Sobeys announces fourth quarter and fiscal 2006 results29 June 2006
Sobeys Inc. (TSX:SBY) today announced quarterly basic net earnings of $0.77 per share ($49.7 million) for its fourth quarter ended May 6, 2006; an increase of 4.1% compared to the $0.74 per share ($48.1 million) reported in the fourth quarter last year which was favourably impacted by $0.05 per share due to an additional week of operations. Included in earnings for its fourth quarter of fiscal 2006 were $5.3 million of costs related to the Ontario business process and system initiative outlined in the Company's fourth quarter 2005 news release. Excluding these costs, basic net earnings per share total $0.82.
Sobeys Inc. also reported annual basic net earnings of $2.93 per share ($189.4 million) for its fiscal year ended May 6, 2006; an increase of 1.7% compared to $2.88 per share ($186.7 million) in fiscal 2005. Included in earnings per share for fiscal 2006 were $0.19 of costs related to the Ontario business process and system initiative. Fiscal 2005 was favourably impacted by $0.05 per share due to an additional week of operations versus the current year.
Fiscal 2006 fourth quarter and annual results include the consolidation of "Variable Interest Entities" (VIEs) as required by AcG-15. For fiscal 2005, only the fourth quarter results include the consolidation of VIEs. The consolidation of VIEs resulted in a $0.3 million increase in net earnings for the 52-week period ended May 6, 2006, compared to a $0.6 million decrease in net earnings for the prior year.
Sales for the fourth quarter were $3.16 billion compared to $3.29 billion the previous year, a 4.0% decrease. As previously mentioned, the fourth quarter of fiscal 2006 contained 13 weeks of operations compared to 14 weeks in the fourth quarter of fiscal 2005. Adjusting for the extra week of sales last year, sales grew 3.6% over the fourth quarter last year.
Sales for the full year were $12.85 billion, a 5.4% increase from $12.19 billion in fiscal 2005. Fiscal 2006 included $587 million of sales that resulted from the consolidation of VIEs. Fiscal 2005 sales included $137 million of sales from the consolidation of VIEs and benefited from a 53rd week of operations resulting in additional sales of $241 million. Adjusting for VIEs and for the additional week of sales last year, sales grew 3.9% over fiscal 2005. All regions experienced total and same store sales growth in the fourth quarter and for the full fiscal year. Same-store sales increased 3.9% in the fourth quarter and 4.0% for the full fiscal year.
Fourth Quarter Financial Highlights:
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- Sales of $3.16 billion, an increase of $109 million or 3.6% on a
comparable 13 week basis.
- Same-store sales increased 3.9%.
- Basic net earnings per share of $0.77 ($49.7 million) compared to
$0.74 per share ($48.1 million) last year, a 4.1% increase.
- EBITDA margin of 4.32% versus 4.04% last year.
- Net profit margin of 1.57% compared to 1.46% last year.
Fiscal 2006 Financial Highlights:
- Sales of $12.85 billion, up $663.9 million, or 5.4%.
- Same-store sales increased 4.0%.
- Basic net earnings per share of $2.93 ($189.4 million) compared to
$2.88 ($186.7 million) last year, a 1.7% increase.
- EBITDA margin of 4.11% versus 4.09% last year.
- Net profit margin of 1.47% compared to 1.53% last year.
- Funded debt to total capital ratio improved to 21.1% from 21.4%.
- EBITDA to interest expense of 15.1 times versus 13.2 times.
- Return on equity of 10.8% compared to 11.5%.
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"Our continued strong sales and earnings growth in the fourth quarter and full fiscal year 2006 are right in line with our expectations." said Bill McEwan, President and Chief Executive Officer. "From improved programs to more consistent execution, including our significant supply chain and systems initiatives, our people have innovated, stayed focused on our plan and delivered results."
Dividend Declaration
The Board of Directors declared a quarterly dividend of $0.14 per share on Sobeys Inc. common shares which will be payable on July 31, 2006, to shareholders of record on July 14, 2006.
About Sobeys
Sobeys Inc., (TSX: SBY) headquartered in Stellarton, Nova Scotia, is a leading national grocery retailer and food distributor. The Company owns or franchises approximately 1,300 stores in all 10 provinces under retail banners that include Sobeys, IGA extra, IGA and Price Chopper. Sobeys Inc. is committed to providing the most worthwhile experience for its customers, employees, franchisees, suppliers and shareholders. More information on Sobeys Inc. can be found at www.sobeys.com.
Forward Looking Statements
This news release may contain forward-looking statements about future performance of Sobeys Inc. These statements are based on Sobeys management's assumptions and beliefs in light of the information currently available to them. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. When relying on forward-looking statements to make decisions, the Company cautions readers not to place undue reliance on these statements, as a number of important factors could cause actual results to differ materially from any estimates or intentions expressed in such forward-looking statements. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company.
Conference Call Invitation
Sobeys Inc. will hold a conference call for investors and analysts on June 28, 2006, at 3:00 p.m. (EDT), during which senior management will discuss the Company's financial results for the fourth quarter and full year, fiscal 2006. To join this conference call dial 416-644-3414 or 1-800-814-4941. You may also listen to a live audio webcast of the conference call by visiting the Company's website located at www.sobeys.com. Replay will be available at this website for ninety days or by dialing 416-640-1917 or 1-877-289-8525 and entering reference number 21192431 followed by the number sign until midnight July 6, 2006.
MANAGEMENT'S DISCUSSION & ANALYSIS
The following Management's Discussion & Analysis ("MD&A") for Sobeys Inc. ("Sobeys" or "the Company") should be read in conjunction with the Company's audited annual consolidated financial statements and the accompanying notes for the 52-weeks ended May 6, 2006, as compared to the 53-weeks ended May 7, 2005. Additional information about the Company, including the Company's Annual Information Form, can be found on SEDAR at www.sedar.com.
The consolidated financial statements and the accompanying notes have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are reported in Canadian dollars.
