Managerial Accounting and Finance Group Assignment: Pizza Pizza & Shoppers Drug Mart Introduction and Overview Pizza Pizza A quick-service restaurant chain is operated and franchised by Pizza Pizza Ltd (PPL). Pizza Pizza and Pizza 73 are the brand names under which the company has operated since 1967. The menu items offered by the establishment consist of pizza, wings, salads, panzos, quesadillas, drinks, desserts, appetizers, sides, and breadbasket items. It provides mobile websites that work with any smartphone and mobile apps for iPhone, iPad, iPod Touch, and Android devices for online meal ordering. The company offers gift cards, organizes all kinds of events, and advertises school lunch programs and corporate catering. PPL runs eateries in Ontario, Quebec, and Alberta using the franchising concept. The head office of PPL is in Toronto, Canada. (https://explorer-globaldata-com.ezproxy.humber.ca/Company/Summary/pizza-pizza-limited) Shoppers Drug Mart Operated by Loblaw Companies Ltd., shoppers Drug Mart Inc. (Shoppers) is a full-service retail drug store operator and licensee. The company sells and services assisted-living devices, home care items, medical equipment, and mobility equipment to institutional and retail consumers. It also operates luxury beauty destinations and pharmacies for medical clinics. Branded pharmaceuticals, over-the-counter medications, cosmetics, health and beauty supplies, seasonal goods, and household necessities are available to customers through its outlets. Shoppers Drug Mart and Shoppers Simply Pharmacy are two of its retail formats. Additionally, under the names Wellwise, PC Health, Medical Cannabis, Shoppers Home Health Care, Specialty Health Network, and MediSystem Pharmacy, Shoppers offer a range of specialty services. It provides private label brands as well. The main office of Shoppers is located in Toronto, Ontario, Canada. Shoppers Drug Mart Inc - Global Data Intelligence Center - Explorer (humber.ca) Ratio Calculations Pizza Pizza: Ratios are calculated using Figure 1, 2 and 3 provided below. Short Term Solvency or Liquidity Ratios Current Ratio= Current assets / Current Liabilities For Year 2022, For Year 2021, Current asset = 40,658 Current asset =42,371 Current Liabilities= 71,768 Current Liabilities= 70,782 Current Ratio = 0.5674 Current Ratio = 0.5986 Quick Ratio= (Current assets – Inventory) / Current Liabilities Current asset = 40,658 Current asset = Inventory=7,921 42,371 Inventory= 6,290 Current Liabilities= 71,768 Current Liabilities= 70,782 Quick Ratio = 0.4562 Quick Ratio = 0.5148 Cash Ratio= Cash / Current Liabilities Cash= 7748 Cash=8723 Current Liabilities= 71,768 Current Liabilities= 70,782 Cash Ratio = 0.108 Cash Ratio= 0.1232 Net Working Capital Ratio= Net Working Capital / Total Assets Net working capital = -31,110 Net working capital= -28,411 Total Assests= 240,509 Total Assests= 233,168 Net Working Capital= 0.1294 Net Working Capital= 0.1218 Interval Measure= Current Assets / Average Daily Operating Costs Current asset = 40,658 Current asset = 42,371 Daily operating cost = -263724 Daily operating cost = -269633 Interval Measure = - 0.1542 Interval Measure= - 0.1571 Asset Utilization Turnover Ratio Inventory Turnover= Cost of Goods Sold / Inventory Inventory=7,921 Inventory= 6,290 Cost of Goods Sold = Cost of food sales +store service expenditure Cost of Goods Sold=(-122,267)+ (-73,270) Cost of Goods Sold = (-121,308)+ (-75,854) = -195537 Inventory Turnover= -24.6859 = -197162 Inventory Turnover= -31.3453 Day’s Sales in Inventory= 365 days / Inventory Turnover Day’s Sales in Inventory = -14.7858 Day’s Sales in Inventory = - 11.6445 Receivables Turnover= Sales / Accounts Receivable Sales = 261,811 Accounts Receivable = 10,884 Receivables Turnover = 24.0547 Sales= 263,792 Accounts Receivable = 11,232 Receivables Turnover = 23.4857 Day Sales in Receivable= 365 days / Receivable Turnover Day Sales in Receivable= 15.1737 Day Sales in Receivable= 15.5414 NWC Turnover= Sales / NWC Sales = 261,811 Sales= 263,792 Net working capital = -31,110 Net working capital= -28,411 NWC turnover= - 8.4156 NWC turnover= - 9.2848 Fixed Asset Turnover= Sales / Net Fixed Assets Sales = 261,811 Sales= 263,792 Net Fixed Assests= 199,851 Net Fixed Assests= 190,797 Fixed Asset Turnover= 1.3100 Fixed Asset Turnover= 1.3826 Total Asset turnover= Sales / Total Assets Sales = 261,811 Sales= 263,792 Total Assests= 240,509 Total Assests= 233,168 Total Asset turnover= 1.0886 Profitability Ratio Profit Margin= Net Income / Sales * 100 Net Income= - 859 Net Income = - 3835 Sales = 261,811 Sales = 263,792 Profit Margin = -0.33 Profit Margin = -1.45 Total Asset turnover=1.1313 Return on Assets (ROA)= Net Income / Total Assets * 100 Net Income= - 859 Net Income = - 3835 Total Assests= 240,509 Total Assests= 233,168 ROA = - 0.36 ROA = -1.64 Return on Equity= Net Income / Total Equity * 100 Net Income= - 859 Net Income = - 3835 Total Equity = - 105502 Return on Equity = -0.0081 Total Equity = -105381 Return on Equity= -0.0364 Dupont Identity or ROE= (Net Income / Sales) * (Sales / Assets) * (Assets / Equity) Net Income= - 859 Net Income = - 3835 Sales = 261,811 Sales = 263,792 Total Equity = -105502 Total Equity = -105381 Total assest = Non current + current assest Total assest= 240,509 Total assest= 233,168 Dupont identity=(-0.0033)*(1.0886)*(-2.2797) Dupont identity = (-0.0145)*(1.1313) (-2.2126) Dupont identity = 0.0082 Dupont identity = 0.0362 Figure 1- page 1, Balance sheet Figure 2- page 2, Income statement Figure 3- page 5, statement of cash flow 2022 Annual Report 25% 10% $1 billion + On average savings by switching from comparable brand to no name ® Amount fully-engaged PC Optimum™ members can save on their grocery bills Value of PC Optimum™ Points redeemed by customers 4.4 million 3.7 million 250 COVID vaccinations administered COVID tests and screenings administered Carbon reduction projects completed $3 billion 50% 30 minutes E-commerce revenue for the year PC Express™ Delivery coverage across the country Launched PC Express™ Rapid Delivery, with delivery in as little as 30 minutes Table of Contents 2 Our Stores, Our Colleagues, Our Strategy 4 Financial Highlights 5 Chairman’s Message 8 Environmental, Social and Governance 10 Our Divisions 12 Our Leading Assets 14 Corporate Governance Practices 16 Board of Directors 16 Leadership 17 Financial Review Helping Canadians Live Life Well ® In 2022, we once again proved that our business is uniquely positioned to help address the prevailing forces of the day. As Canadians demonstrated an eagerness to return to school, work and play, we were there – with cosmetic, cough and cold sales reaching record levels. As Canadians faced an inflationary crisis unseen in decades, we were there – with an unprecedented freeze on no name® prices and over 1 billion in PC Optimum™ point awards and redemptions. As Canadians continued to demand more engagement around the issues that matter most to them and their families, we were there – actively fighting climate change and advancing social equity. Being a purpose-led organization is tough but important work, and we’re unapologetically proud of our efforts. None of this is possible without our 221,000 colleagues and employees, who serve their communities with pride and passion every day, and the millions of Canadians who offer us their trust each and every week. To all of you, we say thank you. 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED 1 Our Stores Our Colleagues Our Strategy As a purpose-driven organization, we exist to help Canadians Live Life Well ®. This commitment factors into how we operate our stores and pharmacies day-to-day, and how we deliver on our long-term organizational strategy. Our strategy keeps us intently focused on the realities of today, the opportunities of tomorrow, and the needs and expectations of consumers decades from now. Our efforts are underpinned by a solid foundation – an energetic colleague base working in great stores and pharmacies that operate efficiently and effectively from one day to the next. From there, we layer on value – everyday digital retail solutions, meaningful payment options, and outstanding loyalty offerings. And looking to the future, we envision connecting Canadians to healthcare solutions, both in our stores and online. Retail Excellence Through disciplined execution within our core retail operations, and by leveraging our scale and strategic assets, we are able to grow sales, optimize gross margins, and reduce operating costs – all while captivating and engaging customers. This requires promotional effectiveness, personalized value, quality service, and continued network investment and optimization to not only meet customer needs but improve overall profitability. Investing for the Future Capital investments in the modernization and automation of our supply chain, the expansion of our retail network, and the evolution of our Connected Healthcare strategy are all examples of Loblaw investing for long-term success. Environment, Social and Governance (ESG) We have a number of commitments within our two ESG priorities – fighting climate change and advancing social equity – that guide our support for the communities we serve. Colleagues, Culture and CORE Values An engaged and collaborative workforce is a key to our success, which is why we welcome authenticity, encourage strong connections, value trust, and make daily decisions with our CORE values – Care, Ownership, Respect, Excellence – top of mind. Driving Business Growth We continue to invest in three targeted growth areas to further differentiate our portfolio of assets and generate competitive advantage: Digital Retail, Loblaw Media™, and PC Optimum™. Our CORE values guide how we think, act and interact with one another. 2 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED care ownership respect excellence CORE values Adarsh’s Curiosity Makes a Big Impact Adarsh Soomal, Senior Regional Maintenance Manager for the Western Region noticed plastic wrap was getting caught in the gears on loading machines, melting, and causing drive train units to fail. He designed a small deflector piece that could be added to the loading machine and prevent plastic from getting sucked into the gears. The next year’s avoidable cost dropped from $70,000 to $24,000 and in the next two years there were no single drive train unit failures at all. “Look at a different way to fix a problem – that’s the way I approach things,” he says. “I always recommend being curious. Ask questions, look at other possibilities.” ADARSH SOOMAL Shirley’s Dream Comes True When Shirley Ibe started Madeup Beauty, an inclusive, Blackowned cosmetics brand aimed at women of colour, getting it on shelves at Shoppers Drug Mart® was an ambitious goal. Shirley attended a session where the Black Business Professionals Association connected small businesses with Loblaw, from there she had several presentations to Loblaw. All of her hard work paid off. Shirley is proud to see her line of makeup that prioritizes Black and other women of colour stocked alongside some of the biggest names in makeup. “From the time I started Madeup Beauty, I’ve always said I would love ® to be in Shoppers Drug Mart stores. It was one of my top choices because it’s Canadian owned,” she says. “And I’m always at Shoppers! I have about a million PC Optimum™ points.” SHIRLEY IBE 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED 3 Financial Highlights +4.7% +6.9% + 8.2% + 5.7% FOOD RETAIL SAME STORE SALES DRUG RETAIL SAME STORE SALES FRONT OF STORE PHARMACY +6.3% 30.9% +10.6% 10.9% REVENUE 2 ADJUSTED RETAIL SEGMENT GROSS PROFIT MARGIN1,2 CONSOLIDATED ADJUSTED EBITDA1,2 CONSOLIDATED ADJUSTED EBITDA MARGIN1,2 2020 29.5% 2020 4,937 ($ millions) 2020 51,836 2021 53,170 2022 56,504 2021 30.7% ($ millions) 2022 30.9% + 22.0% +12.9% ADJUSTED DILUTED NET EARNINGS PER COMMON SHARE1,2 DIVIDEND DECLARED PER COMMON SHARE 2021 5,587 2022 6,181 2020 9.5% 2021 10.5% 2022 10.9% ($) ($) 1 2020 4.09 4 2021 5.59 2022 6.82 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED 2020 1.28 2021 1.40 2022 1.58 2 See the Non-GAAP