Barclays Canadian Retail Consumer Still Working Toward The New Normal Initiatin PDF

EQUITY RESEARCH
CANADIAN RETAIL & CONSUMER

Still working toward the new normal;
initiating coverage with a 2-Neutral rating
We expect 2012 to be a challenging year for the Canadian retail & consumer sector:
Belt tightening is expected to continue as highly levered consumers struggle with
constrained discretionary funds and a deterioration in employment and wage growth
expectations. The housing market is expected to gear down in 2012, with some risk that
prices could contract for the first time since 2008. Incumbent retailers are facing
accelerated growth by Wal-Mart in 2H12 followed by Targets arrival in 2013. Against
this backdrop, we rate the sector 2-Neutral and recommend investors limit holdings to
the more compelling defensive stocks for at least the next 6-9 months, while establishing
positions in attractively valued discretionary names for potential price appreciation once
the defensive-to-discretionary rotation takes hold toward the end of 2012, into 2013.
Top Picks: Of our 12 covered stocks we rate three 1-Overweight: Among defensive
names we like Dollarama (DOL.TO) and Tim Hortons (THI.TO; THI.US) with their
strong earnings growth (2012E EPS growth of 17% and 18%, respectively) and FCF
profiles. In the discretionary segment we like Canadian Tire (CTC-A.TO), trading well
below its historical P/E and poised to benefit when consumer spending bounces back.
We prefer drugstores to food retailers: The food and drugstore group, normally go
to stocks for defensive-oriented investors, is facing extraordinary challenges that have
eroded its defensive appeal. Although we prefer the drugstore stocks (2-Equal Weight:
Shoppers Drug Mart (SC.TO) and Jean Coutu (PJC-A.TO)) largely on easing drug
reform drain, continued regional reform uncertainty and modest earnings growth are
likely to limit valuations, making total return potential less compelling than for THI and
DOL, in our view. Food retail is likely to be the most challenged sector in our coverage
universe in 2012 as already strained growth is further pressured by intensifying
competition from Wal-Mart and Targets arrival. Within the food sector our order of
preference is Metro (MRU-A.TO), Loblaw (L.TO), George Weston (WN.TO), North
West (NWC.TO), and Empire (EMP-A.TO), all 2-Equal Weight.
Weak consumer spending and high gas prices are expected to limit Alimentation
Couche-Tards (ATD-B.TO; 2-EW) earnings upside in the near term beyond the
benefits of acquisition activity. As for RONA (RON.TO; 2-EW), the anticipated housing
slowdown is not supportive of a significant rebound in renovation spending in 2012.
Barclays Capital does and seeks to do business with companies covered in its research reports. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
This research report has been prepared in whole or in part by research analysts based outside the US
who are not registered/qualified as research analysts with FINRA.
PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE
200.
25 January 2012
INITIATING COVERAGE
Canadian Retail & Consumer
2-NEUTRAL
from N/A
For a full list of our ratings, price targets and
earnings in this report, please see table on
page 2
Jim Durran
1.416.863.8967
jim.durran@barcap.com
BCC, Toronto
Benjamin Yang
1.416.863.8931
benjamin.yang@barcap.com
BCC, Toronto
Dennis Snopkowski
1.416.863.8932
dennis.snopkowski@barcap.com
BCC, Toronto
Barclays Capital | Canadian Retail & Consumer
Summary of our Ratings, Price Targets and Earnings Estimates in this Report
Company
Rating
Old
New
Price
Price Target
EPS FY1 (E)
EPS FY2 (E)
20-Jan-12 Old New %Chg Old New %Chg Old New %Chg
0-NR 2-Neu
Alimentation Couche-Tard Inc. (ATD/B CN / ATD-B.TO)
N/A 2-EW
29.85
N/A 32.00
N/A 2.20
N/A 2.39
Canadian Tire Corp., Ltd. (CTC/A CN / CTC-A.TO)
N/A 1-OW
63.70
N/A 74.00
N/A 5.24
N/A 6.14
Dollarama Inc. (DOL CN / DOL.TO)
N/A 1-OW
44.00
N/A 49.00
N/A 2.12
N/A 2.50
Empire Co., Ltd. (EMP/A CN / EMP-A.TO)
N/A 2-EW
56.43
N/A 57.00
N/A 4.58
N/A 5.10
George Weston Ltd. (WN CN / WN.TO)
N/A 2-EW
66.12
N/A 69.00
N/A 4.86
N/A 4.89
Jean Coutu Group (PJC/A CN / PJC-A.TO)
N/A 2-EW
13.27
N/A 14.00
N/A 0.88
N/A 0.98
Loblaw Cos., Ltd. (L CN / L.TO)
N/A 2-EW
37.30
N/A 39.00
N/A 2.84
N/A 2.91
Metro Inc. (MRU/A CN / MRU-A.TO)
N/A 2-EW
51.58
N/A 54.00
N/A 4.29
N/A 4.62
North West Co., Inc. (NWC CN / NWC.TO)
N/A 2-EW
19.95
N/A 20.00
N/A 1.23
N/A 1.32
RONA Inc. (RON CN / RON.TO)
N/A 2-EW
9.55
N/A 10.00
N/A 0.68
N/A 0.91
Shoppers Drug Mart Corp. (SC CN / SC.TO)
N/A 2-EW
41.45
N/A 43.00
N/A 2.83
N/A 3.04
Tim Hortons Inc. (THI CN / THI.TO)
N/A 1-OW
48.80
N/A 54.00
N/A 2.35
N/A 2.75
Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.
FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital.
Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended
Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative
25 January 2012
CONTENTS
CANADAS CONSUMER SPENDING OUTLOOK ITS TOUGH OUT THERE............................15

CANADIAN FOOD RETAIL SECTOR OVERVIEW..........................................................................25
LOBLAW COMPANIES .....................................................................................................................51
GEORGE WESTON ............................................................................................................................63
METRO INC........................................................................................................................................72
EMPIRE COMPANY...........................................................................................................................82
NORTH WEST CO. ............................................................................................................................94
CANADIAN DRUGSTORE SECTOR OVERVIEW......................................................................... 101
SHOPPERS DRUG MART .............................................................................................................. 116
JEAN COUTU GROUP..................................................................................................................... 124
CANADIAN TIRE CORP................................................................................................................. 135
DOLLARAMA ................................................................................................................................. 149
TIM HORTONS ............................................................................................................................... 159
RONA INC. ...................................................................................................................................... 173
ALIMENTATION COUCHE-TARD (ATD-B)................................................................................ 187
25 January 2012
CANADIAN RETAIL & CONSUMER: EXPECT A CHALLENGING YEAR AHEAD

The Canadian Retail & Consumer sector comprises a wide range of industries, from food,
drug, and general/specialty retailers to quick-service restaurants. We are initiating coverage
of 12 companies, with 1-Overweight/2-Neutral ratings on Tim Hortons, Dollarama and
Canadian Tire.
The following investment continuum provides a summary of our view about the defensive
appeal of each segment within our coverage universe and a ranking of our company
investment preference within each segment. Although some of these companies are
considered discretionary stocks by their TSX/S&P index listing (i.e., Dollarama and Tim
Hortons), they are not nearly as discretionary as specialty apparel retailers, or department
stores. Dollar stores are arguably counter cyclical, benefiting from trade down in a weak
economy. Tim Hortons sells mostly modestly priced items, with over 40% of sales derived
by coffee sales which are minimally discretionary.
Figure 1: Barclays Capital - Canadian Retail & Consumer Sector Coverage Summary
Canadian Retail / Consumer Sector
Ticker
Defensive
Rank "Relative" Safe Havens