In the fourth quarter of fiscal 2005, the Company adopted Accounting Guideline 15 "Consolidation of Variable Interest Entities" ("AcG-15"). These consolidated financial statements include the accounts of Sobeys Inc. and its subsidiaries and variable interest entities ("VIEs") which the Company is required to consolidate. Please review the section entitled "AcG-15, Consolidation of Variable Interest Entities" included in this MD&A for more information.
This discussion contains forward-looking statements which reflect management's expectations regarding the Company's objectives, plans, goals, strategies, future growth, results of operations, performance and business prospects and opportunities. Forward-looking statements are typically identified by words or phrases such as "anticipates", "expects", "believes", "estimates", "intends" and other similar expressions. These statements are based on Sobeys management's assumptions and beliefs in light of the information currently available to them. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and risks are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including in the Risk Management section of this MD&A.
When relying on forward-looking statements to make decisions, the Company cautions readers not to place undue reliance on these statements, as a number of important factors could cause actual results to differ materially from any estimates or intentions expressed in such forward-looking statements. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company.
MANAGEMENT'S ANALYSIS OF OPERATIONS
-----------------------------------
Sobeys and its subsidiaries conduct business in four retail regions: Sobeys West, Sobeys Ontario, Sobeys Quebec, and Sobeys Atlantic.
Sobeys' strategy is focused on delivering the best food shopping experience to its customers in the right format, right-sized stores, supported by superior customer service. The five distinct store formats deployed by the Company to satisfy its customers' principal shopping requirements are the full service, fresh service, convenience service, community service and price service formats. The Company remains focused on improving the product, service and merchandising offerings within each format by realigning and renovating its current store base, while continuing to build new stores. The Company's four major banners: Sobeys, IGA extra, IGA and Price Chopper, are the primary focus of these format development efforts.
During the year, the Company opened, replaced, expanded, renovated, acquired and/or converted the banners in 83 stores (2005- 98). In fiscal 2006, the Company continued to execute against a number of initiatives in support of its food-focused strategy including productivity initiatives and business process and system upgrades.
In fiscal 2006, the Company continued the roll-out of the Sobeys banner in Western Canada with the introduction of two new Sobeys stores and one rebannered store in Alberta. The addition of the Alberta stores brings the total Sobeys banner stores in Western Canada to 74.
Compliments, Sobeys new private label brand, was launched in fiscal 2005, to contribute to growth of Company-wide profitability and earn a greater share of customers' food and grocery shopping requirements. The Compliments brand consists of three quality tiers: Value, Selection and Sensations. In addition, the Company introduced two sub-brands during fiscal 2006, Compliments Organics and Compliments Balance-Equilibre, an organic and healthy line of products respectively. At the end of fiscal 2006, the Company has launched approximately 3,700 Compliments products.
The Company remains focused on productivity and business process optimization initiatives, designed to improve its processes and cost structure. A key productivity focus in fiscal 2006 was the continued roll-out of the first phase of the Company's SMART Retailing initiative. The first phase of SMART Retailing focused on continuous improvement processes that have resulted in improved labour productivity in the handling of back-shop inventories, reduction in back room inventories and shrink reduction in produce, bakery, and meat departments. The Company completed the first phase of SMART Retailing during the year with the program implemented in 675 stores. The second phase of SMART Retailing began during fiscal 2006 and has been implemented in 425 stores to date. The second phase of SMART Retailing is focused on the implementation of a comprehensive store performance management process supported by tools to assist in the measurement of the Company's progress against targets and expectations. Phase two continues to support the ongoing implementation of SMART Retailing and focuses on customer satisfaction, sales growth and margin improvements. The third phase will see the extension of the process and productivity improvements across the store.
During fiscal 2006 the Company also made significant progress in the implementation of system-wide business process optimization initiatives that are designed to reduce complexity and improve processes throughout the Company. To this end, Sobeys continued the roll-out of its common point-of-sale ("POS") system. This common POS system provides improved customer information and enhanced customer service at store check-outs, and is a key enabler of other business process optimization initiatives currently underway.
The Company also completed the roll-out of a new scale networking system which improved accuracy and productivity and enabled full compliance with the nutritional labeling requirements that came into effect on December 12, 2005.
As discussed in the fiscal 2005 MD&A, system and process complexities in the Ontario business negatively impacted earnings in that region. In fiscal 2006, Sobeys began its business process and information systems transformation plan for the Company by focusing on the significant opportunity to upgrade information processing and decision support capabilities and improve efficiencies in the Ontario region. The system and processes that are being implemented were developed over several years and are currently employed in the Company's Atlantic Region. The Ontario roll-out will standardize and streamline the "back shop" in support of the Company's food focused strategy. This move will allow Sobeys to leverage technology investments, improve efficiencies and lower costs over the long-term. Costs associated with this initiative totalled $0.19 per share in fiscal 2006. A similar transformation plan was initiated for the Western region in the fourth quarter of fiscal 2006. The anticipated costs for both these initiatives in fiscal 2007 will be $0.27 to $0.32 per share.
To assess its financial performance and condition, Sobeys' management monitors a set of financial measures, which evaluate sales growth, profitability and financial condition. The primary financial performance and condition measures are set out below.