Financial Measures section of the 2022 Annual Report – Financial Review Excluding the impact of the 53rd week in 2020 Chairman’s Message More than ever, our businesses are well positioned to serve the everyday needs of Canadians. In a challenging year of inflationary pressures, each of our businesses delivered value, care and convenience while performing at the high-end of expectations. Collectively, our stores, our colleagues and our employees achieved our purpose – to help Canadians Live Life Well ® – in unique and impactful ways. Galen G. Weston Chairman and President Fellow Shareholders, Our business entered 2022 with momentum, optimism, and a focus on the fundamentals. A year later, we remain confident. Our supermarkets are doing more than ever to offer consumers value. The convenience of our e-commerce platforms drove $3 billion in revenue, stabilizing well above pre-pandemic levels. Joe Fresh® made essential style accessible to everyone. We continued to grow Canada’s most rewarding no-fee financial services with more than 2 million PC® Mastercard® and PC Money™ account holders. And, our pharmacy business is stronger than ever, providing patients with greater access and choice through new services and enhanced care. As we go, we are making meaningful progress against our Environmental, Social and Governance (ESG) goals, executing our strategy in pursuit of our purpose. Supporting Canadians Today In 2022, we enhanced our core through a commitment to retail excellence. More specifically, we drove day-to-day operating efficiency, and focused on being the best buyers in Canada. This improved our performance, drawing more customers while delivering solid financial results. Those successes showed up in many ways. Our no name® price freeze, which capped the price of 1,500 iconic yellow no name products for over three months, led to increases in both market share and customer satisfaction. Our Shoppers Drug Mart® division had record performance, answering the demand for cough, cold and cosmetic products while expanding Canadians’ access to primary care. That retail excellence drove results. We achieved same store sales growth of +4.7 per cent in food retail and +6.9 per cent in drug retail, with revenue of $56.5 billion, growing +6.3 per cent. Consolidated adjusted EBITDA was $6.18 billion, or +10.6 per cent. Adjusted diluted net earnings per share were $6.82 or +22.0 per cent. We generated $1.53 billion in free cash flow and continued to return capital to shareholders by increasing our dividend +12.9 per cent and by repurchasing 12.1 million shares under a common share repurchase program. 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED 5 Investing for the Future While delivering today, we invested for tomorrow. Expanded pharmacy services, the launch of pharmacist-led clinics, the acquisition of Lifemark, and the growth in PC Health™ app users, all give us increased confidence in our Connected Healthcare strategy and its ability to improve care for patients. In 2022, we enhanced our core through a commitment to retail excellence. Our business is also increasingly digital. We integrated our retail platforms, adding new functionality to improve customer experiences. And, we advanced Loblaw Media™, providing more targeted opportunities for our suppliers to reach customers online and in-store. PC Optimum™ continues to evolve. Already recognized as a powerful tool for delivering value, we’re increasing our ability to engage customers with more meaningful personalized offers and more effective promotions. As a result, PC Optimum held its place among the nation’s top 10 most influential brands, according to an Ipsos survey of Canadians. We were the highest-ranking Canadian name, alongside many global giants. 6 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED Focused on the Communities We Serve For decades, Canadians have offered us their trust and confidence. We know this is a privilege and we take our responsibility to the communities we serve to heart. That shows up in many ways. Notably, it underpins our approach to fighting climate change and advancing social equity – our two Environmental, Social and Governance (ESG) priorities. These are challenges that matter to Canadians, and where our efforts can have an impact. We are well on our way, having already made specific commitments and progress towards meaningful change. Looking ahead, we’ll continue to move our business forward. We’ll invest over $2 billion to grow and improve our store network, provide more health and wellness care to Canadians, create jobs, reduce waste and meet our ESG commitments. And we will do so while delivering consistently against our long-term financial framework. We are proud of all that we accomplished in 2022, and with 221,000 committed and hard-working colleagues standing ready to help Canadians Live Life Well ®, we are well-positioned for the year ahead. While the pages that follow offer more detail on our ESG efforts, our ambitions are clear: Fighting Climate Change • Achieve net-zero greenhouse gas emissions for our scope 1 and 2 by the end of 2040, and scope 3 by 2050 • Ensure all of our control brand and in-store plastic packaging Galen G. Weston Chairman and President is either reusable or recyclable by 2025 • Send zero food waste to landfill by the end of 2030 Advancing Social Equity • Be Canada’s most diverse and inclusive employer by deploying inclusion training across our entire workforce by 2024 • Support the health of women and children, by feeding 1 million kids a year by 2025, and providing nation-leading support for women’s health and access to care For more specifics, visit our Responsibility page at loblaw.ca. Looking ahead, we’ll invest over $2 billion to grow and improve our store network, provide more health and wellness care to Canadians, create jobs, reduce waste and meet our ESG commitments. 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED 7 Environmental, Social and Governance Our purpose-led approach has strong relevance to our Environmental, Social and Governance (ESG) priorities, guiding us as we work to fight climate change and advance social equity. Fighting Climate Change Eliminating Food Waste Sent to Landfill By 2030 Net-zero scope 1 and 2 by 2040, and scope 3 by 2050 After reaching our goal of cutting food waste by 50% by 2025 (five years early), we set a new target: send zero food to landfill by 2030 and achieve measurable food waste reductions in every one of our stores by the end of 2023. In 2022 we: In 2020, we met our goal of a 30% reduction in our carbon footprint, ten years early. We have since extended our focus to net-zero, which includes eliminating our enterprise green-house gas (GHG) emissions by 2050. In 2022 we: • Completed 250 carbon reduction projects. • Completed our climate risk assessment, evaluating our risk exposure and opportunities across multiple climate scenarios. • Published our inaugural TCFD-aligned report. • Ensured 100% of our corporate, food franchise, associate- owned Shoppers Drug Mart® stores, and distribution centres were partnered with a food recovery agency and were actively donating to that partner. Advancing Social Equity Be Canada’s most diverse and inclusive employer Tackling Plastic Waste Loblaw has a longstanding commitment to tackling plastic waste, working both at home and internationally on solutions. In 2022 we: • Assessed over 10,000 control brand and in-store packaging products relative to the Golden Design Rules; we established 35% compliance and a plan to achieve 100% compliance by 2025. • Replaced plastic box corners from banana shipping boxes, eliminating 220,000 kilograms of plastic waste. We’ve set goals to achieve industry-leading representation for Management, Executives and our Board of Directors by 2024. We have excellent momentum, the specifics of which will be reported in our 2022 ESG Report. Support the health and well-being of children and women We recognize that women and children are the building blocks of healthy communities, and we are proud to support programs and partners who work tirelessly to support them. In 2022 we: • Raised and donated more than $110 million to support research, charities and non-profits across Canada. • Announced our commitment to Feed More Families™, with a pledge to donate one billion pounds of food to charities by 2028. • Supported Canadians experiencing period poverty though our Our progress in diverse representation earned us spots on The Globe and Mail’s Top 100 Employers for Young People, and Best Diversity Employers. 8 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED LOVE YOU by Shoppers Drug Mart™ program; in partnership with Ontario’s Ministry of Education donated 7,000,000 period products, and an additional 3,250,000 to Manitoba school divisions. How We Diverted the Weight of an Airplane in Plastics Sebastian Kmiecik, Director of Bananas, Melons, and Tropical worked with four banana vendors to replace plastic cornerboards with cardboard ones. The project required collaboration and testing but in the end the cardboard cornerboards were durable, supported the cases of bananas through transit and could withstand the humidity of the tropics. When they calculated the savings they found they had already diverted approximately 220,000 kilograms of plastic from landfill in less than a year – a little bit heavier than a large airplane. Empowering Communities to Give Food a Second Life “Loblaw operates in virtually every community across Canada, and as such, we have a responsibility to the communities we serve,” says Alain Brandon, Vice President, Sustainability, Social Impact and Government Relations. Loblaw has partnered with Food Banks Canada to distribute a series of grants totaling $200,000 that have helped five local food banks purchase refrigeration equipment and community garden equipment. In October, select Ontario banners helped raise $174,000 for Second Harvest, helping to provide fresh, healthy food to social services and food organizations in our local communities equating to approximately 348,000 meals. In November the Flashfood® program reached a milestone of diverting 40 million pounds of food from landfill while saving Canadians $110 million on groceries, since launching in 2019. Loblaw remains committed to zero food waste to landfill by 2030. “It’s extraordinary how you can make such a big impact,” says Sebastian. “Especially when you work for a company the size of Loblaw—anything you do, can have a big, positive impact on the environment. Cardboard cornerboards is just one example – we should all strive to look for more sustainable solutions across the enterprise.” SEBASTIAN KMIECIK “Unlocking access to perishable food – whether it’s meals made by volunteers, fresh produce, meat, or frozen items – is critical in a time where food bank use has soared.” ALAIN BRANDON 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED 9 Our Divisions We operate more than 2,500 stores across Canada, employing directly or through our franchisees approximately 221,000 Canadians in full-time and part-time positions. With 90% of Canadians living within 10 kilometers of one of our stores, we are immersed in the communities we serve, and welcome the opportunity to help our customers lead better and healthier lives. Passionate about food and about creating exceptional customer experiences, our Market division operates a variety of banners – including Loblaws®, Loblaw City Market®, Your Independent Grocer®, Atlantic Superstore®, Zehrs®, Provigo®, Provigo Le Marché®, Real Canadian Wholesale Club®, Real Canadian Liquorstore™, Fortinos® and T&T® stores – and ultimately helps Canadians bring the best to their tables. Shoppers Drug Mart® is Canada’s leading drug store retailer, offering customers incredible convenience and the products and services they need throughout all stages of life. We operate more than 1,300 Associate-owned locations that deliver care and wellness to millions of Canadians weekly – both in-store and virtually making healthcare accessible, convenient and seamless. We also operate home healthcare and luxury beauty retail outlets, a specialty drug distribution network, pharmacy services for long-term care and retirement communities, a generic drug manufacturer, a unique health app, and an electronic medical records platform. Our Discount division – including Real Canadian Superstore®, Maxi®, Extra Foods® and No Frills® – proudly offers Canadian families easy, affordable essentials and stands ready to Feed Everyone by providing fresh, quality products at fantastic value. Joe Fresh® provides uniquely accessible shopping to Canadians, mixing modern designs with incredible value. With collections for women, men and children, shopping is made more convenient and cost-effective for the entire family. 