1
Tim Hortons
THI.TO & US
2
Dollarama
Rating
Market
Target
NTM
Potential
Cap ($M)
P/E
P/E
Total return
1-OW
$7,813
19.5 x
17.8 x
12.0%
DOL.TO
1-OW
$3,304
19.5 x
17.9 x
12.2%
Drugstore retail
1
Shoppers Drug Mart
SC.TO
2-EW
$8,974
14.0 x
13.7 x
6.2%
Jean Coutu
PJC-A.TO
2-EW
$3,003
14.5 x
14.3 x
7.3%
6.2%
Food Retail
1
Metro
MRU-A.TO
2-EW
$5,235
12.5 x
11.7 x
Loblaw
L.TO
2-EW
$10,519
13.5 x
12.2 x
6.8%
North West
NWC.TO
2-EW
$965
15.2 x
14.9 x
5.1%
Empire
EMP-A.TO
2-EW
$3,837
11.3 x
11.3 x
2.6%
2-EW
$8,536
14.0 x
13.8 x
6.5%
Food Manufacturing - CPG

George Weston
WN.TO
Discretionary / Cyclical
1
Canadian Tire
CTC-A.TO
1-OW
$5,207
12.0 x
10.3 x
18.1%
Couche Tard
ATD-B.TO
2-EW
$5,433
13.5 x
12.6 x
8.1%
RONA
RON.TO
2-EW
$1,245
11.0 x
10.2 x
6.2%
Discretionary
Source: Barclays Capital ratings and estimates.

1-OW = 1-Overweight; 2-EW = 2-Equal Weight. Sector rating is 2-Neutral. Data as of 1/20/12. 1
A brief look back at 2011

The Canadian retail & consumer sector achieved solid returns in 2011 as mediocre 1H11
returns improved significantly in 2H11, across most subsectors, lead by gains in the more
compelling defensive names such as Dollarama, Jean Coutu, Tim Hortons and Metro. The
weakest performer was RONA (-33%, S&P/TSX -11%) which suffered from an industrywide contraction in renovation spending.
25 January 2012
All dollar amounts in this report are CAD unless otherwise indicated.
Figure 2: Canadian Retail / Consumer 2011 share price appreciation

Canadian Retail / Consumer Sector Share Price Trends - 2011
40%
30%
20%
10%
0%
-10%
-20%
1/03/2011
4/28/2011
8/22/2011
Food Retailers
CDN Tire/Couche Tard
12/14/2011
Drugstore Retailers
DOL/THI
2011 Price Appreciation

Dollarama
47%
Jean Coutu
38%
Tim Hortons
18%
Metro
16%
Couche Tard
13%
Shoppers DM
6%
Empire
-1%
North West Co
-3%
Canadian Tire
-7%
Loblaw
-7%
George Weston
-14%
RONA
-33%
Source: FactSet.
A significant portion of the gains achieved by the defensive names were achieved through
double-digit multiple expansion as risk averse investors poured their dollars into the small
group of better quality defensive names. Given our view that 2012 will be another
challenging year, we expect further, although less robust, multiple expansion on the more
proven defensive companies within our coverage.
Figure 3: 2011 Change in Forward P/E and FY2 EPS
2011 Share price Change: P/E expansion and EPS forecast growth
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
RON
WN
CTC.a
NWC
EMP.a
Percent Change in FY2 EPS Estimate
Y/Y % ch
P/E
EPS
Price
RON
-9%
-26%
-33%
WN
-19%
7%
-14%
CTC.a
-18%
13%
-7%
L
-11%
5%
-7%
NWC
2%
-5%
-3%
SC
ATD.b MRU.a
THI
PJC.a
DOL
Percent Change in Forward P/E Multiple
EMP.a
-5%
4%
-1%
SC
-2%
8%
6%
ATD.b MRU.a
11%
4%
2%
12%
13%
16%
THI
2%
15%
18%
PJC.a
17%
18%
37%
DOL
12%
32%
47%
Source: FactSet, Reuters
2012 Outlook: a year of consumer belt tightening

We expect 2012 to be a challenging year in the Canadian Retail & Consumer sector as a
Canadian consumer spending pullback that started to take hold in 3Q11 is likely to
constrain earnings growth for at least 6-9 months. This slowdown has been driven by
several factors which collectively have contributed to an erosion of consumer confidence
and a reduction in consumers' financial risk tolerance.
25 January 2012
High personal debt leverage Canadians personal debt leverage now exceeds 150% of
personal income which is above the level achieved in the US prior to the housing crash.
5
Cost inflation has outpaced wage inflation, squeezing household cash flows.
Reduced employment and wage growth expectations the E.U. crisis and slowed
domestic consumer spending have eroded employment expectations.
The housing market appears poised for a modest contraction with some risk that resale
home prices could decline for the first time since 2008 (and 1998 before that).
Depressed consumer confidence these domestic factors have combined with the
headline risk of the E.U. crisis to erode consumer confidence.
U.S. retailer invasion picks up steam: Zellers one-two punch

Increased competition from WalMart and Target will pressure
incumbents earnings growth
As if the challenges of a tight-fisted consumer werent enough, Canadian retailers will also
be facing accelerated growth by Wal-Mart Canada in 2012 and Targets arrival in 2013. In a
two-part real estate transaction in early 2011, Hudsons Bay Trading Company sold 188
Zellers locations to Target, which in turn sold 39 locations to Wal-Mart Canada. This
transaction will transfer approximately 14 million square feet of underperforming retail
space into the hands of two best in class retailers, which will open renovated stores over
the span of two-and-a-half years starting with Wal-Marts opening of 39 converted stores in
2H12 followed by Targets 12- to 18-month rollout, starting in March 2013. This sizeable
redeployment will materially increase competition for customer traffic in a relatively short
period of time, placing added pressure on incumbent retailers growth prospects. Within
our company coverage the Wal-Mart and Target rollouts are seen as most problematic for
the Food retailers, less so for Canadian Tire owing to the fragmented nature of general
merchandise purchases and CTRs differentiated offerings (i.e., auto parts and sporting
goods) and finally Loblaws Joe Fresh apparel business.
Food Retail in the midst of the perfect storm

The Canadian food retail sector is in the midst of the perfect storm which at best is
expected to evolve into a long stretch of grey skies with intermittent showers as Wal-Mart
(2H12), followed by Target (March 2013 through mid-2014) increases the competitive
intensity through its opening of acquired Zellers stores in late 2012 through to 2014.
The consumer spending pullback has resulted in slow to declining traffic in the food retail
sector, and mounting square footage inroads from Wal-Marts Supercenter rollout in
Canada has increased competitive pricing intensity as retailers fight for volume. Challenged
Food retailers have increased their promotional intensity while stretched consumers have
increasingly become bargain hunters, which collectively has resulted in an increase in the
percent of sales sold at a discount.
While we are still expecting earnings growth in the group we do not see the sector being
able to play its usual defensive role in 2012 as the level of earnings uncertainty is too high.
Drugstore Retail easing drain of drug reform, but fully valued

We prefer the Drugstore Retailers over the Food Retailers despite the impact of drug
reforms. While drug reform has constrained earnings growth, more so at Shoppers than at
Jean Coutu, the greatest period of earnings drain from phased-in reform is now in the past.
Both companies offer investors relatively compelling defensive characteristics with limited
downside risk at their current valuations, fuelled by the prescription drug growth of an
aging population.
25 January 2012
Unfortunately, while we see Jean Coutu (+10%) and Shoppers (+8%) earnings growth
reaccelerating as the earnings drain from drug reform eases, several drug reformrelated
risks remain unresolved (British Columbia drug reform, resolution of the Ontario private
label generic drug ban and more recently the federal governments move to reduce
healthcare funding post the current 2014 agreement) which we expect to suppress further
multiple expansion. At current levels, Jean Coutu is the most expensive drugstore stock in
North America at a forward P/E of 14.3x. Shoppers Drug Mart is only modestly lower at
13.7x. This represents on average a 7% premium to CVS and a 19% premium to Walgreens.
Top Picks: we prefer high quality defensive investments

