that are large financial institutions. As at January 2,
2010 and January 3, 2009, there are no net exposures, as the interest
rate derivative agreements are in a liability position.
Credit Risk
Credit risk is the risk that the Company's counterparties will fail to
meet their financial obligations to the Company causing a financial loss.
Accounts receivable arise primarily in respect of prescription sales
billed to governments and third-party drug plans and, as a result,
collection risk is low. There is no concentration of balances with
debtors in the remaining accounts receivable. The Company does not
consider its exposure to credit risk to be material.
Liquidity Risk
Liquidity risk is the risk that the Company will be unable to meet its
obligations relating to its financial liabilities.
The Company prepares cash flow budgets and forecasts to ensure that it
has sufficient funds through operations, access to bank facilities and
access to debt and capital markets to meet its financial obligations,
capital investment program and fund new investment opportunities or other
unanticipated requirements as they arise. The Company manages its
liquidity risk as it relates to financial liabilities by monitoring its
cash flow from operating activities to meet its short-term financial
liability obligations and planning for the repayment of its long-term
financial liability obligations through cash flow from operating
activities and/or the issuance of new debt.
The contractual maturities of the Company's financial liabilities as at
January 2, 2010, are as follows:
Payments
due Payments
between due
Payments 90 days between 1
due in and less year and Payments
the next than a less than due after
90 days year 2 years 2 years Total
-------------------------------------------------------------------------
Bank indebted-
ness $ 270,332 $ - $ - $ - $ 270,332
Commercial
paper 261,000 - - - 261,000
Accounts
payable 885,497 47,133 - - 932,630
Dividends
payable 46,748 - - - 46,748
Medium-term
notes - - - 950,000 950,000
Revolving
term facility - - 1,298 - 1,298
Other long-
term lia-
bilities - - 9,691 13,749 23,440
-------------------------------------------------------------------------
Total $ 1,463,577 $ 47,133 $ 10,989 $ 963,749 $ 2,485,448
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There is no difference between the carrying value of bank indebtedness
and the amount the Company is required to pay. The accounts payable and
other long-term liabilities amounts exclude certain liabilities that are
not considered financial liabilities.
10. FINANCIAL INSTRUMENTS
Interest Rate Derivatives
During the 12 and 52 weeks ended January 2, 2010, the Company had
interest rate derivative agreements converting an aggregate notional
principal amount of $100,000 of floating rate commercial paper debt into
fixed rate debt. The fixed rates payable by the Company under the
derivative agreements range from 4.11% to 4.18%. An agreement covering
$50,000 of the notional principal amount matured in December 2009. The
Company recorded a net loss of $1,811 over the life of this agreement as
interest expense on commercial paper (2008 - net gain of $332). The
remaining agreement for $50,000 with a fixed rate payable of 4.18%
matures in December 2010, with reset terms of one month.
Based on market values of the interest rate derivative agreements at
January 2, 2010, the Company recognized a liability of $1,645 (2008 -
$4,647), all of which (2008 - $1,566) was presented in accounts payable
and accrued liabilities (2008 - $3,081 was also presented in other
long-term liabilities). During the 12 and 52 weeks ended January 2, 2010,
the Company assessed that the interest rate derivatives were an effective
hedge for the floating interest rates on the associated commercial paper
debt. During the 13 and 53 weeks ended January 3, 2009, the Company
assessed that the interest rate derivatives were an effective hedge for
the floating interest rates on the associated commercial paper debt.
Market values were determined based on information received from the
Company's counterparties to these agreements.
During the 12 and 52 weeks ended January 2, 2010, amounts previously
recorded in accumulated other comprehensive loss of $nil were recognized
as income in earnings. During the 13 weeks ended January 3, 2009, amounts
previously recorded in accumulated other comprehensive loss of $186 were
recognized as a loss in earnings. During the 53 weeks ended January 3,
2009, amounts previously recorded in accumulated other comprehensive
income of $186 were recognized as a loss in earnings.
Equity Forward Derivatives
The Company uses cash-settled equity forward agreements to limit its
exposure to future price changes in the Company's share price for share
unit awards under the Company's long-term incentive plan ("LTIP"). The
income or expense arising from the use of these instruments is included
in cost of goods sold and other operating expenses for the year.
Based on market values of the equity forward agreements at January 2,
2010, the Company recognized a net liability of $910 (2008 - $2,093), of
which $286 (2008 - $nil) is presented in other assets, $1,196 (2008 -
$1,006) is presented in accounts payable and accrued liabilities and $nil
(2008 - $1,087) is presented in other long-term liabilities. During the
12 and 52 weeks ended January 2, 2010, the Company assessed that the
percentage of the equity forward derivatives related to unearned units
under the LTIP was an effective hedge for the common share price of the
unearned units. During the 13 and 53 weeks ended January 3, 2009, the
Company assessed that the percentage of the equity forward derivatives
related to unearned units under the LTIP was an effective hedge for the
common share price of the unearned units. Market values were determined
based on information received from the Company's counterparties to these
agreements.
During the 12 and 52 weeks ended January 2, 2010, amounts previously
recorded in accumulated other comprehensive loss of $45 and $294,
respectively, were recognized as income in earnings. During the 13 weeks
ended January 3, 2009, amounts previously recorded in accumulated other
comprehensive loss of $14 were recognized as a loss in earnings. During
the 53 weeks ended January 3, 2009, amounts previously recorded in
accumulated other comprehensive income of $18 were recognized as a loss
in earnings.