1 Billion Customer transactions annually across grocery, pharmacy and financial services. 10 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED PC Financial® brings value and innovation to Canadians. More than 2 million PC® Mastercard® cardholders have collectively saved billions in bank fees while earning trillions of points to redeem for groceries and other essentials. And in 2022, the PC Money™ Account continued to grow, with Canadians valuing this no monthly fee account that gets them even more PC Optimum™ points. We also offer digital verification for authentication, in-platform spend insights, automatic savings goals, and sophisticated analysis of how Canadians earn and redeem PC Optimum™ points. How the Pandemic Deepened Canada’s Relationship with Pharmacists Alessandra Mentors the Business Leaders of Tomorrow Alessandra Bisaillon, Director of Marketing, Customer Management at PC® Bank volunteers with PC Financial’s® Resilience Project Accelerator which partners six teams of university students across Canada with an Advisor and together they are tasked with creating a project that promotes financial literacy and education in underserved populations. Alessandra’s team from Capilano University in Vancouver developed an online platform of financial modules to educate young people about the fundamentals of budgeting, taxes, saving, credit and understanding a balance sheet. The team is actively pitching to school boards across the country and is coming up on their final presentation for the ten judges from PC Financial®. Ruchi Kumar, Senior Director of Pharmacy Services at Shoppers Drug Mart® says she’s seen a change in how Canadians view pharmacists and their services coming out of the pandemic. “More often, patients are seeing Shoppers Drug Mart® pharmacists as healthcare professionals they have easy access to, and I think through the pandemic, pharmacists have demonstrated that they can really help patients achieve their care goals. The relationship between patient and pharmacist, and the loyalty that exists there, has continued to build. Patients’ adoption of digital tools, like the PC Health™ app, has also accelerated, and I’m looking forward to seeing how this trend will shape the future delivery of services in our stores.” “I’m proud to have played a role in helping millions of people access these services, while at the same time, keeping Canadians and our pharmacy teams safe and healthy.” RUCHI KUMAR “Knowing that I’m helping to make a difference in terms of building financial literacy for students and really supporting Canada’s future leaders is very inspiring and motivating.” ALESSANDRA BISAILLON 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED 11 Our Leading Assets We deliver on our purpose – to help Canadians Live Life Well ® – through an exceptional internal infrastructure, a unique and customer-centric culture, and a clear set of expectations for colleagues at all levels of the organization. Brands Supply Chain Our control brands – including President’s Choice , no name , Farmer’s Market™ and Life Brand® – are trusted by Canadians. Our product developers surprise and delight our customers with new and unique experiences and innovations. ® ® PC Optimum™ With over 15.5 million active annual members, PC Optimum™ is unique in its reach and customer engagement. The program is continually refined and enhanced, to provide our customers with greater value and the personalization they seek. Technology & Analytics We use technology and analytics to connect our customers to the things that matter most: food, health, and money. We enable our business strategy with world class data products and services, including: our agile framework, artificial intelligence and machine learning programs, and an ongoing journey to the cloud – all in an attempt to enhance our customers’ experience. 3 Of the country’s top 10 brands – President’s Choice®, no name®, Farmer’s Market™. 12 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED As one of the largest supply chain networks in North America, we are committed to efficiency, responsiveness, and serving the evolving needs of our stores and customers. Continually adopting new technology, embracing automation, and refining our processes allow us to increase our capacity, source with integrity, and reliably serve Canadians across the country. Compliance and Ethical Conduct Our commitment to compliance ensures our colleagues understand our regulatory and legal obligations and have the knowledge they need to comply with those rules. We encourage colleagues and vendors to speak up and take action when necessary, and our policies and training ensure they can conduct themselves in an ethical and compliant manner. Les Becomes More Independent at Work When Les Alexander works part-time in the health and beauty department at the East Village Real Canadian Superstore®, he is usually found with his support worker Brent. Les has a lifelong learning disability that means he cannot read or write, so Brent – through an organization called Vecova – helps Les navigate his tasks. Recently Brent discovered the OrCam Read, a small pen-shaped device that reads and then recites any printed type. Les’ store bought one in the hopes it would better accommodate Les’s disability at work, and it has been a game-changer. Now, Les wears the OrCam Read on a lanyard around his neck throughout his whole shift, pulling it out when he needs to read something. It works so well he feels much closer to working his shifts solo. Driverless Vehicles Hit the Road “I like having a tool that allows me to do things myself instead of having to ask for help because it makes me feel like I have more ownership over my responsibilities.” LES ALEXANDER In our company’s century-long history, we have led the way with many ground-breaking innovations aimed at serving Canadians. Recently, we added to our list of firsts, making history by deploying the first fully driverless delivery on a public road, in partnership with Gatik, a technology company specializing in autonomous vehicles (AVs). In our journey to build and operate a customer-centred supply chain, embracing cutting-edge technology plays a key role in improving our day-to-day function. We believe autonomous delivery enables Loblaw to operate more routes and make more frequent trips, establishing a supply chain that is safer, more sustainable and more resilient. “Working with Gatik, we’ve demonstrated that autonomous driving technology enables supply chain efficiency, moving more orders more frequently for our customers.” DAVID MARKWELL CHIEF TECHNOLOGY AND ANALYTICS OFFICER LOBLAW COMPANIES LIMITED 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED 13 Corporate Governance Practices The Board of Directors and senior executives of Loblaw Companies Limited are committed to strong corporate governance practices as a foundation to the effective management of the Company and its achievement of strategic, financial, and operational objectives. The Governance Committee regularly reviews the Company’s corporate governance practices to ensure they reflect evolving best practices in a rapidly changing environment. The Company’s website, loblaw.ca, includes additional governance information, including the Company’s Code of Conduct (the “Code”), Disclosure Policy, Majority Voting Policy, the position description for the Chairman and President and mandates of the Board of Directors (the “Board”) and of its committees. Director Independence The Canadian Securities Administrators’ Corporate Governance Guidelines provide that a director is independent if he or she has no material relationship with the Company or its affiliates that could reasonably be expected to interfere with the exercise of the director’s independent judgment. Approximately 82% of the directors on the Board are independent. The independent directors meet separately following each Board meeting. Information relating to each of the directors, including their independence, committee memberships, other public company boards on which they serve, as well as their attendance record for all Board and committee meetings, can be found in the Company’s Management Proxy Circular. Board Leadership Galen G. Weston is the Chairman of the Board. The Chairman directs the operations of the Board. He chairs each meeting of the Board, is responsible for the management and effective functioning of the Board generally and provides leadership to the Board in all matters. These and other key responsibilities of the Chairman are set out in a position description established by the Board. The Board has also appointed an independent director, William A. Downe, to serve as lead director. The lead director provides leadership to the Board and particularly to the independent directors. He ensures that the Board operates independently of management and that directors have an independent leadership contact. 14 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED Board Responsibilities and Duties The Board, directly and through its committees, supervises and oversees the management of the business and affairs of the Company. A copy of the Board’s mandate can be found on the Company’s website, loblaw.ca. The Board reviews the Company’s strategic direction, assigns responsibility to management for the achievement of the strategy, approves major policy decisions, delegates to management the authority and responsibility of handling day-to-day affairs, and reviews management’s performance and effectiveness. The Board’s expectations of management are communicated to management directly and through committees of the Board. The Board regularly receives reports on the operating results of the Company as well as reports on certain non-operational matters, including insurance, pensions, corporate governance, environmental, social, workplace health and safety, legal, compliance and treasury matters. The Board also oversees the enterprise risk management (ERM) process, which is designed to assist all areas of the business in managing appropriate levels of risk tolerance by bringing a systematic approach, a methodology and tools for evaluating, measuring and monitoring key risks. The results of the ERM program and other business planning processes are used to identify emerging risks to the Company, prioritize risk management activities and develop a risk-based internal audit plan. Ethical Business Conduct The Code reflects the Company’s long-standing commitment to high standards of ethical conduct and business practices. The Code is reviewed annually to ensure it is current and reflects best practices in the area of ethical business conduct and integrity and includes a strong “tone from the top” message. All directors, officers and employees of the Company are required to comply with the Code and must acknowledge their commitment to abide by the Code on a periodic basis. The Company encourages the reporting of violations and potential violations and has established an Integrity Action Line, a toll-free number that any director, officer, supplier or employee may use to report conduct which he or she feels violates the Code or otherwise constitutes fraudulent or unethical conduct. A fraud reporting protocol has also been implemented to ensure that fraud is reported to senior management in a timely manner. In addition, the Audit Committee has endorsed procedures for the anonymous receipt, retention and