Within this challenging backdrop we recommend investors concentrate their sector
holdings in the more compelling defensive stocks for at least the next 6-9 months, while
considering establishing a position in attractively valued discretionary stocks for longer term
price appreciation once the defensive to discretionary rotation gains more favour toward
the end of 2013. Our Top Picks for 2012 are Tim Hortons (THI.TO/THI.US), Dollarama
(DOL.TO) and Canadian Tire (CTC-A.TO).
Figure 4: Canadian Retail/Consumer Sector Coverage
CDN RETAIL & CONSUMER : SECTOR COVERAGE
Cycle P/E's
Rating:
Yr. End
Current
Avg
Avg
LT
Peak
Trough
AVG
NTM P/E
Current
Target
Upside
Div
Potential
FY1
EPS growth
FY2
Price
Price
to TGT
Yield
Return*
DEFENSIVE STOCKS:
Empire
2-EW
Apr-30
14.8x
9.3x
11.8x
11.3x
-8%
11%
$56.43
$57.00
1.0%
1.6%
2.6%
Loblaw
2-EW
Dec-31
17.3x
12.1x
14.7x
12.2x
10%
2%
$37.30
$39.00
4.6%
2.3%
6.8%
Metro
2-EW
Sep-30
15.0x
9.1x
11.3x
11.7x
9%
8%
$51.58
$54.00
4.7%
1.5%
6.2%
NorthWest Co.
2-EW
Jan-31
$19.95
$20.00
CDN Food Retail Average
16.2x
4.6x
10.2x
14.9x
-14%
7%
15.8x
8.2x
12.0x
11.7x
-1%
7%
0.3%
4.8%
5.1%
2.6%
2.5%
5.2%
7.3%
Jean Coutu
2-EW
Feb-28
25.5x
8.0x
15.8x
14.3x
14%
11%
$13.27
$14.00
5.5%
1.8%
Shoppers Drug Mart
2-EW
Dec-31
24.5x
12.0x
18.6x
13.7x
3%
7%
$41.45
$43.00
3.7%
2.4%
6.2%
25.0x
10.0x
17.2x
14.0x
9%
9%
4.6%
2.1%
6.7%
CDN Drugstore Average

RELATIVE SAFE HAVEN STOCKS
Dollarama
1-OW
Jan-31
18.1x
14.4x
15.8x
17.9x
29%
18%
$44.00
$49.00
11.4%
0.8%
12.2%
Tim Hortons
1-OW
Dec-31
25.0x
15.1x
18.7x
17.8x
15%
17%
$48.80
$54.00
10.7%
1.4%
12.0%
21.6x
14.8x
17.3x
17.9x
22%
17%
11.0%
1.1%
12.1%
Safe Haven Average

CYCLICAL STOCKS:
Canadian Tire
1-OW
Dec-31
36.1x
7.8x
12.7x
10.3x
7%
17%
$63.70
$74.00
16.2%
1.9%
18.1%
Couche Tard
2-EW
Apr-30
26.6x
9.2x
17.4x
12.6x
12%
9%
$29.85
$32.00
7.2%
0.9%
8.1%
RONA
2-EW
Dec-31
17.5x
7.4x
11.7x
10.2x
-34%
34%
$9.55
$10.00
4.7%
1.5%
6.2%
26.7x
8.1x
13.9x
11.0x
-5%
20%
9.4%
1.4%
10.8%
Discretionary Grp. Average
Source: Barclays Capital estimates, FactSet/Reuters, Company Reports. Pricing is as of January 20, 2012 close.
Total Return is share price appreciation and dividend
1-OW = 1-Overweight; 2-EW = 2-Equal Weight; 3-UW = 3-Underweight. Sector rating is 2-Neutral.
Defensive bias in the immediate term:

We recommend that investors overweight the better quality defensive names such as
Tim Hortons (THI.TO/THI.US) and Dollarama (DOL.TO). Unfortunately, an extremely
challenging outlook for the Canadian Food retailers eliminates that sub-group as compelling
defensive considerations. In the drugstore sector, while we see limited downside risk in Jean
25 January 2012
Coutu and Shoppers Drug Mart, they appear fully valued relative to their drug reform
constrained growth prospects in 2012. We expect this lack of compelling defensive choices
to push the already sector-leading valuations of Tim Hortons and Dollarama higher in 2012.
Tim Hortons is the only duallisted stock in our coverage
universe
Dollaramas ample FCF is more

than adequate for store growth
capex; it could also choose to
reduce debt, buy-back shares
25 January 2012
Tim Hortons (THI.TO; 1-OW/Neu; price target $54): proven, consistent earnings growth
with almost 30% of F2012 EPS growth forecast to be driven by share buybacks. We are
forecasting F2011 and F2012 EPS growth of 15% and 17%, respectively. We expect Tims
to announce a new buyback program commensurate with the expiry of the current facility
in March 2012 and a dividend increase at least in line with its F2011 earnings growth. In
addition to its strong earnings and FCF growth profile, Tim Hortons offers investors the
following:
Compelling franchise model with low-risk earnings growth. Tims generates 50%60% of operating earnings from rents and royalties providing a stable stream of income.
Strong new store growth (+4% to 6%) in Canada and the US and industry-leading
comparable store sales (CSS) in both markets (3%-5%) has typically ensured strong
single-digit system sales growth.
Impressive track record of returning cash to shareholders. Since its IPO in 2006, Tims
has increased its dividend four times (average 25% per year). The company has also
aggressively repurchased stock to supplement EPS growth.
Valuation is attractive relative to peers. Tims is currently trading at a wider discount

to its QSR peers compared to its historical average. Relative to MCD, Tims is trading at
a 7% discount vs. its historical 10% premium. We believe Tims should be awarded a
scarcity premium given its high liquidity and large market cap ($8bn; second largest in
our coverage). It is also the only dual-listed stock in our coverage universe.
Dollarama (DOL.TO; 1-OW/Neu; price target $49): a defensive growth company with a
dividend. Dollarama is expected to deliver the strongest earnings growth in our coverage
universe with forecast EPS growth of 16% in F2013 (excludes extra week). Dollaramas
superior store economics enables it to generate strong free cash flows which far outstrip its
capex needs for new store growth. As such, it has ample excess cash to reduce debt and
increase returns to shareholders through dividends and potentially share buybacks. The
following factors also support our 1-Overweight/Neutral recommendation:
Aggressive store network growth opportunity in an underdeveloped market.

Dollarama has compelling, low-cost/quick payback, new store growth potential and
best-in-class store economics driven by its dominant market position (5x greater than
next largest competitor), weaker direct competition, and industry-leading offshore
sourcing capabilities.
Productivity and efficiency enhancements expected to result in material cost savings.

