Loblaws Annual Report Analysis - Term Paper Example

?LOBLAW Analysis The and 2009 show the sales and other expenses that have occurred during the entire year starting from 1st January to 1st January 2011 and likewise for 2009. It encompasses the 52 weeks that make up one complete year. 2. The company’s auditors are the Licensed Public accountants firm, KPMG. The auditor’s role is to give an unbiased opinion on the company’s consolidated financial statements based on their own audits. The audits were conducted in accordance with the generally accepted Canadian auditing standards. They had to comply with ethical requirements in order to make sure that the prepared financial statements are free from any material misstatement. Such misstatements can arise from either an error or fraud. according to the auditor’s opinion, the consolidated financial statements presented fairly, in all material respects, the consolidated financial position of Loblaw Companies Limited as at January 1, 2011 and were in accordance with the Canadian generally accepted accounting principles. 3. Loblaw is Canada’s largest grocery retailer and has taken several initiatives to ensure it sustains the environment. They practice sustainable seafood and have set up salmon farms. In order to prevent the detrimental impacts of excessive fishing, Loblaw is committed to sourcing 100% of their sold seafood from sustainable sources by the end of 2013. In addition to this, they have a campaign against the plastic bag consumption in their stores and were successful in reducing 2.5 billion plastic bags since 2007. Moreover, Loblaw gave a gift of $3 million to invest in researching sustainable means of food production. They also have initiated solar energy projects in partnership with Northland Power Inc. to help reduce their carbon footprint. Consequently, they have been awarded accolades and are ranked in top 50 Canadian sustainable companies list. 4. A) According to the matching principle, the company recognizes its revenue at its VIE and corporate stores at the time the sale is made to its customers and also at the time of delivery of its inventory to the associated and franchised stores B) When it comes to fixed assets they are recorded at cost which includes capitalized interest while depreciation starts once the asset has been put into use. The depreciation is recognized on a straight-line basis and is depreciated over the estimated useful life of the asset which ranges from 20-40 years for buildings, up to 10 years for building improvements and from 3 to 10 years for equipment and fixtures. C) Goodwill at Loblaw is assessed for impairment at a minimum on an annual basis. It is done by comparing the fair value of a reporting unit to its carrying value. A goodwill impairment charge is recognized to the extent that the carrying value of goodwill exceeds the impaired fair value in operating income. D) The company assesses intangible assets to determine if their useful life is definite and in cases where it is they are amortized over their useful lives up to a maximum of 17 years. The intangible assets with indefinite useful lives are annually assessed for impairment. 5. Loblaw generated a higher profit per dollar of sales in the fiscal year 2010 compared to 2009. This is visible by two ratios namely Gross Profit per sales and Operating Margin. Operating Margin is calculated by dividing the Net Operating Income for a period with the Sales. The Operating Margin increased in 2010 to 4.1% from 3.9% in 2009. This is primarily attributed to the subsequent increase in gross profit and the impact the acquisition of T & T. Likewise, the Gross Profit as a percentage of Sales went up from 23.4% in 2009 to 24.5% in 2010 and was caused by factors such as strong Canadian dollars, improved control label, continued buying synergies and more disciplined vendor management. 6. The interest coverage ratio measures the interest payment of the company compared to its Earnings before Income and Taxes. The greater the Interest coverage ratio the better the chances of the company in paying its debt and interest payments. Therefore, creditors and banks alike will look at this figure which has slightly improved from 4.2 in 2009 to 4.3 in 2010 indicating in a stronger position compared to last year. On the other hand shareholders will simply look at the Earnings per share (EPS) ratio which will give them an indication of how profitable it is to acquire a share of that company. The EPS increased by 2.5% compared to the previous, a visible sign of positive growth of the company 7. The difference in the increase in the Basic Net Earnings and the Net EPS for 2010 can be attributed to several factors. EPS was impacted by a charge of $0.10/share for the net effect of stock-based compensation, while changes in the federal tax legislation resulted in a further charge of $0.04/share which didn’t exist in the previous year. Moreover, the increased investment by the company in IT and supply chain imposed an additional charge of $0.36/share. Finally, asset impairment resulted in charges of $0.14/share. All of these combined to account for the difference between Net Earnings change (3.8%) and the EPS change (2.5%). 8. The current ratio remained largely the same from 2009 (4406/3665) to 2010 (=4626/3852) that is 1.2. This is an indication that the number of current assets to current liabilities increased in similar proportions for both the years. This means that the financial position of the company in terms of its current assets and liabilities remained relatively stable compared to other companies. The company thus has the same leverage in current period and can easily pay off its current liabilities using its higher currents. The increase in current liabilities was countered by a greater increase in current assets which the company must have generated from its operations such as accounts receivables. 9. The debt-to-assets ratio decreased from 2009 to 2010. It was 18.56% (=2783/14991) in 2009, while it fell to 15.79% (=2513/15919) in 2010. This shows that the numeric value of the debts decreased while the total worth of the net assets increased. The proportionate difference was 2.77% which implies that the company was able to significantly pay off some of its debts that were outstanding previous years and the amount of debt the company took in 2010 was lesser compare to the debts it was able to pay back hence a decline in the debt level. The assets value increased owing to the acquisition of T&T and other franchise openings. The company moved to a stronger position in 2010 since its dependence on debts was lowered. 