handling of complaints regarding accounting, internal control or auditing matters. These procedures are available on the Company’s website, loblaw.ca. Board Committees The following is a brief summary of some of the responsibilities of each committee of the Board. Audit Committee The Audit Committee is responsible for the oversight of the integrity of the Company’s financial statements and related public disclosure, as well as the adequacy and effectiveness of applicable controls related to its ESG disclosures. In doing so, the Audit Committee reviews management’s administration of the Company’s internal controls over financial reporting, disclosure controls and procedures and internal audit function and related party transactions. The Audit Committee also oversees procedures for the receipt, retention and follow-up of any complaints regarding the Company’s accounting, internal controls and auditing matters. Governance, Employee Development, Nominating and Compensation Committee The Governance Committee is responsible for the oversight of the Company’s governance practices, including the development and implementation of good governance principles, consistent with high standards of corporate governance. The Governance Committee oversees the succession planning and compensation for the Board and Senior Management. The Chair of the Governance Committee, who is an independent director, has also been appointed by the Board to serve as lead director. Pension Committee The Pension Committee is responsible for the oversight of the administration, management, design and governance of the Company’s pension plans, as well as the administration and management of the Company’s benefit programs. Risk and Compliance Committee The Risk and Compliance Committee is responsible for the oversight of the Company’s legal and regulatory compliance and ethics compliance program, ERM program, ESG program, policy, pharmacy and drug safety matters, food safety and product safety matters and information systems and technology matters. ESG Governance The Board oversees and monitors the Corporation’s approach, policies and practices related to ESG matters. Management has established an ESG Steering Committee, comprised of senior leaders, responsible for setting priorities, tracking metrics and championing program initiatives across the Corporation. Various management committees are responsible for setting priorities and implementing and monitoring ESG-related initiatives across the organization. 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED 15 Board of Directors GALEN G. WESTON, B.A., M.B.A. CHRISTIE J.B. CLARK , B. COMM., Chairman and President, Loblaw Companies Limited; Chairman and Chief Executive Officer, George Weston Limited; Chairman of President’s Choice Bank; Chairman, Wittington Investments Limited; and is President of the Weston Family Foundation. M.B.A., F.C.A., F.C.P.A.1*,3, 4 SCOTT B. BONHAM, B.Sc., M.B.A. 1, 4 Corporate Director; Co-founder of Intentional Capital Corp.; Former Co-Founder of GGV Capital; Former Vice-President, Capital Group Companies; Director, The Bank of Nova Scotia; Board Member of Canadian Institute of Advanced Research and the DenmarkBridge. SHELLEY G. BROADER, B.A.1, 4 Corporate Director; Former President and Chief Executive Officer of Chicos FAS, Inc.; former President and Chief Executive Officer of Walmart EMEA Ltd. and Walmart Canada; former President and Chief Operating Officer of The Michaels Companies, Inc.; Director, IFCO Systems US LLC; member of the U.S. Advisory Board of Amoobi SA; and former director of Walmart Canada Corporation and Walmart Mexico. Corporate Director; Former Chief Executive Officer and Senior Partner, PricewaterhouseCoopers LLP; Director, Air Canada, SNC-Lavalin Group Inc.; Trustee, Choice Properties Real Estate Investment Trust; Former Director, Hydro One Inc., Hydro One Limited; Board Member, Canadian Olympic Committee, Canadian Olympic Foundation, Own the Podium, the Sunnybrook Foundation. DANIEL DEBOW, B.A., J.D./M.B.A., L.L.M. 2, 4 Vice President, Product, Shopify Inc.; Former founder and Chief Executive Officer, Helpful.com; Co-founder and former Co-Chief Executive Officer of Rypple; Founding team member of Workbrain. WILLIAM A. DOWNE , C.M., M.B.A.2* CLAUDIA KOTCHA , B.B.A., C.P.A.2, 4 Corporate Director; Former Chief Executive Officer, Chief Operating Officer, Head of BMO Capital Markets, BMO Financial Group; Former Director, Bank of Montreal and its subsidiaries, BMO Nesbitt Burns Holding Corporation and BMO Financial Corp.; Lead Director, ManpowerGroup Inc.; Chairman, Trans Mountain Corporation; Director, Rush University System for Health; Board Member, Social and Economic Policy Advisory Board, Rand Corporation. Corporate Director; Former Vice President, Design Innovation & Strategy, Procter & Gamble; Former Trustee, Cooper Hewitt Smithsonian Design Museum; Director, American Red Cross, Los Angeles Region; Former Director, American Red Cross, Greater Miami and the Keys; Former Trustee of the Cooper Hewitt Smithsonian Design Museum. JANICE FUKAKUSA , F.C.P.A., F.C.A., B.A., M.B.A.1, 4* Corporate Director; Former Chief Financial Officer and Chief Administrative Officer, Royal Bank Of Canada; Director, Cineplex Inc., Brookfield Asset Management Inc., RioCan REIT; Chancellor, Toronto Metropolitan University. M. MARIANNE HARRIS, B.Sc., J.D., M.B.A.1, 2, 3 Corporate Director; Former Managing Director and President, Corporate and Investment Banking, Merrill Lynch Canada Inc., Former Head of Financial Institutions Group Americas, Merrill Lynch Pierce Fenner & Smith; Director, George Weston Limited, Sun Life Financial Inc., Public Sector Pension Investment Board; Former Director, Hydro One Inc./ Hydro One Limited; Former Chair, Investment Industry Regulatory Organization of Canada (IIROC); Member of Dean’s Advisory Council, Schulich School of Business; Advisory Council, Hennick Centre for Business and Law. SARAH RAISS, B.S., M.B.A.2, 3* Corporate Director; Former Executive, TransCanada Corporation; Lead Director, Commercial Metals Company; Director, Ritchie Bros Auctioneers Inc.; Former Chair, Alberta Electric Systems; Former Director, Canadian Oil Sands Limited, Shoppers Drug Mart Corporation, Vermillion Energy Inc. CORNELL WRIGHT, B.A., J.D., M.B.A.4 President and Director of Wittington Investments, Limited; Director, George Weston Limited, BCE, Inc.; Trustee, Choice Properties Real Estate Investment Trust, Former Partner, Torys LLP; Board Chair, the National Ballet of Canada; Trustee of University Health Network; and Executive in Residence at the University of Toronto’s Rotman School of Management. Notes 1 Audit Committee 2 Governance, Employee Development, Nominating and Compensation Committee 3 Pension Committee 4 Risk and Compliance Committee * Chair of the Committee Leadership GALEN G. WESTON NICK HENN BARRY K. COLUMB GREG RAMIER President and Chairman Executive Vice President, Chief Legal Officer and Secretary President, President’s Choice Financial President, Market Division IAN FREEDMAN KEVIN GROH Chief Financial Officer DAVID MARKWELL President, Joe Fresh ROBERT SAWYER Executive Vice President, Chief Technology and Analytics Officer FRANK GAMBIOLI Senior Vice President, Corporate Affairs and Communication RICHARD DUFRESNE Chief Operating Officer ROBERT WIEBE Chief Administrative Officer 16 2022 ANNUAL REPORT LOBLAW COMPANIES LIMITED MARK WILSON Executive Vice President and Chief Human Resources Officer President, Discount Division JEFF LEGER President, Shoppers Drug Mart MARY MACISAAC Senior Vice President, Marketing LAUREN STEINBERG Senior Vice President, Loblaw Digital 2022 Annual Report – Financial Review 2022 Annual Report - Financial Review Financial Highlights Management’s Discussion and Analysis Financial Results Notes to the Consolidated Financial Statements Three Year Summary Glossary of Terms 1 3 69 80 141 143 Financial Highlights(1) 2022 (52 weeks) As at or for the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) Consolidated Results of Operations Revenue Revenue growth Operating income Adjusted EBITDA(2) Adjusted EBITDA margin(2) Net interest expense and other financing charges Adjusted net interest expense and other financing charges(2) Income taxes Adjusted income taxes(2) Adjusted effective tax rate(2) Net earnings Net earnings attributable to shareholders of the Company Net earnings available to common shareholders of the Company(i) Adjusted net earnings available to common shareholders of the Company(2) Consolidated per Common Share ($) Diluted net earnings Adjusted diluted net earnings(2) Dividends Dividends declared per common share ($) Consolidated Financial Position and Cash Flows Cash and cash equivalents and short term investments Cash flows from operating activities Capital investments Free cash flow(2) Financial Measures Retail debt to retail adjusted EBITDA(2) Adjusted return on equity(2) Adjusted return on capital(2) $ 56,504 6.3 % $ 3,342 6,181 10.9 % $ 683 694 665 841 26.4 % $ 1,994 1,921 1,909 2,263 2021 (52 weeks) $ $ $ $ 53,170 0.9 % 2,937 5,587 10.5 % 495 684 466 721 26.3 % 1,976 1,875 1,863 1,911 $ $ 5.75 6.82 $ $ 5.45 5.59 $ 1.580 $ 1.400 $ 1,934 4,755 1,571 1,528 $ 2,440 4,827 1,183 1,959 2.4 x 20.2 % 10.8 % 2.6 x 17.3 % 9.8 % (i) Net earnings available to common shareholders of the Company are net earnings attributable to shareholders of the Company net of dividends declared on the Company’s Second Preferred Shares, Series B. 2022 Annual Report - Financial Review Loblaw Companies Limited 1 Financial Highlights(1) 2022 (52 weeks) 2021 (52 weeks) $ 55,492 3,260 17,165 30.9 % $ 5,939 10.7 % $ 2,746 $ 52,269 2,713 16,041 30.7 % $ 5,322 10.2 % $ 2,623 4.7 % 6.9 % 5.7 % 8.2 % 71.2 547 551 1,346 0.3 % 5.0 % 8.4 % 2.1 % 71.2 548 551 1,342 As at or for the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) Retail Results of Operations Sales Operating income Adjusted gross profit(2) Adjusted gross profit %(2) Adjusted EBITDA(2) Adjusted EBITDA margin(2) Depreciation and amortization Retail Operating Statistics Food retail same-store sales growth Drug retail same-store sales growth Drug retail same-store pharmacy sales growth Drug retail same-store front store sales growth Total retail square footage (in millions) Number of corporate stores(4) Number of franchise stores Number of Associate-owned drug stores Financial Services Results of Operations Revenue Earnings (Losses) before income taxes Financial Services Operating Measures and Statistics Average quarterly net credit card receivables Credit card receivables Allowance for credit card receivables Annualized yield on average quarterly gross credit card receivables Annualized credit loss rate on average quarterly gross credit card receivables 2 2022 Annual Report - Financial Review Loblaw Companies Limited $ 1,338 (2) $ 1,182 160 $ 3,607 3,954 206 13.0 % 2.7 % $ 3,128 3,443 205 12.7 % 2.5 % Management's Discussion and Analysis 1. 4 Forward-Looking Statements 2. Overview 6 3. Strategic Framework 6 4. Key Financial Performance Indicators 7 5. Overall Financial Performance 5.1 Consolidated Results of Operations 5.2 Selected Financial Information 8 8 12 6. Reportable Operating Segments Results of Operations 6.1 Retail Segment 6.2 Financial Services Segment 14 14 16 7. 