Dollarama has numerous infrastructure initiatives in the pipeline that should allow it to
lower its operating expenses to offset rising wages/sourcing costs.
Figure 5: Summary of Canadian Retail/Consumer Sector Coverage
BarCap EPS estimates
Market
Company
Ticker
Rating Yr. End Cap ($M)
P/E
Dividend
Current
Price
Potential
Actual
FY1
FY2
FY1
FY2
DPS
Yield
Price
Target Ttl Return
FOOD RETAILERS/MANUFACTURERS
Empire
EMP-A.TO
2-EW
Apr-30
$3,837
$4.98
$4.58
$5.10
12.3x 11.1x
$0.90
1.6%
$56.43
$57.00
2.6%
Loblaw
L.TO
2-EW
Dec-31
$10,519
$2.58
$2.84
$2.91
13.1x 12.8x
$0.84
2.3%
$37.30
$39.00
6.8%
George Weston
WN.TO
2-EW
Dec 31
$8,536
$4.33
$4.86
$4.89
13.6x 13.5x
$1.44
2.2%
$66.12
$69.00
6.5%
Metro
MRU-A.TO
2-EW
Sep-30
$5,235
$3.92
$4.29
$4.62
12.0x 11.2x
$0.77
1.5%
$51.58
$54.00
6.2%
North West Co.
NWC.TO
2-EW
Jan-31
$965
$1.43
$1.23
$1.32
16.2x 15.1x
$0.96
4.8%
$19.95
$20.00
5.1%
DRUGSTORE RETAILERS
Jean Coutu
PJC-A.TO
2-EW
Feb-28
$3,003
$0.77
$0.88
$0.98
15.1x 13.5x
$0.24
1.8%
$13.27
$14.00
7.3%
Shoppers DM
SC.TO
2-EW
Dec-31
$8,974
$2.75
$2.83
$3.04
14.6x 13.6x
$1.00
2.4%
$41.45
$43.00
6.2%
GEN'L MERCHANDISE/SPECIALTY RETAIL

Canadian Tire
CTC-A.TO
1-OW
Dec-31
$5,207
$4.89
$5.24
$6.14
12.2x 10.4x
$1.20
1.9%
$63.70
$74.00
18.1%
Couche Tard
ATD-B.TO
2-EW
Apr-30
$5,433
US$1.97
US$2.20
US$2.39
13.6x 12.5x
$0.28
0.9%
$29.85
$32.00
8.1%
Dollarama
DOL.TO
1-OW
Jan-31
$3,304
$1.64
$2.12
$2.50
20.8x 17.6x
$0.36
0.8%
$44.00
$49.00
12.2%
RONA
RON.TO
2-EW
Dec-31
$1,245
$1.03
$0.68
$0.91
14.0x 10.5x
$0.14
1.5%
$9.55
$10.00
6.2%
1-OW
Dec-31
$7,813
$2.04
$2.35
$2.75
20.8x 17.7x
$0.68
1.4%
$48.80
$54.00
12.0%
QUICK SERVE RESTAURANT (QSR)

Tim Hortons
THI.TO
Note: ATD EPS estimates are in US$'s

Source: FactSet, Company Reports, Barclays Capital Estimates. Prices are current as of January 20, 2012 close.
25 January 2012
Valuation supported by strong earnings growth. In the context of weakening

consumer spending, we believe Dollarama should be awarded a premium valuation for
its strong earnings growth (highest forecast EPS growth in our coverage) and defensive
characteristics. We also expect DOLs valuation relative to U.S. dollar-store peers to
increase as Dollarama benefits from a scarcity of choice lift in its valuation.
Discretionary entry at the right price for longer term investors

Given our concerns about discretionary spending in 2012, particularly in the first half, we do
not expect any meaningful upside in discretionary stocks for at least the first six months of
2012. However, historically, consumer discretionary stocks have initiated price appreciation
six months in advance of an expected bottom in the economy. Given that we expect 2013
to be at least modestly better than 2012, once consumers can start to see some
employment opportunity improvement, we recommend that investors selectively establish a
position in the better discretionary opportunities.
Targets entry may prove to be
an overhang on shares but we
expect multiple expansion when
consumer spend rebounds
25 January 2012
Canadian Tire (CTC-A.TO; 1-OW/Neu; price target $74.00) the least expensive stock in
our coverage universe. Canadian Tire is currently trading at 10.3x forward P/E (21% below
its long-term average of 13x) which historically has been a solid entry point for the stock.
We are initiating coverage of Canadian Tire with a F2011 EPS forecast of $5.24 which is 4%
below consensus EPS forecast of $5.47, reflecting weaker winter seasonal sales than
consensus is currently assuming. Although we believe that Canadian Tires share price
could suffer some contraction if Q4 results are hampered more than expected by a lack of
winter weather conditions (limited snowfall in the east) we do not expect any material
carryover effect into F2012 earnings. We expect consensus estimates to come down prior
to the Q4 release on February 9. Although we expect that Targets arrival in Canada starting
in 1Q13 could be an overhang on Canadian Tires multiple expansion, if the consumer
spending outlook improves as we expect it to in 2013 we believe we will see at least a 20%
increase in CTCs P/E multiple to 12x (below its LT average of 13x) before they become
more cautious. Beyond Canadian Tires attractive valuation there are several other factors
that support our 1-Overweight/2-Neutral recommendation.
Increased focus on improving retail ROIC. Canadian Tires CEO has made it a
corporate priority to improve total retail returns. Actions such as head office
streamlining and the Forzani acquisition are critical steps toward this goal.
We believe the Forzani synergy targets are conservative. Management has guided to
$25 million in synergies in 2012, ramping up to a run rate of $35 million by 2014. We
believe that these targets will prove conservative if CTC pursues the banner
rationalization opportunities that Forzani was already working towards.
Regaining position as Canadas authority in automotive. Canadian Tire is nearing

completion of the roll-out of its new automotive technology platform which will become
an enabler to more proactive parts and service marketing to the do-it-yourself (DIY) and
do-it-for-me (DIFM) customer (estimated to be a $22 billion market).
New loyalty program with Dunnhumby. The launch of a new loyalty program in early
2012 is an important step for Canadian Tire given that most retailers either have, or are
pursuing, more sophisticated programs that leverage detailed customer data and
improve promotion efficiency.
Increasing shareholder returns. In conjunction with its 3Q11 results, Canadian Tire
announced a 9% increase in its dividend. The company has bumped its payout ratio to
a range of 20%-25% from the previous 15%-20%.
10
FCF is increasingly being returned to shareholders

Facing slowed earnings growth prospects, most of our companies, to varying degrees and
at various stages, are pursuing the implementation of productivity and efficiency programs
to improve their profitability and growth prospects. In the near term, given the various
challenges that a slow growth economy and intensified competition has inflicted on sales
growth and margin trends, the majority of the benefits have been used to ease earnings
downside rather than delivering upside.
As many of our companies have become more comfortable with their cash flow capacity
they have embraced a more balanced approach to the deployment of free cash flow that
provides investors with a reasonable amount of return certainty through debt reduction
(Dollarama), dividend increases and share buybacks. The companies that stand above the
rest on this measure are Metro, Tim Hortons, Dollarama, and Couche-Tard with Shoppers
Drug Mart and Jean Coutu joining the ranks with the introduction of more aggressive
buyback programs.
Figure 6: Canadian Retail/Consumer Sector Company-Generated Returns
Company Generated Returns - 2011e
Fiscal YE
Food Retailers
L
Dec
MRU.a
Sep
EMP.a
Apr
NWC
Jan
WN
Dec
Drug Retailers
SC
Dec
PJC.a
Feb
Relative Safe Havens
DOL
Jan
THI
Dec
Discretionary Retail
RON
Dec
CTC.a
Dec
ATD.b
Apr
BarCap Net
Earnings
Growth Est.
Total
Buyback Current
Dividend "Co.Generated"
EPS
Returns
Yield
Impact
Company Generated Returns - 2012e

