Loblaws 2014 Case Study

LOBLAW COMPANIES LIMITED

2014 ANNUAL REPORT

Guide to Preparation

Read (at a high level only) the Loblaw Companies Limited 2014 financial statements and review the attached ratio information.  Make note of any questions you may have.  The following questions may help you focus on some important areas:

1. Who typically uses the financial statements of a company?

• Internal managers, investors, creditors, employees, competitors, suppliers,

1. What are the primary financial statements? What do they tell us about Loblaw?

• Balance Sheet, Income Statement, Statement of Cash Flows

1. Why are “Notes” provided with the financial statements?  What kinds of information do they provide?  Review note 2 in particular.  What is the purpose of this note?

• Explains which accounting policies/principles the company follows (page 63)
• Revenue recognition, measure of value (fair value, cost, etc…), depreciation methods, intangible asset valuation

1. Consider the key financial ratios for Loblaw.  Do they suggest anything to investigate?  Any particular concerns?

• Problem with inventory, showed through fall in acid test and rise in Inv Days
• AR < AP days which is good for cash flows
• May be overleveraged, at risk of not making interest payments (1.13 coverage)
• Earnings margin way down
• Problem with operating expense? YES Depreciation? Interest?
• Gross margin steady, the problem isn’t with cost of goods sold

1. Take a look at the Balance Sheet.  How much of Loblaw’s assets are short term?  Long term?  Tangible?  Intangible?  Also look at Notes 14 and 16 to reflect on this question.

• 25% short term assets, drop in cash, rise in inventory
• Intangible and goodwill way up, indicates an acquisition (Shoppers) and a premium paid (synergies)
•  Big increase in long term debt (finance acquisition?)
• Share capital increased heavily because of stock in the acquisition

1. What is meant by Finances leases (see note 14)?  How is this type of lease different from an operating lease?  See Note 29 for details of the company’s operating and finance leases.

• Financing lease gets capitalized, intention to buy, significant transfer of ownership of the asset
• Use much more operating leases than finance leases
• Loblaw’s leases some of its land and buildings to others

1. What is meant by Deferred Income Tax Assets on the Balance Sheet (see Note 7)?

1. How has Loblaw funded their assets?  What are their short term commitments?  Long term?  

• Mostly long term debt (up 6 bills) but some new shares as well (up 5 bill)

1. Take a look at the Income Statement.  How much disclosure has Loblaw provided on this statement?

• Not much disclosure on the statement, forced to look through the notes

1. What is Earnings per Share and why is the Basic number different from the Diluted number?  Why are both of these numbers disclosed?  See Note 8 for further information.

• Diluted considers all convertible securities that are in the money
• 3.5 of employee stock options
• 0.5 of other liabilities that are convertible?

1. Take a look at the Statement of Cash Flows.  How much cash is generated from the day to day activities?  How does this number compare to the profit disclosed on the Income Statement?  Why are these two numbers different?

• 2.5 billion
• Interest paid (net of the company's tax deduction) is a cash outflow that we add back to FCFE in order to get a cash flow that is available to all suppliers of capital. 
  

1. How much has Loblaw spent on new long term assets?  Is this a large amount?  How can you tell?

• 1 bill and 6.6 billion for Shoppers, fixed assets went from 9.1 to 10.8

1. How has Loblaw paid for their purchases of new long term assets?

• Mix of debt and equity, debt up by 5 billion and share capital up by 6

1. What has Loblaw done with their excess cash in the year?

1. What is the purpose of Note 35?  Note 36?