17 17 19 20 22 22 22 24 25 Liquidity and Capital Resources 7.1 Cash Flows 7.2 Liquidity and Capital Structure 7.3 Components of Total Debt 7.4 Financial Condition 7.5 Credit Ratings 7.6 Share Capital 7.7 Off-Balance Sheet Arrangements 7.8 Contractual Obligations 8. Financial Derivative Instruments 25 9. Quarterly Results of Operations 9.1 Results by Quarter 9.2 Fourth Quarter Results 27 27 29 10. Disclosure Controls and Procedures 37 11. Internal Control over Financial Reporting 37 12. Enterprise Risks and Risk Management 12.1 Operating Risks and Risk Management 12.2 Financial Risks and Risk Management 38 39 47 13. Related Party Transactions 48 14. Critical Accounting Estimates and Judgments 14.1 Consolidation 14.2 Business Combinations - Valuation of Intangible Assets 14.3 Inventories 14.4 Impairment of Non-Financial Assets 14.5 Impairment of Credit Card Receivables 14.6 Income and Other Taxes 14.7 Segment Information 14.8 Provisions 14.9 Leases 52 52 52 52 52 53 53 53 54 54 15. Accounting Standards 54 16. Strategic Update and Outlook 55 17. Non-GAAP Financial Measures 56 18. Additional Information 68 2022 Annual Report - Financial Review Loblaw Companies Limited 3 Management’s Discussion and Analysis The following Management’s Discussion and Analysis (“MD&A”) for Loblaw Companies Limited and its subsidiaries (collectively, the “Company” or “Loblaw”) should be read in conjunction with the audited annual consolidated financial statements and the accompanying notes included on page 69 to 140 of this Annual Report – Financial Review (“Annual Report”). The Company’s annual audited consolidated financial statements and the accompanying notes for the year ended December 31, 2022 have been prepared in accordance with International Financial Reporting Standards (“IFRS” or “GAAP”) as issued by the International Accounting Standards Board (“IASB”) and include the accounts of the Company and other entities that the Company controls and are reported in Canadian dollars, except when otherwise noted. Management uses non-GAAP financial measures to exclude the impact of certain expenses and income that must be recognized under GAAP when analyzing consolidated and segment underlying operating performance, as the excluded items are not necessarily reflective of the Company’s underlying operating performance and make comparisons of underlying financial performance between periods difficult. The Company adjusts for these items if it believes doing so would result in a more effective analysis of underlying operating performance. The exclusion of certain items does not imply that they are non-recurring. See Section 17 “Non-GAAP Financial Measures”, of this MD&A for more information on the Company’s non-GAAP financial measures. The information in this MD&A is current to February 22, 2023, unless otherwise noted. A glossary of terms used throughout this Annual Report can be found on page 143. Unless otherwise indicated, all comparisons of results for the fourth quarter of 2022 (12 weeks ended December 31, 2022) are against results for the fourth quarter of 2021 (12 weeks ended January 1, 2022) and all comparisons of results for the full-year of 2022 (52 weeks ended December 31, 2022) are against the results for the full-year of 2021 (52 weeks ended January 1, 2022). 1. Forward-Looking Statements This Annual Report, including this MD&A, contains forward-looking statements about the Company’s objectives, plans, goals, aspirations, strategies, financial condition, results of operations, cash flows, performance, prospects, opportunities and legal and regulatory matters. Specific forward-looking statements in this Annual Report include, but are not limited to, statements with respect to the Company’s anticipated future results, events and plans, strategic initiatives and restructuring, regulatory changes including further healthcare reform, future liquidity, planned capital investments, and the status and impact of information technology (“IT”) systems implementations. These specific forward-looking statements are contained throughout this Annual Report including, without limitation, Section 3 “Strategic Framework”, Section 5.1 “Consolidated Results of Operations”, Section 6.1 “Retail Segment”, Section 6.2 “Financial Services Segment”, Section 7 “Liquidity and Capital Resources”, Section 9 “Quarterly Results of Operations”, Section 12 “Enterprise Risks and Risk Management”, Section 14 “Critical Accounting Estimates and Judgments”, Section 15 “Accounting Standards”, Section 16 “Strategic Update and Outlook” and Section 17 “Non-GAAP Financial Measures”. Forward-looking statements are typically identified by words such as “expect”, “anticipate”, “believe”, “foresee”, “could”, “estimate”, “goal”, “intend”, “plan”, “seek”, “strive”, “will”, “may”, “should” and similar expressions, as they relate to the Company and its management. Forward-looking statements reflect the Company’s estimates, beliefs and assumptions, which are based on management’s perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. The Company’s estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and, as such, are subject to change. The Company can give no assurance that such estimates, beliefs and assumptions will prove to be correct. 4 2022 Annual Report - Financial Review Loblaw Companies Limited Numerous risks and uncertainties could cause the Company’s actual results to differ materially from those expressed, implied or projected in the forward-looking statements, including those described in the Company’s MD&A in the 2022 Annual Report, and the Company’s 2022 Annual Information Form (“AIF”) for the year ended December 31, 2022. Such risks and uncertainties include: • changes in economic conditions, including inflation, levels of employment, costs of borrowing, household debt, political uncertainty and government regulation, the impact of natural disasters, war or acts of terrorism, pandemics, changes in interest rates, tax rates, or exchange rates, and access to consumer credit; • failure to attract and retain colleagues may impact the Company’s ability to effectively operate and achieve financial performance goals; • inability of the Company’s IT infrastructure to support the requirements of the Company’s business, or the occurrence of any internal or external security breaches, denial of service attacks, viruses, worms and other known or unknown cybersecurity or data breaches; • failure to maintain an effective supply chain and consequently an appropriate assortment of available product at the store and digital retail level; • changes to the regulation of generic prescription drug prices, the reduction of reimbursements under public drug benefit plans and the elimination or reduction of professional allowances paid by drug manufacturers; • • • • changes to any of the laws, rules, regulations or policies applicable to the Company’s business; • failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements; • • adverse outcomes of legal and regulatory proceedings and related matters; • failure to execute the Company’s e-commerce initiatives or to adapt its business model to shifts in the retail landscape caused by digital advances; • failure to realize the anticipated benefits associated with the Company’s strategic priorities and major initiatives, including revenue growth, anticipated cost savings and operating efficiencies, or organizational changes that may impact the relationships with franchisees and Associates (as defined within); • • failure to realize benefits from investments in the Company’s new IT systems and related processes; • reliance on the performance and retention of third party service providers, including those associated with the Company’s supply chain and apparel business and located in both advanced and developing markets. public health events including those related to food and drug safety; errors made through medication dispensing or errors related to patient services or consultation; failure to adapt to environmental and social risks, including failure to execute against the Company’s climate change and social equity initiatives; failure to effectively respond to consumer trends or heightened competition, whether from current competitors or new entrants to the marketplace; inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory or control shrink; and This is not an exhaustive list of the factors that may affect the Company’s forward-looking statements. Other risks and uncertainties not presently known to the Company or that the Company presently believes are not material could also cause actual results or events to differ materially from those expressed in its forward-looking statements. Additional risks and uncertainties are discussed in the Company’s materials filed with the Canadian securities regulatory authorities (“securities regulators”) from time to time, including, without limitation, the section entitled "Risks" in the Company's 2022 AIF (for the year ended December 31, 2022). Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect the Company’s expectations only as of the date of this MD&A. Except as required by law, the Company does not undertake to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 2022 Annual Report - Financial Review Loblaw Companies Limited 5 Management’s Discussion and Analysis 2. Overview Loblaw Companies Limited is a Canadian public company incorporated in 1956 and is Canada's food and pharmacy leader, and the nation's largest retailer. The Company has two operating segments: Retail and Financial Services. The Retail segment consists primarily of corporate and franchise-owned retail food and Associate-owned drug stores, which includes in-store pharmacies, health care services and other health and beauty products, apparel and other general merchandise. The Company’s Financial Services segment provides credit card and everyday banking services, the PC Optimum™ Program, insurance brokerage services, and telecommunication services. The businesses are underpinned by the PC Optimum Program, a customer loyalty program that provides more than a billion dollars in annual rewards and is unique to each consumer across their network-wide purchases. 3. Strategic Framework Loblaw is driven by its purpose to help Canadians Live Life Well® which guides the Company's strategic framework. This framework centres around a passion for customers and drives investments in three key strategic priorities: Everyday Digital Retail, Payments and Rewards, and Connected Healthcare. Enabling these investments comes from a sharp focus on leveraging data driven insights and process efficiency excellence to deliver strong financial performance. The framework is supported by colleagues with a shared set of CORE values and culture principles that encourages colleagues to be authentic, build trust and make connections. The Company strives to be the "best in food, health and beauty" and with its focus on retail excellence, it is constantly improving its retail operations to differentiate its customer offerings and deliver scale through its national logistics infrastructure. Building for the future, its purpose guides its investments in strategic growth initiatives to further differentiate its portfolio of assets, generate competitive advantages in products, services and price, improve its operational efficiencies, and create new areas of growth. Retail operations benefit from more than one billion customer touchpoints annually and deliver a unique customer experience driven by industry leading control brands, healthy alternatives and a choice of in-store shopping, pick-up and delivery. The approach to being “best in food” is driven by fresh food selection, competitive value and customized assortments across banners. The approach to being “best in health and beauty” is supported by high quality health and wellness products, an expanding offer of healthcare services, and a diverse and differentiated beauty offering. Loblaw's purpose-led approach to addressing environmental, social and governance issues focuses on two priorities: fighting climate change and advancing social equity. Environmental, social and governance (“ESG”) considerations are central to decisions made across the Company. By integrating consideration of environmental and social risks and good governance practices in its day-to-day business activities, implementing robust compliance and ethics programs and supporting its colleagues and the communities in which it operates, the Company aims to be a leading contributor to Canadian society both today and for generations to come. Together, each of these components forms a part of the strategic framework that guides our direction now and into the future. 