BarCap Net
Earnings
Growth Est.
Total
Buyback Current
Dividend "Co.Generated"
EPS
Returns
Yield
Impact
12.5%
1.8%
-6.3%
3.1%
11.8%
-1.6%
4.6%
0.3%
1.1%
0.4%
2.2%
1.4%
1.5%
4.8%
2.1%
13.1%
7.8%
-4.4%
9.0%
14.4%
2.8%
5.5%
10.0%
7.9%
0.4%
0.0%
5.2%
1.4%
-0.6%
0.0%
2.2%
1.4%
1.5%
4.8%
2.1%
4.9%
12.2%
12.9%
12.1%
2.7%
2.5%
9.2%
0.5%
5.1%
2.4%
1.9%
5.3%
16.2%
3.9%
5.9%
3.6%
5.4%
2.4%
1.9%
9.9%
13.2%
29.8%
7.3%
-0.5%
7.9%
0.8%
1.4%
30.1%
16.6%
15.3%
12.1%
0.8%
5.3%
0.8%
1.4%
16.8%
18.8%
-33.7%
7.4%
4.1%
-0.3%
-0.2%
2.4%
1.4%
1.8%
0.9%
-32.5%
9.0%
7.4%
29.9%
17.1%
5.7%
3.9%
0.0%
6.0%
1.4%
1.8%
0.9%
35.3%
19.0%
12.6%
Note: Growth rates for MRU.A and ATD.B are adjusted for one extra week in 2011 and DOL for 2012.
Note: Growth rate for EMP.A is adjusted for one less week in 2011 and MRU.A and ATD.B for 2012.
Source: FactSet, Company Reports, Barclays Capital estimates. Priced as of January 20, 2012 close.
25 January 2012
11
Figure 7: SNAPSHOT: Retail/Consumer Valuation Performance - Canada vs. US

Canadian vs U.S. Food Retailer Share Performance
Canadian vs U.S. Drug Retailer Share Performance
Canada
U.S.
Canada
Note: Canada includes L, MRU.A, EMP.A, and US includes SWY, KR

Source: FactSet, Barclays Capital Estimates
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Jan-10
Mar-10
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
U.S.
Note: Canada includes SC, PJC.A, and US includes CVS, WAG

Canadian vs U.S. Home Hardware Share Performance
Canadian Tire vs WMT/TGT/M Share Performance

50%
Canadian Tire
U.S.
Rona
Note: Canada includes CTC.A, and US includes WMT, TGT, M

Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Jan-10
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
-20%
Nov-10
0%
-10%
Sep-10
10%
Jul-10
20%
May-10
30%
Mar-10
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
40%
U.S.
Note: Canada includes RON and US includes HD, LOW

2011 Share price Change: P/E expansion and EPS forecast growth
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
RON
WN
CTC.a
NWC
EMP.a
Percent Change in FY2 EPS Estimate
Y/Y % ch
P/E
EPS
Price
RON
-9%
-26%
-33%
WN
-19%
7%
-14%
CTC.a
-18%
13%
-7%
L
-11%
5%
-7%
NWC
2%
-5%
-3%
SC
ATD.b
MRU.a
THI
PJC.a
DOL
Percent Change in Forward P/E Multiple
EMP.a
-5%
4%
-1%
SC
-2%
8%
6%
ATD.b
11%
2%
13%
MRU.a
4%
12%
16%
THI
2%
15%
18%
PJC.a
17%
18%
37%
DOL
12%
32%
47%
25 January 2012
12
This page intentionally left blank.
25 January 2012
13
Figure 8: SNAPSHOT: Economic Overview Canada vs. US

Canada vs. US Real GDP Growth
Canada vs. US Retail Trade. Ex/ Auto and Gas (SA)
8%
10%
6%
8%
4%
6%
2%
4%
0%
2%
-2%
0%
-4%
-2%
-6%
-4%
-8%
-6%
-10%
2006
2007
2008
2009
2010
2011
-8%
2006
Canada Real GDP
2007
2008
2009
US Real GDP
2010
Canada
Source: Bloomberg
Source: Statistics Canada, U.S. Census, Haver
Canada vs. US Consumer Confidence Indices
Canada vs. US Unemployment Rate
2011
U.S.
11%
120
110
10%
100
9%
90
80
8%
70
7%
60
50
6%
40
5%
30
20
4%
2006
2007
2008
2009
Canada
2010
2011
2006
2007
2008
2009
2010
Canada
US
2011
US
Source: FactSet
Source: FactSet, Conference Board of Canada
Canadian vs. US Job Additions (m/m, 000's)
Wage growth: Canada vs. U.S. (y/y)
100
600
400
50
6%
5%
200
4%
0
-200
-50
-400
-600
-100
3%
2%
1%
-800
0%
-150
-1000
2006
2007
2008
2009
2010
Canada
2007
2008
2009
2010
2011
2011
US
Canada
Source: Haver
Source: Haver
Personal Debt to Disposable Income: Canada vs. US
Canada vs. US Housing Affordability: 1990 = 100
US
More Affordable
120
160%
110
100
140%
90
80
70
120%
60
50
100%
40
30
Source: Haver
25 January 2012
US
Canada
2Q 11
1Q 10
4Q 08
3Q 07
2Q 06
1Q 05
4Q 03
3Q 02
2Q 01
1Q 00
4Q 98
3Q 97
2Q 96
1Q 95
4Q 93
3Q 92
2Q 91
2Q-11
1Q-10
4Q-08
3Q-07
2Q-06
1Q-05
4Q-03
3Q-02
2Q-01
1Q-00
4Q-98
3Q-97
2Q-96
1Q-95
4Q-93
3Q-92
2Q-91
1Q-90
Canada
1Q 90
20
80%
U.S.
Source: Bank of Canada, National Association of Realtors
14
CANADAS CONSUMER SPENDING OUTLOOK ITS TOUGH OUT THERE

Consumer confidence, risk
tolerance and spending
decreased in 2011...
3Q12 might see an

improvement
Canadian consumer spending has deteriorated over the past two quarters as highly
levered consumers struggle with declining discretionary funds and eroded
employment/wage growth expectations. As 2011 unfolded, Canadian consumer
confidence was eroded by lowered employment/income growth expectations and renewed
international economic uncertainty (E.U. financial crisis and U.S. deficit financing/budget
challenges). In addition, consumers buying power deteriorated throughout 2011 as aboveaverage cost inflation, particularly in food and gasoline, significantly outpaced modest wage
growth, resulting in a decline in available discretionary spending dollars (including those for
food). This spending constraint combined with declining expectations for international
demand of Canada's natural resources resulted in deterioration in the employment outlook
as the year progressed. Collectively, these inter-related domestic and international
dynamics have contributed to an erosion of consumer confidence and a reduction in
consumers' financial risk tolerance.
Reduced spending habits are expected to remain a constraint to growth until they begin
to lap themselves in 3Q12. Hopes for an improved trend toward the end of 2012 are partly
dependant on where U.S./international growth trends net out and how well housing prices
hold up in Canada as the housing market undergoes what is expected to be a modest
easing in 2012 toward "normalized household formation growth" in 2013.
Figure 9: Canadian Unemployment rate vs. Wage Growth
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Unemployment (%)
Wage Growth (Y/Y%)
Source: StatsCan
Figure 10: CDN CPI vs. Hourly Wage growth Index

3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
2006
2007
2008
2009
2010
2011
Source: Haver, StatsCan, Barclays Capital estimates
25 January 2012
15
Figure 11: Canadian Consumer Confidence Index