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-------------------------------------------------------------------------
52 weeks Ended 53 weeks Ended
May 6, 2006 May 7, 2005
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Same store sales growth 4.0% 3.7%
Sales growth 5.4% 10.3%
Basic earnings per share growth 1.7% 12.6%
Return on Equity 10.8% 11.5%
Funded debt to total capital 21.1% 21.4%
Funded debt to EBITDA 0.9x 0.9x
Company-wide capital expenditures (in millions) $560 $436
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RESULTS OF FISCAL 2006 OPERATIONS
---------------------------------
Summary Table of Consolidated Financial Results:
($ in millions, except per share data)
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
May 6, 2006 May 7, 2005 May 1, 2004
(Restated)
% % %
$ of Sales $ of Sales $ of Sales
------------------------------------------------------------
Sales $12,853.3 100.00% $12,189.4 100.00% $11,046.8 100.00%
Gain on sale
of assets - 0.00% - 0.00% 14.6 0.13%
Earnings,
before
interest,
income taxes
and minority
interest 331.6 2.58% 322.6 2.65% 294.3 2.66%
Interest
expense 34.9 0.27% 37.9 0.31% 43.2 0.39%
Income taxes 100.1 0.78% 98.0 0.80% 84.6 0.77%
Minority
interest 7.2 0.06% - 0.00% - 0.00%
Net earnings 189.4 1.47% 186.7 1.53% 166.5 1.51%
Cash flows
from
operating
activities $ 495.3 3.85% $ 438.2 3.59% $ 364.6 3.30%
Dividends $ 0.545 $ 0.50 $ 0.44
Weighted
average
number of
shares
outstanding,
basic 64.7 64.9 65.3
Weighted
average
number of
shares
outstanding,
diluted 65.4 65.5 65.9
Per share,
basic:
Cash flows
from
operating
activities $ 7.66 $ 6.75 $ 5.58
Net earnings $ 2.93 $ 2.88 $ 2.55
Per share,
diluted:
Cash flows
from
operating
activities $ 7.57 $ 6.69 $ 5.53
Net earnings $ 2.90 $ 2.85 $ 2.53
Fiscal 2004 has been restated to reflect retroactive adjustments related
to lease accounting and EIC-144.
Please see sections entitled "Lease Accounting" and "EIC-144" in the
fiscal 2006 annual MD&A.
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The following is a review of Sobeys' performance for the 52 week period ended May 6, 2006 compared to the 53 week period ended May 7, 2005. The performance review takes into consideration the impact of the additional week of operations in fiscal 2005.
Sales
The following table illustrates fiscal 2006 sales growth after eliminating the impact of VIE consolidation and the additional week of sales in fiscal 2005:
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-------------------------------------------------------------------------
Reported
Reported Growth Adjusted Reported
Sales over VIE Sales Sales
Fiscal Fiscal impact Fiscal Fiscal
($ in millions) 2006 2005 2006 2006 2005
-------------------------------------------------------------------------
Fiscal 2006 12,853 5.4% 587 12,266 12,189
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Adjusted
Adjusted Growth
53rd VIE Sales over
Week impact Fiscal Fiscal
($ in millions) Impact 2005 2005 2005
---------------------------------------------------------------
Fiscal 2006 241 137 11,811 3.9%
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In fiscal 2006, Sobeys achieved sales of $12.85 billion, an increase of $664 million or 5.4 percent over fiscal 2005. Fiscal 2006 contained 52 weeks of operations compared to 53 weeks in fiscal 2005. Also impacting sales growth in fiscal 2006 and the fourth quarter of fiscal 2005 was the consolidation of VIEs, which accounted for approximately $587 million in fiscal 2006 and $137 million in fiscal 2005. Adjusting for the 53rd week of operations and VIEs the Company had sales growth of $455 million or 3.9 percent over fiscal 2005.
Sales growth was also driven by the Company's continued implementation of sales and merchandising initiatives across the country, coupled with the increased retail selling square footage resulting from the development of new stores and an ongoing program to enlarge and renovate existing store assets.
Store square footage increased by 1.6 percent in fiscal 2006 as a result of the opening of 56 new or replacement stores and the expansion of 18 stores, net of stores closed.
Sobeys same-store sales, sales from stores in the same locations in both reporting periods, increased by 4.0 percent.
Sales growth was impacted by a year-over-year decline of approximately $134.5 million in company-wide tobacco sales. Excluding this decline in the tobacco business, sales growth would have been 5.0 percent rather than the 3.9 percent reported above.
Inflation was approximately 1.5% for the year, with variances by region.
The Company expects sales growth to continue in fiscal 2007 as a result of the on-going capital investment in its retail store network, and continued offering, merchandising and pricing improvements across the country.
Earnings before Interest, Income Taxes, Depreciation and Amortization
Fiscal 2006 EBITDA (earnings before interest, income taxes, depreciation and amortization) increased $29.2 million or 5.9 percent to $528.2 million from $499.0 million reported in fiscal 2005. EBITDA as a percentage of sales increased to 4.11 percent from 4.09 percent last year. Excluding VIEs, EBITDA as a percent of sales was 4.17 percent in fiscal 2006, a 4 basis point increase from fiscal 2005 EBITDA as a percent of sales.
For the 13-weeks and 52-weeks ended May 6, 2006, $5.3 million and $18.6 million, respectively, of pre-tax costs related to the Ontario business process and system initiative were incurred. These costs included the severance, labour, implementation and training costs associated with the Ontario systems implementation as well as the cost of writing off the Commisso's brand-name. As part of the transformation of the Ontario business, the Company is converting 12 Commisso's stores in Ontario to the Sobeys and Price Chopper banners. These conversions began in fiscal 2006 and will continue into the first half of fiscal 2007. Excluding these costs and the impact of VIEs, EBITDA increased 6.2 percent over fiscal 2005 and EBITDA as a percent of sales would have been 4.31 percent, an 18 basis point improvement over fiscal 2005.
Contributing to increased EBITDA was the growth in sales and an increase in gross margin, as a result of improved productivity initiatives and changes in mix, compared to the prior year.
Earnings before Interest, Income Taxes, Depreciation, Amortization and
Rent
Fiscal 2006 earnings before interest, income taxes, depreciation and amortization and rent ("EBITDAR") was $863.2 million compared to $774.9 million in fiscal 2005. The Company leases a substantial portion of its store network. Therefore, to arrive at a measure of operating performance excluding the impact of capital, gross rent expense of $335.0 million in fiscal 2006 and $275.9 million in fiscal 2005 is added to EBITDA to arrive at EBITDAR. EBITDAR as a percent of sales in fiscal 2006 was 6.72 percent compared to 6.36 percent in fiscal 2005.