Fair Value of Financial Instruments
The fair value of a financial instrument is the estimated amount that the
Company would receive or pay to settle the financial assets and financial
liabilities as at the reporting date.
The fair values of cash, accounts receivable, deposits, bank
indebtedness, commercial paper, short-term debt, accounts payable and
dividends payable, fair value approximates their carrying values due to
their short-term maturities. The fair values of long-term receivables,
revolving term facility and other long-term liabilities approximate their
carrying values due to the current market rates associated with these
instruments; and the fair value of the medium-term notes at January 2,
2010 is approximately $1,007,522 compared to a carrying value of $950,000
(excluding transaction costs) due to decreases in market interest rates
for similar instruments (2008: the fair value of long-term debt
approximated its carrying value).
The interest rate and equity forward derivatives are recognized at fair
value, which is determined based on current market rates and on
information received from the Company's counterparties to these
agreements.
11. CAPITAL MANAGEMENT
The Company's primary objectives when managing capital are to profitably
grow its business while maintaining adequate financing flexibility to
fund attractive new investment opportunities and other unanticipated
requirements or opportunities that may arise. Profitable growth is
defined as earnings growth commensurate with the additional capital being
invested in the business in order that the Company earns an attractive
rate of return on that capital. The primary investments undertaken by the
Company to drive profitable growth include additions to the selling
square footage of its store network via the construction of new,
relocated and expanded stores, including related leasehold improvements
and fixtures, the purchase of sites for future store construction, as
well as through the acquisition of independent drug stores or their
prescription files. In addition, the Company makes capital investments in
information technology and its distribution capabilities to support an
expanding store network. The Company also provides working capital to its
Associates via loans and/or loan guarantees. The Company largely relies
on its cash flow from operations to fund its capital investment program
and dividend distributions to its shareholders. This cash flow is
supplemented, when necessary, through the borrowing of additional debt.
No changes were made to these objectives during the period.
The Company considers its total capitalization to be bank indebtedness,
commercial paper, short-term debt, long-term debt (including the current
portion thereof) and shareholders' equity, net of cash. The Company also
gives consideration to its obligations under operating leases when
assessing its total capitalization. The Company manages its capital
structure with a view to maintaining investment grade credit ratings from
two credit rating agencies. In order to maintain its desired capital
structure, the Company may adjust the level of dividends paid to
shareholders, issue additional equity, repurchase shares for cancellation
or issue or repay indebtedness. The Company has certain debt covenants
and is in compliance with those covenants as at January 2, 2010 and
January 3, 2009.
The Company monitors its capital structure principally through measuring
its net debt to shareholders' equity and net debt to total capitalization
ratios, and ensures its ability to service its debt and meet other fixed
obligations by tracking its interest and other fixed charges coverage
ratios.
The following table provides a summary of certain information with
respect to the Company's capital structure and financial position as at
the dates indicated.
January 2, January 3,
2010 2009
-------------------------------------------------------------------------
Cash $ (44,391) $ (36,567)
Bank indebtedness 270,332 240,844
Commercial paper 260,386 339,943
Short-term debt - 197,845
Long-term debt 946,098 647,250
---------------------------
Net debt 1,432,425 1,389,315
Shareholders' equity 3,826,110 3,420,529
---------------------------
Total capitalization $ 5,258,535 $ 4,809,844
---------------------------
---------------------------
Net debt:Shareholders' equity 0.37:1 0.41:1
Net debt:Total capitalization 0.27:1 0.29:1
EBITDA:Cash interest expense(1)(2) 19.59:1 17.05:1
(1) For purposes of calculating the ratios, EBITDA is comprised of EBITDA
for the 52 week and 53 week periods ended January 2, 2010 and
January 3, 2009, respectively. EBITDA (earnings before interest,
taxes, depreciation and amortization) is a non-GAAP financial
measure. Non-GAAP financial measures do not have standardized
meanings prescribed by GAAP and therefore may not be comparable to
similar measures presented by other reporting issuers.
(2) Cash interest expense is also a non-GAAP measure and is comprised of
interest expense for the 52 week and 53 week periods ended January 2,
2010 and January 3, 2009, respectively, and excludes the amortization
of deferred financing costs and includes capitalized interest.
As measured by the ratios set out above, the Company maintained its
desired capital structure and financial position during the period.
The following table provides a summary of the Company's credit ratings at
January 2, 2010:
Dominion
Standard Bond Rating
& Poor's Service
--------------------------
Corporate credit rating BBB+ -
Senior unsecured debt BBB+ A (low)
Commercial paper - R-1 (low)
There were no changes to the Company's credit ratings during the 12 and
52 weeks ended January 2, 2010.
Earnings Coverage Exhibit to the Consolidated Financial Statements
52 Weeks Ended January 2, 2010
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Earnings coverage on long-term debt obligations 19.16 times
-------------------------------------------------------------------------
The earnings coverage ratio on long-term debt (including any current
portion) is equal to earnings (before interest and income taxes) divided
by interest expense on long-term debt (including any current portion).
Interest expense excludes any amounts in respect of amortization and
includes amounts capitalized to property and equipment that were included
in and excluded from, respectively, interest expense as shown in the
consolidated statement of earnings of the Company for the period.
%SEDAR: 00016987EF
For further information: Media Contact: Tammy Smitham, Director, Communications & Corporate Affairs, (416) 490-2892, or [email protected], (416) 493-1220, ext. 5500; Investor Relations: (416) 493-1220, ext. 5678, [email protected]
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