6 2022 Annual Report - Financial Review Loblaw Companies Limited 4. Key Financial Performance Indicators(1) The Company has identified key financial performance indicators to measure the progress of short and long term objectives. Certain key financial performance indicators are set out below: As at or for the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) Consolidated Revenue growth Operating income Adjusted EBITDA(2) Adjusted EBITDA margin(2) Net earnings Net earnings attributable to shareholders of the Company Net earnings available to common shareholders of the Company(i) Adjusted net earnings available to common shareholders of the Company(2) Diluted net earnings per common share ($) Adjusted diluted net earnings per common share(2) ($) Cash and cash equivalents and short term investments Cash flows from operating activities Free cash flow(2) Financial Measures Retail debt to retail adjusted EBITDA(2) Adjusted return on equity(2) Adjusted return on capital(2) Retail Segment Food retail same-store sales growth Drug retail same-store sales growth Operating income Adjusted gross profit(2) Adjusted gross profit %(2) Adjusted EBITDA(2) Adjusted EBITDA margin(2) Financial Services Segment Earnings (Losses) before income taxes Annualized yield on average quarterly gross credit card receivables Annualized credit loss rate on average quarterly gross credit card receivables $ $ $ $ $ 2022 (52 weeks) 2021 (52 weeks) 6.3 % 3,342 6,181 10.9 % 1,994 1,921 1,909 2,263 5.75 6.82 1,934 4,755 1,528 0.9 % 2,937 5,587 10.5 % 1,976 1,875 1,863 1,911 5.45 5.59 2,440 4,827 1,959 $ $ $ $ $ 2.4 x 20.2 % 10.8 % 2.6 x 17.3 % 9.8 % 4.7 % 6.9 % $ 3,260 17,165 0.3 % 5.0 % 2,713 16,041 $ 30.9 % 5,939 $ $ 10.7 % $ (2) 13.0 % 2.7 % 30.7 % 5,322 10.2 % $ 160 12.7 % 2.5 % (i) Net earnings available to common shareholders of the Company are net earnings attributable to shareholders of the Company net of dividends declared on the Company’s Second Preferred Shares, Series B. 2022 Annual Report - Financial Review Loblaw Companies Limited 7 Management’s Discussion and Analysis 5. Overall Financial Performance 5.1 Consolidated Results of Operations The following is a summary of selected consolidated financial information for 2022: 2022 (52 weeks) As at or for the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) Revenue Operating income Adjusted EBITDA(2) Adjusted EBITDA margin(2) Depreciation and amortization Net interest expense and other financing charges Adjusted net interest expense and other financing charges(2) Income taxes Adjusted income taxes(2) Adjusted effective tax rate(2) Net earnings attributable to non-controlling interests Net earnings attributable to shareholders of the Company Net earnings available to common shareholders of the Company(i) Adjusted net earnings available to common shareholders of the Company(2) Diluted net earnings per common share ($) Adjusted diluted net earnings per common share(2) ($) Diluted weighted average common shares outstanding (in millions) $ 56,504 3,342 6,181 10.9 % $ 2,795 683 694 665 841 26.4 % $ 73 $ 1,921 $ $ 2021 (52 weeks) $ $ $ $ 53,170 2,937 5,587 10.5 % 2,664 495 684 466 721 26.3 % 101 1,875 $ Change % Change $ 3,334 405 594 6.3 % 13.8 % 10.6 % $ 131 188 10 199 120 4.9 % 38.0 % 1.5 % 42.7 % 16.6 % $ $ (28) 46 (27.7)% 2.5 % 1,909 1,863 46 2.5 % 2,263 5.75 6.82 1,911 5.45 5.59 352 0.30 1.23 18.4 % 5.5 % 22.0 % 331.7 $ $ $ $ 341.8 (i) Net earnings available to common shareholders of the Company are net earnings attributable to shareholders of the Company net of dividends declared on the Company’s Second Preferred Shares, Series B. Loblaw continued to deliver strong and consistent financial and operating results across its various businesses in 2022. Global inflationary pressures and lessened impact from COVID-19 influenced consumer behaviours and positively impacted Retail sales. Loblaw’s portfolio of best in class assets was well positioned to meet customer’s everyday needs across food, health and wellness, further bolstered by its acquisition of Lifemark Health Group (“Lifemark”) during the year. The Company’s relentless focus on retail excellence leveraged these assets to deliver strong sales growth, gross margin improvements, and leverage its operating costs. 8 2022 Annual Report - Financial Review Loblaw Companies Limited Net Earnings Available to Common Shareholders of the Company and Diluted Net Earnings Per Common Share Net earnings available to common shareholders of the Company were $1,909 million ($5.75 per common share) in 2022. This represented an increase of $46 million ($0.30 per common share) or 2.5% when compared to 2021. The increase included an improvement in underlying operating performance of $352 million which was partially offset by the unfavourable change in adjusting items totaling $306 million, as described below: • the improvement in underlying operating performance of $352 million ($1.03 per common share) was primarily due to the following: ◦ ◦ an improvement in the underlying operating performance in the Retail segment driven by an increase in adjusted gross profit(2), partially offset by an increase in selling, general and administrative expenses (“SG&A”) and depreciation and amortization; and the favourable impact from non-controlling interests; partially offset by, ◦ a decline in the Financial Services segment primarily due to the year-over-year impact of the expected credit loss provision from lapping a larger prior year release versus the current year increase and from lapping a prior year reversal of certain commodity tax accrued. • the unfavourable change in adjusting items totaling $306 million ($0.93 per common share) was primarily due to the following: ◦ ◦ the year-over-year unfavourable impact of the recovery related to Glenhuron Bank Limited (“Glenhuron”) of $271 million ($0.79 per common share); the unfavourable impact of the charge related to a President’s Choice Bank (“PC Bank”) commodity tax matter of $86 million ($0.25 per common share); and ◦ the unfavourable impact of the Lifemark transaction costs of $12 million ($0.04 per common share); partially offset by, ◦ ◦ • the year-over-year favourable impact from the gains on the sale of non-operating properties of $35 million ($0.11 per common share); and the year-over-year favourable change in restructuring and other related costs of $24 million ($0.07 per common share). diluted net earnings per common share also included the favourable impact of the repurchase of common shares over the last 12 months ($0.20 per common share). In July 2022, the Tax Court of Canada (“Tax Court”) released a decision relating to PC Bank, a subsidiary of the Company. The Tax Court ruled that PC Bank is not entitled to claim notional input tax credits for certain payments it made to Loblaws Inc. in respect of redemptions of loyalty points. On September 29th, 2022, PC Bank filed a Notice of Appeal with the Federal Court of Appeal. Although the Company believes in the merits of its position, the Company recorded a charge of $111 million, inclusive of interest, in the second quarter of 2022. The Company believes that this provision is sufficient to cover its liability, if the appeal is ultimately unsuccessful. Between 2015 and 2019, the Company was reassessed by the Canada Revenue Agency and the Ontario Ministry of Finance on the basis that certain income earned by Glenhuron, a wholly owned Barbadian subsidiary of the Company that was wound up in 2013, should be treated, and taxed, as income in Canada. In the fourth quarter of 2021, the Supreme Court of Canada (“Supreme Court”) ruled in favour of the Company on the Glenhuron matter and the Company reversed $301 million of previously recorded charges, of which $173 million was recorded as interest income and $128 million was recorded as income tax recovery, and an additional $16 million, before taxes, was also recorded in respect of interest income earned on expected cash tax refunds. As a result of related reassessments received during the first quarter of 2022, the Company reversed another $35 million of previously recorded charges, of which $2 million was recorded as interest income and $33 million was recorded as an income tax recovery, and an additional $9 million, before taxes, was recorded in respect of interest income earned on expected cash tax refunds. Adjusted net earnings available to common shareholders of the Company(2) were $2,263 million, an increase of $352 million or 18.4% compared to 2021. Adjusted net earnings per common share(2) in 2022 were $6.82 per common share, an increase of $1.23 or 22.0%. The increase includes the favourable impact of the repurchase of common shares. 2022 Annual Report - Financial Review Loblaw Companies Limited 9 Management’s Discussion and Analysis Revenue 2022 (52 weeks) For the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) Retail Financial Services Eliminations Revenue $ 55,492 1,338 (326) 56,504 $ 2021 (52 weeks) $ $ Change % Change 3,223 156 (45) 3,334 6.2 % 13.2 % (16.0)% 6.3 % 52,269 $ 1,182 (281) 53,170 $ $ Revenue was $56,504 million in 2022, an increase of $3,334 million, or 6.3% compared to 2021. The increase was primarily driven by an increase in Retail segment sales of $3,223 million, due to positive same-store sales growth and Lifemark revenue since the date of acquisition. Furthermore, there was an improvement in Financial Services segment sales of $156 million. Operating Income Operating income was $3,342 million in 2022, an increase of $405 million, or 13.8% compared to 2021. The increase in operating income was driven by an improvement in underlying operating performance of $454 million, partially offset by an unfavourable change in certain adjusting items totaling $49 million as described below: • the improvement in the underlying operating performance of $454 million was primarily due to the following: ◦ an improvement in the underlying operating performance of the Retail segment due to an increase in adjusted gross profit(2), partially offset by an increase in SG&A and depreciation and amortization; partially offset by, ◦ • a decline in the Financial Services segment primarily due to the year-over-year impact of the expected credit loss provision from lapping a larger prior year release versus the current year increase and from lapping a prior year reversal of certain commodity tax accrued. the unfavourable year-over-year impact of certain adjusting items totaling $49 million was primarily due to the following: ◦ ◦ the unfavourable impact of the charge related to a PC Bank commodity tax matter of $111 million; and the unfavourable impact of the Lifemark transaction costs of $16 million; partially offset by, ◦ ◦ the year-over-year favourable impact from the gains on the sale of non-operating properties of $45 million; and the year-over-year favourable change in restructuring and other related costs of $28 million. Adjusted EBITDA(2) 2022 (52 weeks) For the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) Retail Financial Services Adjusted EBITDA(2) $ $ 5,939 242 6,181 2021 (52 weeks) $ $ $ Change % Change 5,322 $ 265 5,587 $ 617 (23) 594 11.6 % (8.7)% 10.6 % Adjusted EBITDA(2) was $6,181 million in 2022, an increase of $594 million, or 10.6% compared to 2021. The increase in adjusted EBITDA(2) was primarily due to an increase in the Retail segment of $617 million which was partially offset by a decrease in the Financial Services segment of $23 million. Depreciation and Amortization Depreciation and amortization was $2,795 million in 2022, an increase of $131 million or 4.9% compared to 2021. The increase in depreciation and amortization in 2022 was primarily driven by an increase in IT assets and leased assets. Included in depreciation and amortization was accelerated depreciation of $24 million (2021 – nil) due to the reassessment of the estimated useful life of certain IT assets, and the amortization of intangible assets related to the acquisition of Shoppers Drug Mart Corporation (“Shoppers Drug Mart”) and Lifemark of $497 million (2021 – $506 million). 