Earnings before Interest and Income Taxes
EBIT (earnings before interest and income taxes) increased to $331.6 million in fiscal 2006, a 2.8 percent increase from the prior year, with an EBIT margin of 2.58 percent compared to 2.65 percent in fiscal 2005. Included in fiscal 2006 EBIT was a $20.2 million increase in depreciation and amortization expense ($196.6 million current year compared to $176.4 million last year), reflecting the Company's continued capital investments. Also included in EBIT are the Ontario business process and system initiative costs outlined above. Adjusting for the Ontario business process and system initiative costs and the impact of VIEs, EBIT would total $338.8 million representing an EBIT margin of 2.76 percent. The 53rd week of operations in fiscal 2005 favourably impacted EBIT by approximately $6.1 million or 2.1 percentage points but had no impact on EBIT margin in the prior year.
The Company will continue to focus on disciplined cost management initiatives, supply chain and retail productivity improvements and migration of best practices across its four regions to continue to fuel and fund investments to drive sales, reduce costs and improve margins over time.
Interest Expense
Interest expense declined $3.0 million, in fiscal 2006, to $34.9 million from $37.9 million reported last year, due to lower long-term borrowing levels. Interest coverage, which is EBIT divided by interest expense, improved to 9.5 times compared to 8.5 times last year.
The majority of the Company's debt is long-term and at fixed rates, accordingly there is limited exposure to interest rate volatility. The Company is exposed to interest rate risk when arranging new debt.
Income Taxes
The annual effective tax rate decreased to 33.7 percent from 34.4 percent last year. The decrease in the effective tax rate for the year was the result of adjustments to future statutory rates applied to timing differences of future tax balances and a reduction in federal capital taxes.
Net Earnings
Fiscal 2006 basic net earnings per share totalled $2.93 ($189.4 million), an increase of 1.7 percent compared to the $2.88 per share ($186.7 million) recorded during fiscal 2005. Net earnings for fiscal 2005 were favourably impacted by approximately $3.5 million or $0.05 per share as a result of the 53rd week of operations in the prior year.
Net earnings for the year ended May 6, 2006 included increased depreciation and amortization expense, and Ontario business process and system initiative costs referred to above.
The consolidation of VIEs resulted in a $0.3 million increase in net earnings for the 52-week period ended May 6, 2006 and a $0.6 million decrease in net earnings for the prior fiscal year. The Ontario business process and system initiative costs reduced basic earnings per share by $0.19 for the 52 weeks of fiscal 2006.
Excluding the Ontario process and system costs and the impact of VIEs, fiscal 2006 basic earnings per share would have been $3.11 compared to basic earnings per share of $2.84 in the prior year excluding the impact of VIEs and the 53rd week of operations. This would represent a 9.5 percent increase in basic earnings per share year-over-year.
RESULTS OF FOURTH QUARTER FISCAL 2006 OPERATIONS
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The following is a summary of selected consolidated financial information from the Company's unaudited interim consolidated financial statements for the 13 and 14-weeks ended May 6, 2006 and May 7, 2005, respectively.
Summary Table of Consolidated Financial Results for the fourth quarter:
($ in millions, except per share data)
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13 Weeks Ended 14 Weeks Ended
May 6, 2006 May 7, 2005
$ % of Sales $ % of Sales
---------------------------------------------
Sales $ 3,162.6 100.00% $ 3,294.7 100.00%
EBIT 85.2 2.69% 84.6 2.57%
Interest expense 7.9 0.25% 10.7 0.32%
Income taxes 24.1 0.76% 25.8 0.78%
Net earnings 49.7 1.57% 48.1 1.46%
Cash flows from operating
activities $ 299.3 9.46% $ 236.7 7.18%
Weighted average number of
shares outstanding, basic 64.7 64.7
Net earnings per
share, basic $ 0.77 $ 0.74
Weighted average number of
shares outstanding, diluted 65.4 65.3
Net earnings per
share, diluted $ 0.76 $ 0.74
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The following is a review of Sobeys' performance for the 13-week period ended May 6, 2006 compared to the 14-week period ended May 7, 2005.
Sales
The following table illustrates fourth quarter of fiscal 2006 sales after eliminating the impact of the additional week of sales included in the fourth quarter of fiscal 2005 (VIEs were consolidated in both the fourth quarter of fiscal 2005 and 2006):
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Reported Adjusted
Reported Decline Reported Adjusted Growth
Sales over Sales 53rd Sales over
Fiscal Fiscal Fiscal Week Fiscal Fiscal
($ in millions) 2006 2005 2005 Impact 2005 2005
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Fourth Quarter 3,163 (4.0%) 3,295 241 3,054 3.6%
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Sales decreased $132.1 million or 4.0 percent compared to the fourth quarter of fiscal 2005. The fourth quarter of fiscal 2006 contained 13 weeks of operations compared to 14 weeks in fiscal 2005 and this additional week accounted for approximately $241 million or 7.3 percentage points of the prior year reported sales. Adjusting for the additional week, sales growth was 3.6 percent over the fourth quarter of the prior year.
Same-store sales increased 3.9 percent during the fourth quarter of fiscal 2006. The growth in retail sales was a direct result of the continued implementation of sales and merchandising initiatives across the Company, and the Company's ongoing financial commitment to upgrade and renovate existing store assets. Same-store sales growth outpaced overall Company sales growth as there was little growth in the Company's wholesale sales to independent customers in the fourth quarter this year compared to the fourth quarter last year. Tobacco sales have decreased in the current quarter and the disposition of the Company's Cash and Carry business in Ontario and Quebec in the quarter also had a negative impact on sales. Excluding the impact of the tobacco decline and the impact of the Cash and Carry disposition, sales growth would have been 6.1 percent on a comparable 13 week basis.
