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Loblaw Companies Limited (L)

Q3 2009 Earnings Call

November 17, 2009 11:00 am ET

Executives

Inge Vandenberg – Senior Vice President, Corporate Affairs

Galen G. Weston – Executive Chairman

Allan L. Leighton – President and Deputy Chairman

Dalton T. Philips – Chief Operating Officer

Robert G. Vaux – Chief Financial Officer

Sarah R. Davis – Executive Vice President, Finance

Analysts

Patricia Baker - Scotia Capital

Perry Caicco - CIBC World Markets

Irene Nattel - RBC Capital Markets

Jim Durran - National Bank Financial

Michael Van Aelst - T. D. Newcrest

Keith Howlett - Desjardins Securities

Winston Lee - Credit Suisse

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Loblaw Companies Limited third quarter earnings conference call. (Operator Instructions) I’d like to remind everyone this conference call is being recorded today, Tuesday, November 17, 2009 at 11:00 AM Eastern Time.

I will now turn the conference over to Inge Vandenberg, Senior Vice President, Corporate Affairs. Please go ahead.

Inge Vandenberg

Good morning and welcome to the Loblaw Companies Limited third quarter conference call. This call is also being webcast simultaneously on our website, www.loblaw.ca. I’m joined here this morning by Galen G. Weston, Executive Chairman; Allan Leighton, President and Deputy Chairman; Dalton Philips, Chief Operating Officer; Bob Vaux, Chief Financial Officer and Sarah Davis, Executive Vice President, Finance.

Before we begin today’s call, I want to remind you that the discussion will include forward-looking statements such as the company’s beliefs and expectations regarding certain aspects of its financial performance in 2009 and future years. These statements are based on certain assumptions and reflect management’s current expectations, and they are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These risks and uncertainties are discussed in the company’s materials filed with the Canadian Securities Regulators from time to time including the company’s annual report and third quarter report. Any forward-looking statements speak only as of the date they are made. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, other than as required by law.

Certain non-GAAP financial measures may be discussed or referred to today. Please refer to our third quarter report and other materials filed with the Canadian Securities Regulators from time to time for a reconciliation of each of these measures to the most directly comparable GAAP financial measures. Our third quarter report as well as the archive of this conference call will be available on our website.

I will now turn the call over to Galen Weston.

Galen G. Weston

Good morning. Thank you for joining us. As we progressed through the third quarter, our sales were increasingly impacted by the significant decline in inflation and the ramp up of our pricing investments.

Earnings benefited from cost containment and supply chain efficiencies. We expect that sales and margins will be challenged due to decreasing inflation, competitive intensity and our ongoing renovation and infrastructure programs.

Lastly, this quarter we’re delighted to finalize the acquisition of T & T Supermarkets Incorporated, and we welcome T & T’s talented management team and colleagues into our Loblaw’s family of companies and look forward to continue running what we believe are the best Asian supermarkets in Canada.

I’ll now turn the call over to Bob Vaux to review our financial performance.

Robert G. Vaux

Good morning and thank you for joining us today. Sales in the third quarter decreased by 0.2% to $9.5 billion, while same-store sales decreased by 0.6%. Sales and same-store sales in the quarter were positively affected by about 0.5% as a result of the shift of the Thanksgiving holiday into the third quarter of ’09 from the fourth quarter of ’08.

Sales were negatively impacted by 0.5% as a result of the sale of the company’s food service business in the fourth quarter of ’08 and positively impacted by 0.2% by the acquisition of T & T. Excluding these items, sales and same-store sales declined by 0.4% and 1.1% respectively.

In the third quarter, sales growth in food and drugstore was modest, sales growth in apparel was moderate, while sales of other general merchandise declined significantly and gas bar sales declined significantly as a result of lower retail gas prices, despite moderate volume drop.

National food price inflation as measured by the Consumer Price Index for food purchased from stores was 4.2% in the third quarter of ’09. Our internal retail food price inflation was below CPI for food and significantly lower than our internal retail food price inflation in the second quarter of ’09. In addition, I’ll remind you that we experienced moderate internal food price inflation in the third quarter of ’08.

Gross profit in the third quarter was $2.2 billion or 22.9% of sales versus $2.1 billion or 22.1% of sales in the third quarter of last year. The improvement was largely due to improved buying synergies, more disciplined vendor management, sales mix, lower fuel costs and the efficiency of transportation operations. Increased investments in pricing partially offset the improvement.

Operating income was $378 million in the third quarter compared to $312 million in Q3 ’08. Operating margin was 4% compared to 3.3% last year and operating income and operating margin were positively influenced by improved gross profit, lower labor and supply chain costs and a lower net stock-based compensation charge, partially offset by the previously announced incremental investment in information technology in supply chain. The company incurred an incremental cost of $25 million in the third quarter related to its previously announced investment in information technology in supply chain, which negatively impacted earnings per share by roughly $0.06.

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