10 2022 Annual Report - Financial Review Loblaw Companies Limited Net Interest Expense and Other Financing Charges Net interest expense and other financing charges were $683 million in 2022, an increase of $188 million or 38.0% compared to 2021. The increase was primarily driven by prior year interest income related to Glenhuron as discussed in the Income Taxes section below, an increase in interest expense from higher interest rates, and an increase in long term debt and borrowings related to credit card receivables. This was partially offset by higher interest income on certain short term investments and postemployment and other long term employee benefits due to higher interest rates. Included in interest expense from long term debt is an early repayment premium charge of $7 million recorded in 2022. Income Taxes 2022 (52 weeks) For the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) Income taxes Add impact of the following Tax impact of items included in adjusted earnings before taxes Recovery related to Glenhuron Adjusted income taxes(2) Effective tax rate Adjusted effective tax rate(2) $ 665 2021 (52 weeks) $ 143 33 $ 841 25.0 % 26.4 % $ 466 $ Change % Change $ 199 42.7 % 127 128 16 (95) 12.6 % (74.2)% 721 $ 19.1 % 26.3 % 120 16.6 % Income tax expense was $665 million (2021 – $466 million) and the effective tax rate was 25.0% (2021 – 19.1%). The increase in the effective tax rate was primarily attributable to the recovery of income taxes related to Glenhuron in 2021 and the impact of the reversal of the non-deductible interest related to Glenhuron in 2021. Adjusted income tax expense(2) in 2022 was $841 million (2021 – $721 million) and the adjusted effective tax rate(2) was 26.4% (2021 – 26.3%). The increase in the adjusted effective tax rate(2) was primarily attributable to the impact of certain non-deductible items. Between 2015 and 2019, the Company was reassessed by the Canada Revenue Agency and the Ontario Ministry of Finance on the basis that certain income earned by Glenhuron, a wholly owned Barbadian subsidiary of the Company that was wound up in 2013, should be treated, and taxed, as income in Canada. In the fourth quarter of 2021, the Supreme Court ruled in favour of the Company on the Glenhuron matter and the Company reversed $301 million of previously recorded charges, of which $173 million was recorded as interest income and $128 million was recorded as income tax recovery, and an additional $16 million, before taxes, was also recorded in respect of interest income earned on expected cash tax refunds. As a result of related reassessments received during the first quarter of 2022, the Company reversed another $35 million of previously recorded charges, of which $2 million was recorded as interest income and $33 million was recorded as an income tax recovery, and an additional $9 million, before taxes, was recorded in respect of interest income earned on expected cash tax refunds. Net Earnings Attributable to Non-Controlling Interests Net earnings attributable to non-controlling interests were $73 million in 2022, a decrease of $28 million or 27.7% compared to 2021. Non-controlling interests represent the share of earnings that relates to the Company’s Food Retail franchisees and is impacted by the timing of when profit sharing with franchisees is agreed and finalized under the terms of the agreements. The decrease in noncontrolling interests was primarily driven by the normalizing of franchisee earnings after profit sharing. 2022 Annual Report - Financial Review Loblaw Companies Limited 11 Management’s Discussion and Analysis 5.2 Selected Financial Information The selected information presented below has been derived from and should be read in conjunction with the annual consolidated financial statements of the Company dated December 31, 2022, January 1, 2022, and January 2, 2021. The analysis of the data contained in the table focuses on the trends and significant events or items affecting the financial condition and results of the Company’s operations over the most recent three years. For the years ended December 31, 2022 and January 1, 2022 and January 2, 2021 (millions of Canadian dollars except where otherwise indicated) 2022 (52 weeks) 2021 (52 weeks) Revenue Operating income Adjusted EBITDA(2) Adjusted EBITDA margin(2) Depreciation and amortization Adjusted net interest expense and other financing charges(2) Adjusted effective tax rate(2) Net earnings Net earnings attributable to the shareholders of the Company Net earnings available to common shareholders of the Company(i) Adjusted net earnings available to common shareholders of the Company(2) Basic net earnings per common share ($) Diluted net earnings per common share ($) Adjusted diluted net earnings per common share(2) ($) $ 56,504 3,342 6,181 10.9 % $ 2,795 694 26.4 % $ 1,994 1,921 1,909 2,263 $ 5.82 $ 5.75 $ 6.82 $ $ $ Diluted weighted average common shares (in millions) Dividends declared per common share ($) Dividends declared per Second Preferred Share, Series B ($) Total assets Total long term debt Lease liabilities Long term financial liabilities 331.7 $ 1.580 $ 1.325 $ 38,147 $ 7,783 9,115 $ 16,898 341.8 $ 1.400 $ 1.325 $ 36,614 $ 7,213 8,839 $ 16,052 2020 (53 weeks) $ 53,170 $ 52,714 2,937 2,365 5,587 5,004 10.5 % 9.5 % $ 2,664 $ 2,596 684 742 26.3 % 26.7 % $ 1,976 $ 1,192 1,875 1,108 1,863 1,096 1,911 5.49 5.45 5.59 $ $ $ 1,499 3.08 3.06 4.18 $ 358.2 $ 1.280 $ 1.325 $ 35,873 $ 7,046 8,901 $ 15,947 (i) Net earnings available to common shareholders of the Company are net earnings attributable to shareholders of the Company net of dividends declared on the Company’s Second Preferred Shares, Series B. Revenue Revenue was $56,504 million in 2022, an increase of $3,334 million when compared to 2021. Food retail same-store sales growth was 4.7% (2021 – 0.3%). Drug retail same-store sales growth was 6.9% (2021 – 5.0%). Revenue was $53,170 million in 2021, an increase of $456 million when compared to 2020, which was negatively impacted by $878 million due to the 53rd week in 2020. Food retail same-store sales growth was 0.3% (2020 – 8.6%). Drug retail same-store sales growth was 5.0% (2020 – 4.9%). 12 2022 Annual Report - Financial Review Loblaw Companies Limited The Company’s Retail segment sales have continued to grow despite the pressure of a competitive retail market, impacts of global economic uncertainties, and regulatory environment over the last three years. In 2020, the COVID-19 pandemic had a significant impact on the Company’s colleagues, customers, suppliers and other stakeholders. The Company experienced sales volatility and changes in sales mix as the pandemic impacted consumer behaviour throughout the year. In 2021, COVID-19 continued to have a significant impact on the Company, continuing to accelerate some long-term trends, enabling the Company to advance its strategic growth areas of Everyday Digital Retail, Connected Healthcare and Payments and Rewards. In Food Retail, sales remained strong as eat-at-home trends remained elevated even in period where social restrictions loosened. In Drug Retail, sales benefited from growth in pharmacy services as COVID-19 testing and vaccinations ramped up throughout the year. Higher margin front-store categories within Drug Retail, that had previously negatively impacted earnings, increased sales momentum as the economy opened up. In 2022, COVID-19 continued to impact Retail segment sales through the first half of the year. Food Retail benefited from elevated eat-at-home trends, and Drug Retail from strong cosmetics and over-the-counter (“OTC”) product sales, as customers returned to pre-pandemic activities, while COVID-19 related testing and vaccines continued at elevated levels. Retail segment sales growth in the second half of 2022 benefited from global inflationary pressures and reflected continued strength in cosmetics and OTC sales in Drug Retail. The Financial Services segment sales have continued to grow, however, have been impacted by the COVID-19 pandemic. During 2020, the Company’s Financial Services segment sales were negatively impacted by the COVID-19 pandemic from lower credit card related revenues from lower customer spending and lower sales attributable to the partial closure of The Mobile Shop™ kiosks during the second quarter of 2020. The Financial Services segment also launched the PC Money™ Account in the third quarter of 2020, an everyday banking product that allows account holders to earn PC Optimum points by making payments. The underlying operating performance of the Company’s Financial Services segment improved in 2021. In 2021, the Financial Services segment benefited from an increase in customer spending and higher sales attributable to The Mobile Shop kiosks. In 2022, the Financial Services segment continued to benefit from an increase in customer spending. Further, the segment benefited from growing credit card receivables in 2022 driven by growth in the active customer base. Net Earnings Available to Common Shareholders of the Company and Diluted Net Earnings Per Common Share Net earnings available to common shareholders of the Company and diluted net earnings per common share fluctuated over the past three years and were impacted by certain adjusting items set out in Section 17 “Non-GAAP Financial Measures,” and the changes in the underlying operating performance of the Company. The fluctuations in net earnings available to common shareholders of the Company and diluted net earnings per common share were primarily due to: • • the impact of the 53rd week in fiscal year 2020; • • cost savings and operating efficiencies and investments in and benefits from strategic initiatives; • • the favourable impact of the repurchase of common shares for cancellation; and changes in underlying operating performance of the Retail segment due to COVID-19. The Company’s financial results for the year ended December 31, 2022 and January 1, 2022 had higher revenue and cost of sales when compared to 2020. In addition, SG&A increased in 2020 as a result of the incremental cost of COVID-19 related investments to benefit and protect colleagues and customers which have stabilized in 2021 and 2022; fluctuations in the performance of the Financial Services segment driven by the impact of the increase in customer spending, the reversal of certain commodity taxes accrued, and year-over-year movement of the expected credit loss provision; the impact of certain adjusting items, including: ◦ ◦ ◦ ◦ ◦ ◦ ◦ charge related to PC Bank commodity tax matter; Lifemark transaction costs; the recovery relating to Glenhuron; fair value adjustment on non-operating properties; fair value adjustment on fuel and foreign currency; restructuring and other related recoveries and costs; and the gain on sale of non-operating properties. 2022 Annual Report - Financial Review Loblaw Companies Limited 13 Management’s Discussion and Analysis Total Assets and Long Term Financial Liabilities In 2022, total assets of $38,147 million increased by 4.2% compared to 2021. The increase was primarily driven by an increase in inventory, credit card receivables, and goodwill. This was partially offset by a decrease in cash and cash equivalents and a decrease in income tax recoverable due to collection of income tax refunds from Glenhuron. Long term financial liabilities of $16,898 million, increased by 5.3% compared to 2021. This was primarily driven by an increase in lease liability and long term debt driven by an increase in guaranteed investment certificates (“GIC”). In 2021, total assets of $36,614 million increased by 2.1% compared to 2020. The increase was primarily driven by an increase in receivables due to the recovery of taxes and interest from Glenhuron, an increase in credit card receivables and an increase in cash and cash equivalents. Long term financial liabilities of $16,052 million increased by 0.7% compared to 2020. This was primarily driven by an increase in long term debt due to Eagle Credit Card Trust® (“Eagle”) Eagle issuance of $300 million of senior and subordinated term notes with a maturity date of June 17, 2026 at a weighted average interest rate of 1.61%. The increase was also due to an increase in the independent funding trust, partially offset by a decrease in GICs. 6. Reportable Operating Segments Results of Operations The Company has two reportable operating segments, with all material operations carried out in Canada: • The Retail segment consists primarily of corporate and franchise-owned retail food and Associate-owned drug stores, which includes in-store pharmacies, health care services and other health and beauty products, apparel and other general merchandise. This segment is comprised of several operating segments that are aggregated primarily due to similarities in the nature of products and services offered for sale in the retail operations and the customer base; and • The Financial Services segment provides credit card and everyday banking services, the PC Optimum Program, insurance brokerage services, and telecommunication services. 