Earnings before Interest, Income Taxes, Depreciation and Amortization
EBITDA for the quarter ended May 6, 2006 was $136.7 million; an increase of 2.7 percent or $3.6 million versus the $133.1 million recorded in the same quarter last year. EBITDA as a percentage of sales increased to 4.32 percent from 4.04 percent when compared to fourth quarter fiscal 2005 results. The Company experienced a modest increase in gross margin percentage, compared to the same quarter last year, as a result of the continued implementation of enhanced merchandising programs and store productivity initiatives.
Earnings before Interest, Income Taxes, Depreciation, Amortization and
Rent
EBITDAR for the fourth quarter of fiscal 2006 grew by $16.3 million to $221.0 million from $204.7 million in the fourth quarter of fiscal 2005. EBITDAR as a percent of sales was 6.99 percent compared to 6.21 percent in the fourth quarter of fiscal 2005.
Earnings before Interest and Income Taxes
EBIT for the fourth quarter increased $0.6 million or 0.7 percent to $85.2 million. The 14th week of operations in the fourth quarter of fiscal 2005 favourably impacted EBIT by approximately $6.1 million. EBIT margin, which is EBIT divided by sales, for the fourth quarter increased to 2.69 percent from 2.57 percent in the same quarter last year.
Interest Expense
Interest expense in the fourth quarter decreased $2.8 million to $7.9 million compared to $10.7 million during the same time period last year. Interest coverage for the fourth quarter improved to 10.8 times, compared to 7.9 times for the same quarter last year due to the decrease in interest expense and the increase in EBIT.
Income Taxes
The Company's effective income tax rate for the fourth quarter was 31.2 percent compared to 34.9 percent in quarter four of fiscal 2005. The decrease in the effective tax rate for the quarter was the result of adjustments to the statutory rates applied to timing differences of future tax balances and a reduction in federal capital taxes.
Net Earnings
Fourth quarter fiscal 2006 basic net earnings per share totaled $0.77 ($49.7 million), an increase of 4.1 percent compared to the $0.74 per share ($48.1 million) recorded in the same quarter of fiscal 2005. Net earnings for the fourth quarter of fiscal 2005 were favourably impacted by approximately $3.5 million or $0.05 per share for the 14th week of operations. Fiscal 2006 fourth quarter net earnings also included $0.05 per share of costs for the Ontario system and process initiatives. Excluding the Ontario system and process costs as well as the 14th week of operations in the fourth quarter of the prior year, basic earnings per share would have been $0.82 in the fourth quarter of fiscal 2006 compared to $0.69 in the fourth quarter of fiscal 2005, representing growth of 18.8 percent.
Financial Information by Quarter
($ in millions, except per share information)
<<
Q4 Q3 Q2 Q1
(13 weeks) (13 weeks) (13 weeks) (13 weeks)
May 6, Feb 4, Nov. 5, Aug. 6,
Operations 2006 2006 2005 2005
------------------------------------------------
Sales $ 3,162.6 $ 3,171.9 $ 3,218.4 $ 3,300.4
EBITDA 136.7 128.6 132.8 130.1
EBIT 85.2 78.6 84.1 83.7
Net earnings $ 49.7 $ 45.7 $ 45.8 $ 48.2
Per share information,
basic
EBIT $ 1.32 $ 1.21 $ 1.30 $ 1.29
Net earnings $ 0.77 $ 0.71 $ 0.71 $ 0.74
Weighted average number
of shares, basic 64.7 64.8 64.8 64.7
Per share information,
diluted
EBIT $ 1.30 $ 1.20 $ 1.29 $ 1.28
Net earnings $ 0.76 $ 0.70 $ 0.70 $ 0.74
Weighted average number
of shares, diluted 65.4 65.4 65.4 65.3
EBITDA as percent of sales 4.32% 4.05% 4.13% 3.94%
EBIT as percent of sales 2.69% 2.48% 2.61% 2.54%
Q4 Q3 Q2 Q1
(14 weeks) (13 weeks) (13 weeks) (13 weeks)
May 7, Jan. 29, Oct. 30, July 31,
Operations 2005 2005 2004 2004
------------------------------------------------
Sales $ 3,294.7 $ 2,917.0 $ 2,966.7 $ 3,011.0
EBITDA 133.1 119.1 123.9 122.9
EBIT 84.6 76.2 81.2 80.6
Net earnings $ 48.1 $ 44.8 $ 47.2 $ 46.6
Per share information,
basic
EBIT $ 1.31 $ 1.18 $ 1.25 $ 1.23
Net earnings $ 0.74 $ 0.69 $ 0.73 $ 0.71
Weighted average number
of shares, basic 64.7 64.6 65.0 65.3
Per share information,
diluted
EBIT $ 1.30 $ 1.17 $ 1.24 $ 1.22
Net earnings $ 0.74 $ 0.69 $ 0.72 $ 0.71
Weighted average number
of shares, diluted 65.3 65.3 65.7 65.9
EBITDA as percent of sales 4.04% 4.08% 4.18% 4.08%
EBIT as percent of sales 2.57% 2.61% 2.74% 2.68%
All quarters prior to the fourth quarter of fiscal 2005 have been
restated to reflect the retroactive adjustment related to lease
accounting. Please see the section entitled "Lease Accounting" in the
fiscal 2006 annual MD&A.
>>
FINANCIAL CONDITION
-------------------
The Company's financial condition at May 6, 2006 continued to strengthen as indicated in the following table:
Capital Structure and Key Financial Condition Measures
<<
May 6, May 7, May 1,
($ in millions) 2006 2005 2004
(Restated)
-----------------------------------
Shareholders' equity $ 1,834.3 $ 1,682.1 $ 1,561.3
Total long-term debt(1) $ 490.0 $ 457.8 $ 453.1
Funded debt to total capital 21.1% 21.4% 22.5%
Adjusted debt to total capital(3) 45.5% 48.1% 42.9%
Funded debt to EBITDA 0.9x 0.9x 1.0x
EBITDA to interest expense 15.1x 13.2x 10.3x
Current assets to current liabilities 1.00x 0.86x 0.83x
Total assets $ 3,738.6 $ 3,445.8 $ 3,278.9
Long-term debt(2) $ 465.0 $ 262.9 $ 420.0
(1) Includes current portion of long-term debt.