10. The day sales Inventory is calculated using the formula = (inventory)/(cost of sales) * 365. For 2010, it was 24.9 days (=2114/30997*365), while for 2009 it was 25.1 (=2112/30735*365). This shows that the number of days it took on average for inventory to sell in 2010 was slightly lesser than compared to 2009. This can be due to recession and the slowing consumption pattern that was observed during most of 2009 because of the financial crisis. It is more or less consistent with my observation since it takes roughly a period of 3 weeks for the inventory that is stocked on shelves to get picked up by consumers. 11. The Dividend Reinvestment Plan (DRIP) has given the shareholders a chance to reinvest the quarterly dividend earnings that they will get to buy back common share of the company without incurring any brokerage fees or commission. Hence, this appeared as a benefit to a majority of the shareholders who continued with this plan and reinvested back availing a 3% discount to market. The common share equity generated in 2010 was thus equal to $167 million compared to the $120 million last figure. The debt-to-equity ratio reflected similar changes as it changed from 0.5:1 in 2008 to 0.4:1 in 2009 and 2010. This was mainly due to the reason that the equity increased in greater proportions compared to the net debt of the company. During the two years the plan was in place that is from 2009 to 2010 the ratio remained somewhat consistent since the increase in equity was countered by a similar increase in debt. Any company would want to introduce such a plan since it offers cheap capital without any increased risk to the company in the form of interest or preferred dividend. It can also be a quick way of generating capital through your existing resources where certain financial needs have to be met. Shareholders who take advantage of this reap the benefits in higher ownership of shares and greater earnings but might also experience dilution of their shares thereby reducing the net EPS for them. 12. The P/E ratio indicates that an average investor was willing to pay $15 for each dollar of earnings that the company was offering. In such a case the rate of return would be same as 1/15 = 6.67%. Google’s rate of return = 1/19.9 = 5.03%. Investors would willingly accept a lower rate of return from Google since it is more trusted and has negligible chances of going bankrupt and promises constant dividend earnings. A more trusted company can still deliver with lower rate of return because of its goodwill and past performance records. 13. In 2009 the cash generated from operations contributed in a significant improvement in non-cash working capital owing to the improvement in inventory levels and changes in accounts payable and accrued liabilities. On the other hand for 2010, the non-working capital did not increase that much and therefore money was spent on paying the accounts payable and accrued liabilities which eventually resulted in lowering of the cash compared to the previous year and hence a lower cash flow for operating activities 14. The company’s cash flows are more consistent with the growth stage of the company’s lifecycle. Since a significant amount of $1,448 million was invested in fixed assets and other investing opportunities this shows that the company is still growing and expanding and there is much room for improvement and expansion. The acquisition of the T&T supermarket is a clear example of the growth potential of Loblaw. Whereas, the financing activities cash flow is positive indicating that the company is slowly shifting from growth stage to the maturity stage and the operating activities will continue to grow in the near future as the company expands its territory. 15. The recession hit with quite severity and slowed the growth of the company. This was indicated by the slow sales growth rate of 0.9%, as sales increased from $30735 million in 2009 to $30997 million in 2010. This can be attributed to the rising inflation and the high gas prices in the region. Although sales in food and drugstore were flat but activities like the acquisition of T & T positively impacted the overall sales by 1.4%. This was a major reason why a company like Loblaw was able to sustain itself compared to other big giants such as Circuit City who almost went bankrupt. Moreover, since the product offering by Loblaw is of necessity rather than high end wants, therefore people had to buy them no matter what the situation was. This resulted in sustained sales if not growth. Food and drug items are basic necessities of life and therefore even when there is a recession people cut on other expense but not this. Moreover, the company’s internal food price inflation was deflated in comparison to CPI which showed an increase of 5% (2009). In order to attract consumers Loblaw had to reduce prices that badly dented the sales. Nonetheless, it still survived the recession because of the industry where it was operating and due to its mix of goods that it was selling that were coupled with proper planning. It should also be noted that 33 corporate or franchise stores were closed in 2009 mainly due to the effects of inflation which were too high to bear for these stores. 16. The EBITDA acronym stands for Earnings before Interest, Taxes, Depreciation and Amortization. EBITDA in 2010 was $1,924 million compared to $1,794 million in 2009. This affected the EBITDA margin which was 5.8% in 2009 to go up to about 6.2% in 2010. This was mainly due to the increase in EBITDA figures. EBITDA is widely used in loan covenants and helps the shareholders give a fair idea of what the company’s position is in terms of its profits since it excludes all the above mentioned capital expenses. 17. I would recommend my friend to invest in Loblaw and purchase its common share. The EPS has improved by 2.5% which is a good indication of growth amidst recession. The EPS growth rate for last year was 18.9% showing how strong the company is and gives huge dividends to its common shareholders. Another positive sign for investing is to see the Return on average shareholder’s equity which was about 10.4% in 2010. This is a good number for a large firm which sustained its sales and was able to show a positive growth too even after being hit by increasing inflation and reducing consumer consumption. The company is progressing from the growth stage to its maturity stage and its recent acquisition of T&T shows it has funds to invest and expand its operation. This would only help and create higher returns for the company since its asset base would also increase. The return on average net assets increased from last year and stood at 12.4% in 2010 which shows that company is a healthy one and has been successful in recovering profits out of its investments and possessions. Higher Net earnings also suggest the same and therefore it’s a good option to invest in Loblaw. Read More