120
110
100
90
80
70
60
50
40
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Conference Board.
Customer traffic at many of Canadas larger retailers has been down, or flat, throughout
the year (Loblaw, Wal-Mart, Dollarama, Rona), or has weakened more recently (Tim
Hortons) with indications from most retailers suggesting that Canadian consumers are
returning to the hunkered down shopping habits of 2008. This has resulted in an increase
in the percentage of lower margin promotional items being purchased, a re-acceleration of
private label sales and a need for intensified price discounting to stimulate demand.
Store traffic is flat/down;

consumers are hunkered down
Figure 12: Canadian Discretionary vs. Staples Retailers Weighted Average CSS Growth
CDN Staple vs Discretionary Retail - WTD CSS trend
CDN Staple vs Discretionary Retail - WTD 2 Yr stacked CSS trend

5%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
4%
3%
2%
1%
0%
Staples CSS
Discretionary CSS
Staples CSS
Q3-11
Q2-11
Q1-11
Q4-10
Q3-10
Q2-10
Q1-10
Q3-11
Q2-11
Q1-11
Q4-10
Q3-10
Q2-10
Q1-10
Q4-09
Q3-09
Q2-09
Q1-09
-1%
Discretionary CSS
Source: Company Reports, Barclays Capital Estimates
Retail sales (ex auto and gasoline) achieved almost no growth through 2011 versus
relatively robust spending in 2010. Inflation has driven most, if not all, of the dollar growth
as real growth has been below 1% throughout the year. On an inflation-adjusted basis
the food retail, health & personal care (pharmacy merchandise) and clothing store channels
suffered real sales declines throughout most of 2011. Some Canadian retailers will be up
against weaker prior year comparables in the first half of 2012 but we expect this to ease
the downside risk rather than drive any sustainable recovery in 2011s weakened trends.
25 January 2012
16
Figure 13: Major Consumer spending trends y/y % change

CDN Retail CSS trends - Y/Y % chg
Q1-10
Q2-10
Q3-10
Q4-10
Q1-11
Q2-11
Food retail
0.2%
-0.2%
-0.3%
-0.9%
0.3%
0.4%
Q3-11
1.8%
Drug retail - FE
2.0%
1.6%
1.4%
3.2%
5.1%
2.3%
1.4%
Specialty retail
3.9%
3.0%
1.0%
1.2%
-1.2%
-0.1%
0.1%
HIW retail
8.5%
0.6%
-4.0%
-6.3%
-9.6%
-5.3%
-3.0%
Group avg CSS
2.4%
1.1%
-0.1%
-0.5%
-0.9%
-0.3%
0.7%
CDN Consumer spending - Y/Y % chg

Q1-10
Q2-10
Q3-10
Q4-10
Q1-11
Q2-11
Q3-11
Retail Sales ex Auto & Gas
4.5%
3.4%
2.6%
3.0%
-0.1%
0.3%
1.4%
Personal Consumer expenditures
3.5%
3.5%
3.2%
3.2%
2.1%
2.3%
1.9%
Renovation spending (NSA)
17.7%
14.6%
8.3%
3.5%
2.3%
1.2%
5.5%
Resale Housing Activity (actuals)
45.3%
-2.9%
-23.6%
-15.7%
-6.5%
-1.2%
13.0%
Single unit housing starts

82.4%
51.0%
11.3%
Source: Haver Analytics, Company reports, Barclays Capital estimates.
-15.0%
-27.5%
-16.6%
-2.1%
Figure 14: Canadian Retail Sales Trends y/y % change

CDN Retail Trade - Channel sales
Total Retail Trade

Auto
Gas Stations
% Imp 2007
2008
2009
2010
100%
22%
12%
4%
-2%
14%
-3%
-6%
-19%
6%
8%
16%
6%
5%
11%
YTD
2011
3%
5%
19%
1Q-10 2Q-10 3Q-10 4Q-10 1Q-11 2Q-11 3Q-11

8%
13%
21%
5%
7%
14%
4%
6%
10%
5%
7%
18%
3%
3%
18%
4%
6%
21%
4%
4%
19%
Retail Trade Ex. Auto and Gas
66%
6%
4%
1%
3%
0%
5%
3%
3%
3%
0%
0%
1%
Grocery and Food
23%
4%
5%
4%
2%
0%
0%
1%
4%
2%
2%
-1%
0%
Health and Personal Care
7%
9%
4%
4%
6%
-1%
7%
7%
4%
6%
0%
-1%
-2%
Clothing and Accessories
6%
5%
1%
-3%
7%
3%
7%
5%
6%
8%
0%
4%
4%
General Merchandise
17%
5%
5%
2%
3%
2%
5%
3%
2%
2%
1%
3%
3%
Home Goods
Bldg. Mat'l/Garden Equip/Supplies
6%
6%
8%
7%
3%
3%
-8%
-1%
4%
2%
0%
-3%
3%
15%
6%
4%
1%
-3%
4%
-5%
0%
-10%
0%
-5%
1%
1%
Source: Haver Analytics, StatsCan. YTD as of November 2011.
Figure 15: Real Retail Sales Growth Estimates - CPI adjusted

CDN Retail Trade - Channel Sales Trends - CPI adjusted
2007
2008
2009
2010
Total Retail Trade

CPI inflation
"Real" Total Retail Trade
6%
2%
4%
4%
2%
1%
-3%
0%
-3%
6%
2%
3%
YTD
2011
3%
3%
0%
Gas Stations
Gasoline Inflation
"Real" Gas Stations - proxy
Grocery and Food
Food Inflation (ex alcohol)
"Real" Food Store Sales
Health & Personal Care
H & PC Inflation
"Real" Health & Pers. Care Store Sales
Clothing and Accessories
Clothing Inflation
"Real" Clothing & Acc. Store Sales
11%
5%
6%
4%
3%
1%
9%
1%
7%
5%
3%
2%
14%
13%
1%
5%
4%
2%
4%
1%
2%
1%
3%
-2%
-19%
-15%
-3%
4%
5%
-1%
4%
3%
1%
-3%
4%
-7%
16%
12%
4%
2%
2%
0%
6%
3%
4%
7%
4%
3%
19%
22%
-3%
0%
4%
-4%
-1%
2%
-3%
3%
4%
-1%
1Q-10 2Q-10 3Q-10 4Q-10 1Q-11 2Q-11 3Q-11

8%
2%
6.3%
5%
2%
2.9%
4%
2%
2.2%
5%
2%
3.0%
3%
3%
0.0%
4%
3%
0.5%
4%
3%
1.0%
21%
19%
2%
0%
1%
-1%
7%
3%
4%
7%
3%
4%
14%
15%
0%
1%
3%
-1%
7%
2%
5%
5%
4%
1%
10%
3%
7%
4%
2%
2%
4%
3%
1%
6%
6%
1%
18%
10%
8%
2%
2%
0%
6%
2%
3%
8%
3%
5%
18%
16%
2%
2%
3%
-1%
0%
2%
-2%
0%
3%
-3%
21%
28%
-7%
-1%
4%
-4%
-1%
2%
-4%
4%
3%
1%
19%
23%
-4%
0%
4%
-4%
-2%
1%
-3%
4%
5%
-2%
Source: Haver Analytics, StatsCan. YTD as of November 2011.
25 January 2012
17
Figure 16: SNAPSHOT: Housing Trends - Canada vs. USA

Single-Unit Housing Starts - Canada vs. US
Canada vs. US Resale Housing Activity - Y/Y % Change