(2) Excludes current portion of long-term debt.
(3) Adjusted debt includes capitalization of lease obligations based on
six times net annual lease payments (gross lease payments net of
expected sub-lease income)
>>
Fiscal 2004 has been restated to reflect retroactive adjustments related
to lease accounting and EIC-144.
Please see the sections entitled "Lease Accounting" and "EIC-144" in the
fiscal 2006 MD&A
The ratio of funded debt to total capital improved to 21.1 percent from the 21.4 percent reported for the same period last fiscal year, as a result of the growth in retained earnings.
The Company also monitors adjusted debt to total capital, where net annual lease payments are capitalized at six times annual lease payments, and this capitalized lease obligation is then added to funded debt. Adjusted debt to capital at year end was 45.5 percent versus 48.1 percent last year.
The Company's long-term debt is comprised of $118.6 million due within the next five years, and $371.4 million with longer maturities, for a total of $490.0 million (2005 $457.8 million). The fair value of the Company's long-term debt is estimated to be $517.7 million. Long-term debt maturities in fiscal 2007 and 2008 amount to $48.6 million. Cash generated from operations will finance these maturities. Management monitors debt markets with a view to replacing maturing debt with longer-term maturities.
The ratio of funded debt to EBITDA remained consistent with the level at last fiscal year end, reflecting the growth in EBITDA.
Improvement in the EBITDA to interest expense coverage ratio (15.1 times versus 13.2 times at May 7, 2005) resulted from an improvement in the trailing 12-month EBITDA ($528.2 million compared to $499.0 million for the 12-months ended May 7, 2005) coupled with a 7.9 percent decline in trailing 12-month interest expense ($34.9 million compared to $37.9 million for the 12-months ended May 7, 2005).
Current assets to current liabilities increased to 1.00 times from 0.86 times in the same period last year. The change in the current ratio reflects working capital changes which are described in the liquidity and capital resources section which follows.
Sobeys' liquidity position remained strong at May 6, 2006, with only 10.1 percent utilization (utilized for letters of credit) of the authorized $300 million revolving bank lines. At May 6, 2006, the Company had cash, and cash equivalents totaling $332.1 million compared to $272.8 million at May 7, 2005 including $166.9 million in short term commercial paper as of May 6, 2006.
On October 21, 2005, the Company filed a short-form base shelf prospectus providing for the issuance of up to $500 million in unsecured Medium Term Notes ("MTN") over the next two years. On October 28, 2005, the Company issued a $175 million Series D MTN with a maturity date of October 29, 2035 (30 years) and an interest rate of 6.06 percent. The proceeds from this issuance were used to repay the Sobeys' Series A MTN which matured on November 1, 2005 and carried a rate of 7.60 percent. Through a bond forward the Company had locked in the rate on the underlying government of Canada 15-year yield for refinancing $100 million of the November 2005 Series A MTN maturity. The settlement of this bond forward resulted in a $4.4 million addition to deferred costs which is being amortized to interest expense over the 30-year term of the related MTN.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The table below highlights major cash flow components for the 13 and 52 weeks ended May 6, 2006 compared to the 14 and 53 weeks ended May 7, 2005.
Major Cash Flow Components
<<
13 weeks 14 weeks 52 weeks 53 weeks
Ended Ended Ended Ended
----------------------------------------
May 6, May 7, May 6, May 7,
($ in millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Net earnings $ 49.7 $ 48.1 $ 189.4 $ 186.7
Items not affecting cash 87.9 75.6 260.4 235.7
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137.6 123.7 449.8 422.4
Net change in non-cash working
capital 161.7 113.0 45.5 15.6
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Cash flows from operating
activities 299.3 236.7 495.3 438.0
Cash flows used in investing
activities (113.1) (113.3) (409.6) (295.7)
Cash flows from (used in)
financing activities (6.3) (5.8) (26.4) (67.0)
Initial impact of VIEs - 32.9 - 32.9
-------------------------------------------------------------------------
Increase in cash and cash
equivalents $ 179.9 $ 150.5 $ 59.3 $ 108.2
-------------------------------------------------------------------------
>>
Operating Activities
Cash flows from operating activities amounted to $299.3 million in the fourth quarter of fiscal 2006 compared to $236.7 million in the comparable period last year. This increase of $62.6 million was due to increased net earnings of $1.6 million, an increase in items not affecting cash of $12.3 million and an increase in non-cash working capital of $48.7 million, from a positive $113.0 million in fiscal 2005 to a positive $161.7 million in fiscal 2006.
Cash flows from operating activities on an annual basis were $495.3 million compared to $438.0 million in the comparable period last year. This increase of $57.3 million was the result of a $2.7 million improvement in net earnings, a $29.9 million improvement in non-cash working capital and a $24.7 million increase in items not affecting cash.
The following table presents non-cash working capital changes as compared to the third quarter of fiscal 2006 and last fiscal year.