6.1 Retail Segment For the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) Sales Operating income Adjusted gross profit(2) Adjusted gross profit %(2) Adjusted EBITDA(2) Adjusted EBITDA margin(2) Depreciation and amortization 2022 (52 weeks) $ 55,492 3,260 17,165 30.9 % $ 5,939 10.7 % $ 2,746 14 2022 Annual Report - Financial Review Loblaw Companies Limited $ Change % Change $ 52,269 $ 3,223 2,713 547 16,041 1,124 30.7 % $ 5,322 $ 617 10.2 % $ 2,623 $ 123 Sales 2022 (52 weeks) Same-store sales $ 39,398 16,094 7,944 8,150 4.7 % 6.9 % 5.7 % 8.2 % For the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) Food retail Drug retail Pharmacy and healthcare services Front store 2021 (52 weeks) 6.2 % 20.2 % 7.0 % 11.6 % 4.7 % 2021 (52 weeks) Same-store Sales sales $ 37,481 14,788 7,224 7,564 0.3 % 5.0 % 8.4 % 2.1 % Sales Retail segment sales were $55,492 million in 2022, an increase of $3,223 million, or 6.2% compared to 2021, primarily driven by the following factors: • • Food retail same-store sales growth was 4.7% (2021 – 0.3%) for 2022. ◦ ◦ ◦ Sales growth in food was strong, mainly due to higher than normal inflation; ◦ Food Retail traffic increased and basket size decreased. Sales growth in pharmacy was modest; The Consumer Price Index as measured by The Consumer Price Index for Food Purchased From Stores was 9.7% (2021 – 2.2%) which was generally in line with the Company’s internal food inflation; and Drug retail same-store sales growth was 6.9% (2021 – 5.0%). ◦ ◦ ◦ Pharmacy same-store sales growth was 5.7% (2021 – 8.4%). Pharmacy and healthcare services samestore sales growth benefited from an increase in acute and chronic prescription volumes from the economic re-opening. The number of prescriptions dispensed increased by 2.5% (2021 – 0.9%). On a same-store basis, the number of prescriptions dispensed increased by 2.6% (2021 – 2.7%) and the average prescription value increased by 2.4% (2021 – 4.7%); Pharmacy and healthcare services sales include Lifemark revenues of $279 million. Lifemark revenues are excluded from same-store sales; and Front store same-store sales growth was 8.2% (2021 – 2.1%). Front store same-store sales growth benefited from the economic re-opening and higher consumer spending. In 2022, 13 food and drug stores were opened, and 10 food and drug stores were closed, and net retail square footage has remained constant at 71.2 million square feet. Operating Income Operating income was $3,260 million in 2022, an increase of $547 million, or 20.2% compared to 2021. The increase was driven by an improvement in underlying operating performance of $485 million and the favourable change in adjusting items totaling $62 million, as described below: • the improvement in underlying operating performance of $485 million was primarily from an increase in adjusted gross profit(2), partially offset by an increase in SG&A and an increase in depreciation and amortization; and • the favourable change in adjusting items totaling $62 million was primarily due to the following: ◦ the year-over-year favourable impact from the gains on the sale of non-operating properties of $45 million; and ◦ the year-over-year favourable change in restructuring and other related costs of $28 million; partially offset by, ◦ the unfavourable impact of the Lifemark transaction costs of $16 million. Adjusted Gross Profit(2) Adjusted gross profit(2) was $17,165 million in 2022, an increase of $1,124 million, or 7.0% compared to 2021. Adjusted gross profit percentage(2) of 30.9% increased by 20 basis points when compared to 2021, driven by growth in higher margin Drug Retail front store categories. Compared to 2021, when inflation started to accelerate, Food Retail gross margins were flat. Adjusted EBITDA(2) Adjusted EBITDA(2) was $5,939 million in 2022, an increase of $617 million, or 11.6% compared to 2021. The increase was driven by an increase in adjusted gross profit(2) of $1,124 million, partially offset by an increase in SG&A of $507 million. SG&A as a percentage of sales was 20.2%, a decrease of 30 basis points when compared to 2021. The favourable decrease of 30 basis points was primarily due to operating leverage gained from higher sales and lower COVID-19 related expenses. Depreciation and Amortization Depreciation and amortization was $2,746 million in 2022, an increase of $123 million when compared to 2021. The increase in depreciation and amortization was primarily driven by an increase in IT and leased assets. Included in depreciation and amortization in 2022 was accelerated depreciation of $24 million (2021 – nil) due to the reassessment of the estimated useful life of certain IT assets, and the amortization of intangibles assets related to the acquisitions of Shoppers Drug Mart and Lifemark of $497 million (2021 – $506 million). 2022 Annual Report - Financial Review Loblaw Companies Limited 15 Management’s Discussion and Analysis Lifemark Health Group On May 10, 2022, the Company acquired all of the outstanding common shares of Lifemark for total cash purchase consideration of $829 million. Lifemark is the Canadian leading provider of outpatient physiotherapy, massage therapy, occupational therapy, chiropractic, mental health, and other ancillary rehabilitation services through its more than 300 clinics across Canada. The acquisition of Lifemark adds to the Company’s growing role as a healthcare service provider, with a network of health and wellness solutions, accessible in-person and digitally. Revenue of $279 million and nominal net earnings were contributed by Lifemark from the date of acquisition. In 2022, net earnings includes amortization related to the acquired intangible assets of $8 million. 6.2 Financial Services Segment 2022 (52 weeks) For the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) Revenue Earnings (Losses) before income taxes (millions of Canadian dollars except where otherwise indicated) Average quarterly net credit card receivables Credit card receivables Allowance for credit card receivables Annualized yield on average quarterly gross credit card receivables Annualized credit loss rate on average quarterly gross credit card receivables $ 2021 (52 weeks) 1,338 (2) $ 1,182 160 $ Change % Change $ 156 (162) 13.2 % (101.3)% As at December 31, 2022 As at January 1, 2022 $ Change % Change $ $ $ 3,607 3,954 206 3,128 3,443 205 13.0 % 12.7 % 2.7 % 2.5 % 479 511 1 15.3 % 14.8 % 0.5 % Revenue Revenue was $1,338 million in 2022, an increase of $156 million compared to 2021. The increase was primarily driven by: • • higher interest income from growth in credit card receivables; and higher interchange income and credit card related fees from an increase in customer spending; partially offset by, • lower sales attributable to The Mobile Shop. Earnings (Losses) before income taxes Losses before income taxes were $2 million in 2022, a decrease of $162 million compared to 2021. The decrease was primarily driven by: • • a charge related to a commodity tax matter of $111 million recorded in the second quarter of 2022; higher loyalty program costs, operating costs, contractual charge-off and funding costs from an increase in customer spending and an increase in interest rates; • prior year reversal of certain commodity tax accrued in the amount of $37 million; and • the year-over-year impact of the expected credit loss provision from lapping a larger prior year release of $32 million versus the current year increase of $1 million; partially offset by, • higher revenue as described above. In July 2022, the Tax Court released a decision relating to PC Bank, a subsidiary of the Company. The Tax Court ruled that PC Bank is not entitled to claim notional input tax credits for certain payments it made to Loblaws Inc. in respect of redemptions of loyalty points. On September 29th, 2022, PC Bank filed a Notice of Appeal with the Federal Court of Appeal. Although the Company believes in the merits of its position, the Company recorded a charge of $111 million, inclusive of interest, in the second quarter of 2022. The Company believes that this provision is sufficient to cover its liability, if the appeal is ultimately unsuccessful. Credit Card Receivables As at December 31, 2022, credit card receivables were $3,954 million, an increase of $511 million compared to January 1, 2022. This increase was primarily driven by growth in the active customer base and an increase in customer spending. The allowance for credit card receivables was $206 million, an increase of $1 million compared to January 1, 2022. 16 2022 Annual Report - Financial Review Loblaw Companies Limited 7. Liquidity and Capital Resources 7.1 Cash Flows Major Cash Flow Components 2022 (52 weeks) For the years ended December 31, 2022 and January 1, 2022 (millions of Canadian dollars except where otherwise indicated) 2021 (52 weeks) $ Change % Change Cash and cash equivalents, beginning of year Cash flows from (used in): $ 1,976 $ 1,668 $ 308 18.5 % Operating activities $ 4,755 $ 4,827 $ (72) (1.5)% Investing activities (2,368) (1,271) (1,097) (86.3)% Financing activities Effect of foreign currency exchange rate changes on cash and cash equivalents Change in cash and cash equivalents Cash and cash equivalents, end of year (2,751) (3,249) 498 15.3 % $ $ (4) (368) 1,608 $ $ 1 308 1,976 $ $ (5) (500.0)% (676) (219.5)% (368) (18.6)% Cash Flows from Operating Activities Cash flows from operating activities were $4,755 million, a decrease of $72 million compared to 2021. The decrease in cash flows from operating activities was primarily driven by an unfavourable change in non-cash working capital and growth in credit card receivables from a rise in customer spending, partially offset by higher cash earnings and net lower income taxes paid due to the recovery of cash taxes related to Glenhuron. Cash Flows used in Investing Activities Cash flows used in investing activities were $2,368 million, an increase of $1,097 million compared to 2021. The increase in cash flows used in investing activities was primarily driven by the acquisition of Lifemark and an increase in investments in fixed and intangible assets, partially offset by a decrease in short term investments. Capital Investments and Store Activity As at or for the periods ended December 31, 2022 and January 1, 2022 Corporate square footage (in millions) Franchise square footage (in millions) Associate-owned drug store square footage (in millions) Total retail square footage (in millions) Number of corporate stores Number of franchise stores Number of Associate-owned drug stores Total number of stores Average store size (square feet) Corporate Franchise Associate-owned drug store (i) 2022 (52 weeks) 2021(i) (52 weeks) % Change 34.9 17.3 19.0 71.2 547 551 1,346 2,444 35.1 17.2 18.9 71.2 548 551 1,342 2,441 (0.6)% 0.6 % 0.5 % —% (0.2)% —% 0.3 % 0.1 % 63,800 31,400 14,100 64,100 31,200 14,100 (0.5)% 0.6 % —% Comparative figures for the number of corporate stores has been restated to conform with current year presentation, which separately counts in-store health clinics. 2022 Annual Report - Financial Review Loblaw Companies Limited 17 Management’s Discussion and Analysis Capital Investments Capital investments were $1,571 million, an increase of $388 million or 32.8%, compared to 2021. Cash Flows used in Financing Activities Cash flows used in financing activities were $2,751 million, a decrease of $498 million compared to 2021. The decrease in cash flows used in financing activities was pri...
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