2,000
200
60%
U.S. Avg - 1,108k
150
1,500
100
1,000
40%
20%
0%
50
500
Canada Avg - 98k
-40%
0
1Q90
1Q93
1Q96
1Q99
1Q02
Canada (left axis)
1Q05
1Q08
-20%
00
1Q11
01
02
03
04
U.S. (right axis)
05
06
07
Canada
Source: Haver
Source: CREA, National Association of Realtors
Canada vs. US Resale Housing Price - Y/Y % Change
Canada vs. US Housing Affordability: 1990 = 100
20%
120
15%
110
08
09
10
11
U.S.
More Affordable
100
10%
90
5%
80
0%
70
-5%
60
50
-10%
40
-15%
30
20
-20%
00
01
02
03
04
05
06
07
Canada
08
09
10
1Q 90
11
4Q 92
3Q 95
2Q 98
1Q 01
4Q 03
Canada
U.S.
2Q 09
U.S.
Source: CREA, National Association of Realtors
Source: Bank of Canada, National Association of Realtors
Canada Sales-to-New Listings Ratio
Canada 5Yr vs. US 30Yr Fixed Mortgage Rates
90.0%
3Q 06
15%
80.0%
Balanced market
territory
70.0%
13%
11%
60.0%
50.0%
9%
40.0%
7%
30.0%
20.0%
5%
10.0%
3%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
0.0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Canada - 5Yr Fixed
US - 30Yr Fixed
Source: CREA, Barclays Capital Estimates
Source: Bank of Canada, Bloomberg
Personal Debt to Disposable Income: Canada vs. US
Canadian Employment Growth vs Housing Resale Activity
150%
150
50
45
140%
100
40
130%
35
50
120%
30
110%
25
100%
20
90%
-50
80%
-100
15
10
5
Canada
Source: Haver
25 January 2012
US
2Q-11
1Q-10
4Q-08
3Q-07
2Q-06
1Q-05
4Q-03
3Q-02
2Q-01
1Q-00
4Q-98
3Q-97
2Q-96
1Q-95
4Q-93
3Q-92
2Q-91
1Q-90
70%
-150
0
06
07
08
09
Employment growth
10
11
Housing Resale
Source: Bloomberg, CREA
18
Canadians personal debt to

discretionary income ratio is 2.4x
above its past 20-year average
Canadians personal debt leverage exceeds the U.S. peak, presenting some concern given
the weak employment outlook and meagre wage growth. Despite a less-than-robust
economy, Canadian consumers have taken full advantage of low interest rates driving their
personal debt leverage well above the peak levels achieved prior to the U.S. housing market
crash. While normatively Canadians personal debt to discretionary income ratio has been
higher than their U.S. counterparts, the current index is 2.4x above its past 20-year average
spread. This is obviously of some concern and provides some insight into why Canadians
may be hunkering down for a while as they try to establish a more comfortable risk level.
Figure 17: Canada vs. US Personal Debt to Disposable Income
Canada
2Q-11
1Q-10
4Q-08
3Q-07
2Q-06
1Q-05
4Q-03
3Q-02
2Q-01
1Q-00
4Q-98
3Q-97
2Q-96
1Q-95
4Q-93
3Q-92
2Q-91
1Q-90
160%
150%
140%
130%
120%
110%
100%
90%
80%
70%
US
Source: Haver
Housing is no longer seen as a driver of growth

We dont expect a material
housing correction but we do
expect growth to slow
Canadian housing activity growth appears to have run its course as a major driver of
consumer spending and economic growth. The Canadian housing market played a major
role in Canadas economic recovery from the recession. We do not expect the Canadian
housing market to experience a material contraction in 2012 (reasonable affordability,
balanced sales-to listings ratio), but we do expect a modest easing of growth in the second
half of 2012 as the housing market migrates toward more normative household formation
trends (+1 to 2% range) over the next 3-5 years. This suggests that related renovation
spending and home decor expenditures are likely to be flat to modestly up in 2012, with
strength in 1H12, followed by a softening in 2H12. Of equal or greater importance, we
dont expect to see a broad-based deterioration in home prices, with the exception of more
heated markets like Vancouver, which should allow consumers to avoid the psychological
damage of deterioration in the value of their largest asset. This will be a major support to
consumers spending stance as they wait for improvements in employment/wage growth.
Figure 18: CREA and CMHC 2011 & 2012 Housing Activity Forecasts
2009A
2010A
2011E
CREA
Single detached
% chg y/y
Multiple unit
% chg y/y
Housing Starts
% chg y/y
Resale housing
% chg y/y
Total Housing
% chg y/y
Avg Resale Price ($k)
% chg y/y
75.7
-19%
73.4
-38%
149.1
-29%
464.5
613.6
-4.5%
$320.3
92.6
22%
97.4
33%
189.9
27.4%
446.9
-3.9%
636.8
3.8%
$338.4
5.6%
CMHC
82.2
-11.2%
108.8
11.7%
191.0
0.6%
453.3 450.1
1.4%
0.7%
641.1
0.7%
$362.7 $367.5
7.2%
8.6%
2012E
CREA
CMHC
83.8
1.9%
103.0
-5.3%
186.8
-2.2%
451.2 458.5
-0.5% 1.9%
645.3
0.6%
$363.6 $372.4
0.2%
1.3%
Source: CREA, CMHC.
25 January 2012
19
Housing trends have been

volatile
Since 2009 resale housing trends have been very volatile throughout each year, partly due to
the impact of the 2009 Household Renovation tax credit (HRTC - expired February 2010)
and the July 2010 implementation of the harmonized sales tax (HST) in Ontario, which
increased the tax exposure of new and resale home purchases, acting as an avoidance
stimulus.
Single unit starts have decreased 11% so far in 2011, following a 22% increase in 2010.
The Canada Mortgage and Housing Corporation (CMHC) is forecasting a 2% increase in
2012, which is expected be front-end loaded.
Resale housing activity has increased 2% year-to-date recovering from a modest decline
of 4% in 2010. The Canadian Real Estate Association (CREA) and CMHC are forecasting
resale activity to slow, or decline modestly in 2012, with average resale house prices
forecast to remain above prior year levels (+0.25% to +1.3%) after appreciating 7% to
9% in 2011.
Figure 19: Resale Housing & Single Unit Starts Activity Y/Y % chg
Resale Housing Activity (actuals) - Y/Y % chg
Q1
Q2
Q3
Q4
H1
H2
2009
-27.0%
1.4%
17.7%
58.4%
-10.5%
32.7%
7.7%
2010
45.3%
-2.9%
-23.6%
-15.7%
13.6%
-20.1%
-3.9%
-1.2%
13.0%
6.1% e
2.2% e
2011
-6.5%
2012
easy PY
Total Yr.
-3.5%
9.8% e
weak PY
tough PY
Q4
H1
H2
Total Yr.
-19%
easy PY tougher PY
Single unit housing starts (SAAR) - Y/Y % chg

Q1
Q2
Q3
2009
-41%
-33%
-16%
17%
-37%
-1%
2010
82%
51%
11%
-15%
66%
-3%
22%
2011
-27%
-17%
-2%
2.5% e
-22%
0.1% e
-11.2% e
2012
easy PY
easy PY tougher PY tough PY
weak PY tougher PY
Source: CMHC, CREA and Barclays Capital estimates
25 January 2012
20
A benign rate outlook provides immediate-term comfort but be aware a 100bps rate hike
pushes affordability over the edge. Fortunately, low interest rates have kept housing
affordability in a comfortable range and a balanced sales-to-listings ratio has allowed prices
to remain firm in most markets. However, it is important to know that once the interest rate
outlook changes It only takes a 100bps increase in mortgage rates at current home prices to
raise the affordability index toward levels that have historically resulted in a market
contraction. For each 100bps increase in interest rates, house prices would have to fall 8%
to reset affordability at current levels, or personal income would need to rise 10%.
Figure 20: Canadian Sales-to-Listings Ratio and Housing Affordability Remain in Balanced Market Territory
CDN Resale Housing Sales-to-listings ratio
CDN Housing Affordability Index
90%
55
80%
80%
50
60%
70%
45
40%
60%
40
20%
35
0%
Affordability Index (left)
-20%
25
Resale Activity - Y/Y (right)
-40%
Resale Price - Y/Y (right)