<<
Non-Cash Working Capital
(Including VIEs)
Quarter
Increase Year-
Including (Decrease) Including to-Date
Including VIEs in Cash VIEs Increase
($ in millions) VIEs as as of flows as of (Decrease)
of May 6, February Including May 7, in Cash
2006 4, 2006 VIEs 2005 flows
-------------------------------------------------------
Receivables $ 208.2 $ 219.0 $ 10.8 $ 199.8 $ (8.4)
Inventories 626.8 652.5 25.7 588.6 (38.2)
Prepaid expenses 45.9 44.2 (1.7) 43.4 (2.5)
Income taxes
receivable 5.8 19.4 13.6 21.9 16.1
Accounts payable
and accrued
liabilities (1,158.8) (1,048.5) 110.3 (1,083.3) 75.5
Impact of business
acqusitions on
working capital (3.0) 0.0 3.0 0.0 3.0
-------------------------------------------------------------------------
Total $ (275.1) $ (113.4) $ 161.7 $ (229.6) $ 45.5
-------------------------------------------------------------------------
>>
Receivables decreased $10.8 million, inventory levels decreased $25.7 million and accounts payable and accrued liabilities increased $110.3 million compared to the third quarter of fiscal 2006. The decrease in accounts receivable during the quarter is reflective of the collection of supplier revenue that was outstanding at the end of the third quarter. The increase in accounts payable and accrued liabilities was consistent with the prior year and can be attributed to a combination of higher trade payables and accrued liabilities such as construction costs and employee incentives. The decrease in inventory levels is consistent with inventory level trends in prior years.
Compared to May 7, 2005 accounts receivable increased $8.4 million, inventories increased $38.2 million and accounts payable and accrued liabilities increased $75.5 million. The increase in inventory and the corresponding increase in trade accounts payable reflects higher inventory levels required to support the Company's expanded store network and growing sales.
Investing Activities
Cash used in investing activities of $113.1 million in the fourth quarter was $0.2 million lower than in the fourth quarter of last fiscal year. The decrease in cash used in investing activities was the result of a decrease in property and equipment purchases of $10.1 million, a decrease in deferred cost additions of $8.9 million, partially offset by an increase in restricted cash of $14.7 million when compared to the fourth quarter of fiscal 2005.
Company-wide capital investment includes on-balance sheet capital expenditures, all known capital investments by franchise affiliates and capital investments by third-party landlords. Company wide capital investment totaled $560 million in fiscal 2006, an increase of $124 million from $436 million in the previous year. The Company remains committed to growing and improving its store network. During the quarter, 12 corporate and franchised stores were opened or replaced compared to 13 corporate and franchised stores opened or replaced during the fourth quarter of last year. An additional 4 stores were expanded during the quarter compared to 7 in the same time period last year. There were 4 stores rebannered in the current quarter compared to 16 for the same quarter last year.
On an annual basis, 56 corporate and franchised stores were opened or replaced this fiscal year compared to 41 corporate and franchised stores opened or replaced last year. An additional 18 stores were expanded in the year compared to 19 stores last year and 9 stores were rebannered this year compared to 36 last year.
Net retail store square footage increased during the fourth quarter by 1,341 square feet (405,108 square feet opened, less 403,767 square feet closed). Net retail store additions for the year totalled 322,484 square feet (1,341,601 square feet opened less 1,019,117 square feet closed). At May 6, 2006, Sobeys' square footage totaled 25.4 million square feet, a 1.6 percent increase over May 7, 2005.
The Company continues to focus on growth through a combination of new store openings, renovations, replacements and enlargements and, where appropriate, through strategic acquisitions. It is expected that there will be a significant increase in capital expenditures for fiscal 2007. This will include a continued focus on the retail store network along with increased spending on landbank sites and logistics infrastructure. During fiscal 2007, the Company plans to open, expand, or renovate approximately 90 corporate and franchised stores across Canada, increasing square footage by approximately four percent.
Financing Activities
Financing activities during the fourth quarter used $6.3 million of cash compared to $5.8 million of cash used in the comparable period of fiscal 2005.
Financing activities year-to-date reduced cash by $26.4 million compared to a $67.0 million cash decrease for the same period last year. The Company repaid, on maturity, the $175 million Series A MTN with the proceeds from the issuance of a New Series D MTN. This resulted in a corresponding increase in issuance of long-term debt and debt repayments of $175.0 million. During fiscal 2005, the Company repurchased 708,700 common shares as part of a normal course issuer bid as well the Company purchased 32,305 shares from employees, the purchase price for these share repurchases was $23.1 million. The Company completed no repurchases in fiscal 2006. The Company's share capital was comprised of the following at fiscal year-end, on May 6, 2006:
<<
Authorized Number of Shares
-------------------------------------------------------------------------
Preferred shares, par value of $25 each,
issuable in series 471,000,000
Preferred shares, without par value,
issuable in series 500,000,000
Common shares, without par value 498,682,931
Issued
-------------------------------------------------------------------------
Common shares, without par value 65,426,282
>>
As of June 28, 2006, the Company had common shares outstanding of
65,426,282.
ACCOUNTING POLICY CHANGES
-------------------------
Accounting standards implemented during fiscal 2006 and 2005:
EIC-144, Accounting by a Customer (Including a Reseller) for Certain
--------------------------------------------------------------------
Consideration Received from a Vendor ("EIC-144")
------------------------------------------------
In January 2004, the CICA issued a new accounting standard, EIC-144 titled "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor". EIC-144 provides that cash consideration received from a vendor is presumed to be a reduction in the prices of the vendor's products or services and should, therefore, be characterized as a reduction in cost of sales and related inventory when recognized in the customer's income statement and balance sheet. If the consideration is a payment for assets or services delivered to the vendor, the cash consideration should be characterized as revenue or other income. If it is a reimbursement of costs incurred to sell the vendor's products, the cash consideration should be characterized as a reduction of that cost, provided certain conditions are met. EIC-144 requires retroactive application to all financial statements for annual and interim periods ending after August 15, 2004. The Company adopted EIC-144 in the 2005 fiscal year, adjusting for it retroactively, with restatement of comparative periods.
The Company receives allowances from certain vendors, whose products are purchased for resale. Included in these vendor programs are allowances for volume purchases, exclusivity allowances, listing fees, and other allowances. Due to the retroactive implementation of EIC-144, the timing of recognition of certain vendor allowances has changed, resulting in the Company recording a decrease in opening retained earnings for fiscal 2005 of $5.9 million (net of income taxes receivable of $3.4 million), and a decrease in inventory of $9.3 million. The implementation of EIC-144 did not result in a material change in the annual net earnings for fiscal 2006 or fiscal 2005 or in fiscal 2006 or fiscal 2005 quarterly net earnings.
