RA 7-4 LOBLAW COMPANIES LIMITED AND EMPIRE COMPANY LIMITED

(a) Loblaw is primarily a retailer of food, general merchandise, drugs and financial products. It operates 609 corporate owned stores and 427 franchisee owned stores. Empire operates in two businesses – food retailing and real estate. Food retailing is the distribution of food products throughout Canada under the banners of Sobeys, IGA, and Price Chopper to name a few. The company has owned and franchised outlets. The real estate division is involved in the development of commercial properties held for food- anchored retail plazas, and development of residential housing lots for sale.

(b) Empire has cash and cash equivalents totaling $231.6 million at May 2, 2009. As per Note 1, the company includes cash, treasury bills and guaranteed investments with maturity dates at time of acquisition of 90 days or less. No further details are provided as to the composition of the cash and cash equivalents. There is no restricted cash.
Loblaw’s has cash and cash equivalents of $528 million which includes highly liquid marketable investments with 90 days or less maturity. In Note 8, Loblaw provides additional details as to the composition of the cash and cash equivalents as follows (in millions $):

* Cash $42 * Government treasury bills $219 * Government sponsored debt securities $58 * Corporate commercial paper $209.

Loblaw also has no restricted cash.

(c) Loblaw’s has Accounts Receivable totaling $867 million at January 3, 2009. As per Note 9, these receivables are made up of credit card receivables (from the PC credit card) and other receivables (due from independent franchisees, associated stores and independent accounts for goods sold) for $436 million. The credit cards have been securitized and therefore, the credit card receivable is reported net of the securitized amount of $1.775 billion.

Empire has (trade) receivables of $318.7 million arising on the sale of goods to franchisees and also current loans and other receivables of $55.8 million, and long term loans and other receivables of $75.3 million at May 2, 2009. As per Note 6, the company has total loans receivable of $65.5 million, mortgages receivable of $21.2 million and other receivables of $44.4 million before the allocation between current and non-current. The loans receivable are long term financing provided to retail associates and are repayable in ten years, with variable interest rates and are secured by inventory, fixtures and equipment. These loans are reported at approximate fair value.

RA 7-4 LOBLAW COMPANIES LIMITED AND EMPIRE COMPANY LIMITED (Continued)

The only similar receivables between the two companies are the receivables arising from sales to associates and franchisees.

(d) As per Note 1 for Empire, the loans and receivables are recorded at amortized cost and tested for impairment where losses are immediately reported to net income. As further detailed in Note 22, the company outlines its credit risk and how the allowance is determined. Credit risk arises when a customer fails to meet its obligations. The company tries to mitigate this credit risk through a credit approval process, credit limits and continual monitoring of accounts. Also, some of the loans are secured, and the security is monitored. Finally, the company has a large number of customers and a geographic dispersion to lessen the impact of losses. To determine the allowance, the company examines the due dates and the amounts past due the 30 day collection period. At May 2, 2009, the company had 71% (248.9/349.9) of receivables that were current, 9% (32.5/349.9) over 30 days but less than 90 days due, and 20% (68.5/349.9) that were over 90 days due. All of the loans and other receivables were current. To determine the allowance for doubtful accounts the company reviews past due accounts. During the year ended the company recorded $11.6 million for provision for losses, $2.4 million for recoveries, and 6.7 million in write-offs. The bad debts expense was $11.6 million for the year. The allowance for doubtful accounts at May 2, 2009 was $31.2 million, representing 8.9% (31.2/349.9) of all trade receivables outstanding at the year end. This appears to be adequate, given that this is about 50% of all accounts past due by more than 90 days.

For Loblaw, Note 10 details the allowance for doubtful accounts. There is no aging of the accounts provided. The company does state in Note 8, that $7 million of the credit receivables are past due and not classified as impaired as they are less than 90 days past due. Credit card balances that are more than 180 days past due are written off. The company notes that the amount past due for the other receivables but not impaired are $79 million, of which a nominal amount is more than 60 days past due (Note 9).
As per Note 10, at January 3, 2009, the company reported an allowance for doubtful accounts related to the credit cards of $15 million and $24 million on the other receivables. This represents 5.5% (24/436) of other trade receivables outstanding. This is substantially lower than Empire’s allowance, and seems low. We were also not given an aging by Loblaw except the small amount of information mentioned in the previous sentence. The provision for losses for credit card receivables and other receivables was $35 million and $81 million, respectively, for the year ended January 3, 2009.

RA 7-4 LOBLAW COMPANIES LIMITED AND EMPIRE COMPANY LIMITED (Continued)

In Note 26, Loblaw outlines how it manages credit risk due to default on the PC Bank credit cards receivables, and the other receivables from its independent franchisees, associated stores and independent accounts. The company manages this risk by using credit scoring techniques, monitoring the credit card balances and implementing technology to speed up collection. Because the company has many customers over a large geographic area, credit risk is minimized. Balances with franchisees and associates are monitored, and settled on a regular basis, pursuant to agreements.

(e) Loblaw has securitized its credit card receivables in the amount of $1,775 million. Loblaw sells these to independent trusts and retains servicing responsibilities, certain administrative responsibilities and rights to some of the cash flows after the investors’ obligations are met. Loblaw does not receive any compensation for the ongoing servicing of these credit cards accounts sold.

(f) In order to calculate the turnover ratios, we need the credit sales and the related accounts receivable. Only the receivable from the franchisees and associates could be used from the turnover ratio. (The credit card sales arise outside of Loblaw where ever the customer uses their PC Bank credit card.) However, we do not know the amount of credit sales made to franchisees and associates for either company. In both cases, cash sales are made to many customers who buy goods in the corporate owned stores and the sales number is a combination of credit and cash sales. Without the breakdown, a turnover ratio cannot be calculated.