During fiscal 2006 the Company adopted the amendment to EIC-144 issued in January 2005. The amendment requires disclosure of the amount of vendor allowances that have been recognized in income but for which the full requirements for entitlement have not yet been met. Certain allowances from vendors are contingent on the Company achieving minimum purchase levels. The Company recognizes these allowances in income in accordance with EIC-144 when it is probable that the minimum purchase level will be met, and the amount of allowance can be estimated. As of the year ended May 6, 2006 the Company has recognized $3.5 million of allowances in income where the minimum purchase level had not yet been met.
AcG-15, Consolidation of Variable Interest Entities
---------------------------------------------------
Effective for the fourth quarter ended May 7, 2005, the Company was required to implement Accounting Guideline 15 "Consolidation of Variable Interest Entities" ("AcG-15") issued by the CICA. AcG-15 required the Company to consolidate certain entities that are deemed to be subject to control of the Company on a basis other than through ownership of a voting interest in the entity.
Variable interest entities are defined under AcG-15 as entities that do not have sufficient equity at risk to finance their activities without additional subordinated financial support, or where the equity holders lack the overall characteristics of a controlling financial interest. The guideline requires that the VIE be consolidated with the financial results of the entity deemed to be the primary beneficiary of the VIE's expected losses and its expected residual returns.
The Company implemented AcG-15 during the fourth quarter ended May 7, 2005 retroactively without restatement of prior periods. Entities that have been identified as meeting the characteristics of a VIE were consolidated in the Company's results effective for the fourth quarter of fiscal 2005.
The Company has identified the following entities as VIEs:
Independent Franchises
The Company has identified 300 (2005 - 287) franchisees whose franchise agreements result in the Company being deemed the primary beneficiary of the entity according to AcG-15. The results for these entities were consolidated with the results of the Company.
Warehouse and Distribution Agreement
The Company has an agreement with an independent entity to provide warehouse and distribution services. The terms of the agreement with this entity require the Company to consolidate its results with those of the Company pursuant to AcG-15.
The Company has consolidated the results of these independent franchisees and the entity providing warehouse and distribution services effective for the fourth quarter of fiscal 2005.
<<
Balance Sheet as at May 6, 2006
Consolidated Consolidated
balance balance
sheet as sheet as
at May 6, Impact at May 6,
2006 of the 2006
before Implemen- after
AcG 15 tation AcG 15
(in millions) Impact of AcG 15 Impact
----------- ----------- -----------
ASSETS
Current
Cash and cash equivalents $ 292.8 $ 39.3 $ 332.1
Receivables 251.7 (43.5) 208.2
Inventories 503.9 122.9 626.8
Prepaid expenses 40.8 5.1 45.9
Mortgages, loans and other
receivables 14.6 1.3 15.9
Income taxes receivable 8.0 (2.2) 5.8
----------- ----------- -----------
1,111.8 122.9 1,234.7
Mortgages, loans and other receivable 163.7 (95.3) 68.4
Other assets 171.4 8.6 180.0
Property and equipment 1,580.8 31.4 1,612.2
Assets held for realization 8.5 - 8.5
Intangibles 21.5 - 21.5
Goodwill 613.3 - 613.3
----------- ----------- -----------
$ 3,671.0 $ 67.6 $ 3,738.6
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES
Current
Accounts payable and accrued
liabilities $ 1,136.6 $ 22.2 $ 1,158.8
Future tax liabilities 46.1 - 46.1
Long-term debt due within one year 23.9 1.1 25.0
----------- ----------- -----------
1,206.6 23.3 1,229.9
Long-term debt 448.3 16.7 465.0
Long-term lease obligation 16.6 4.2 20.8
Employee future benefit obligation 96.0 - 96.0
Future tax liabilities 45.4 (1.3) 44.1
Deferred revenue 3.3 - 3.3
Minority interest 0.2 45.0 45.2
----------- ----------- -----------
1,816.4 87.9 1,904.3
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Capital stock 904.8 - 904.8
Contributed surplus 0.9 - 0.9
Retained earnings 948.9 (20.3) 928.6
----------- ----------- -----------
1,854.6 (20.3) 1,834.3
----------- ----------- -----------
$ 3,671.0 $ 67.6 $ 3,738.6
----------- ----------- -----------
----------- ----------- -----------
The impact of implementation of AcG-15 on the consolidated balance sheet of the Company can be explained as follows:
- Accounts receivable and long-term notes receivable due from the
franchisees were eliminated upon consolidation. Cash, inventories,
fixed assets, accounts payable and debt financing of the fixed assets
has been consolidated.
- A charge of $14.5 million was recorded to opening retained earnings
for the fourth quarter of fiscal 2005 to reflect:
1. The reduction of inventory values of the franchisees that
include charges from the Company for distribution costs and
vendor allowances that are not recognized by the Company until
final sale to customers.
2. Goodwill that is carried on the accounts of stores determined
to be VIEs has been assessed as being impaired with no fair
market value, and, as such, has been eliminated.
- Based on a change in management's estimation process, it has been
determined that a charge of $5.7 million to retained earnings was
required in the second quarter of 2006 to reflect additional minority
interest in the VIEs. Additional adjustments of $0.2 million to
retained earnings are reflective of changes in the number of VIE
entities required to be consolidated.
- Minority interest represents the equity in the VIEs held by the common
shareholder.
Income Statement impact for 52-weeks ended, May 6, 2006:
Consolidated Consolidated
statement statement
of earnings of earnings
at May 6, Impact at May 6,
2006 of the 2006
before Implemen- after
AcG 15 tation AcG 15
(in millions) Impact of AcG 15 Impact
Source: newswire
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