2011
2010
2009
2008
2007
-60%
2006
2000
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
2001
20
20%
2005
30%
30
2004
40%
2003
Balanced market
territory
2002
50%
Source: CREA, Haver, StatsCan, Bank of Canada
Residential renovation spending has decelerated significantly since mid-2010 as resale

housing activity started to weaken in 2Q10 followed by a decline in single unit starts.
Figure 21: Canadian Housing Activity Trends
100%
80%
60%
40%
20%
0%
-20%
-40%
Renovation Spending (Y/Y)
Resales (Y/Y)
3Q 11
2Q 11
1Q 11
4Q 10
3Q 10
2Q 10
1Q 10
4Q 09
3Q 09
2Q 09
1Q 09
4Q 08
3Q 08
2Q 08
1Q 08
4Q 07
3Q 07
2Q 07
1Q 07
4Q 06
3Q 06
2Q 06
1Q 06
-60%
Single Unit Starts (Y/Y)
Source: StatsCan
25 January 2012
21
Figure 22: Staples vs. Discretionary Y/Y $ Change in Seasonally Adjusted Monthly Retail Sales ($M)
$600
$500
$400
$300
$200
$100
$0
($100)
($200)
($300)
($400)
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
Staples
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Discretionary
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Staples ($mm - Y/Y)

Supermarket
Convenience
Beer
Health and personal care
Staples
$222
($20)
$105
$162
$469
$116
($40)
$61
$162
$298
$93
$18
$34
$38
$182
$138
$12
$7
$42
$199
$85
($1)
$17
($41)
$60
$25
$5
$30
($38)
$22
($76)
$15
$39
($57)
($78)
($59)
$14
$45
($46)
($46)
($35)
$12
$20
($41)
($43)
($33)
$9
$38
($44)
($30)
($42)
$9
$50
($63)
($46)
$12
$12
$44
($20)
$48
($54)
($1)
$25
($60)
($90)
Discretionary ($mm - Y/Y)

Clothing & Clothing Accessories
Sporting Goods
Electronics & Appliances
Furniture/Furnishings
Building Materials
General Merchandise
Misc
Discretionary
$221
$68
$41
$31
($125)
$279
($89)
$426
$151
$15
$28
$37
($146)
$133
($37)
$181
$70
$2
$23
($27)
($348)
$131
($62)
($210)
$83
$16
$29
$9
($96)
$148
($47)
$143
($72)
($29)
$27
($29)
($262)
$108
($55)
($312)
$88
$4
$12
$25
($250)
$123
($43)
($41)
$79
$10
$45
($4)
($78)
$188
($24)
$217
$115
$0
($33)
($72)
($22)
$260
($18)
$231
$108
($12)
($2)
$28
$24
$212
($5)
$354
$90
$17
($17)
$41
$18
$224
$2
$375
$67
$7
($16)
$13
$75
$177
$21
$345
$134
$15
($32)
($11)
$62
$204
$8
$380
$98
$30
$5
($35)
$22
$199
$12
$331
Percent Contribution to Y/Y $ Change

Supermarket
47%
Convenience
-4%
Beer
22%
34%
39%
-13%
20%
54%
51%
10%
19%
21%
69%
6%
3%
21%
140%
-1%
29%
-68%
115%
24%
135%
-173%
97%
-19%
-50%
72%
128%
-30%
-99%
101%
80%
-29%
-47%
96%
111%
-29%
-127%
146%
90%
-19%
-110%
138%
25%
25%
91%
-41%
60%
1%
-28%
66%
Percent Contribution to Y/Y $ Change

52%
Sporting Goods
16%
7%
10%
Building Materials
-29%
General Merchandise
65%
Misc
-21%
83%
8%
21%
16%
-80%
73%
-20%
-33%
-1%
13%
-11%
165%
-62%
29%
58%
11%
6%
21%
-67%
103%
-33%
23%
9%
9%
-9%
84%
-35%
18%
-212%
-10%
-61%
-29%
605%
-297%
104%
36%
5%
-2%
21%
-36%
87%
-11%
50%
0%
-31%
-14%
-10%
113%
-8%
31%
-3%
8%
-1%
7%
60%
-1%
24%
4%
11%
-5%
5%
60%
1%
20%
2%
4%
-5%
22%
51%
6%
35%
4%
-3%
-8%
16%
54%
2%
30%
9%
-11%
2%
7%
60%
4%
Y/Y Percent Change

Supermarket
Convenience
Beer
Total
1.9%
-6.9%
4.1%
6.3%
2.8%
1.5%
3.2%
2.3%
1.4%
1.7%
2.3%
2.1%
0.4%
1.6%
1.8%
1.4%
-0.1%
1.2%
-1.5%
0.6%
0.4%
0.9%
2.0%
-1.4%
0.2%
-1.2%
2.8%
2.6%
-2.1%
-0.7%
-0.9%
2.5%
3.0%
-1.7%
-0.4%
-0.6%
2.3%
1.3%
-1.5%
-0.4%
-0.5%
1.6%
2.5%
-1.6%
-0.3%
-0.7%
1.6%
3.3%
-2.4%
-0.4%
0.2%
2.1%
2.8%
-0.7%
0.4%
-0.9%
-0.2%
1.6%
-2.2%
-0.8%
5.3%
-1.3%
-0.2%
2.3%
1.1%
4.7%
-0.5%
1.4%
4.4%
1.8%
-1.5%
3.4%
0.8%
4.9%
0.3%
2.0%
3.2%
0.7%
-1.3%
1.1%
3.4%
3.8%
2.3%
1.0%
6.5%
1.5%
-2.6%
-0.9%
2.8%
4.5%
0.9%
3.3%
4.6%
3.0%
0.5%
-2.8%
1.0%
4.3%
1.4%
1.4%
3.7%
-3.5%
7.3%
6.2%
4.4%
Y/Y Percent Change

11.7%
7.7%
3.5%
4.1%
-3.3%
4.3%
3.8%
5.6%
Sporting Goods
7.5%
1.6%
0.3%
1.7%
-3.0%
0.4%
1.1%
0.0%
3.7%
2.5%
2.0%
2.6%
2.3%
1.0%
3.9%
-2.7%
2.5%
3.1%
-2.1%
0.7%
-2.3%
2.0%
-0.3%
-5.4%
Building Materials
-5.3%
-6.2%
-13.5%
-4.1%
-10.6% -10.4%
-3.4%
-1.0%
General Merchandise
6.5%
3.0%
2.9%
3.3%
2.4%
2.7%
4.1%
5.8%
Misc
-9.1%
-4.0%
-6.5%
-5.0%
-6.0%
-4.7%
-2.6%
-2.0%
Total
3.4%
6.9%
3.8%
7.8%
5.0%
3.5%
3.1%
1.7%
Staples: Supermarket, Convenience, Pharmacy/Personal Care, Beer
Ttl Discretionary: Furniture/Furnishings, Electronics, Clothing/Shoes, Home Ctr/Bldg, Gen'l Merch, Sports, Misc Retailers
Source: Statistics Canada
25 January 2012
22
25 January 2012
23
Figure 23: SNAPSHOT: North American Food Retail Industry Canada vs. US
NORTH AMERICAN FOOD RETAIL INDUSTRY
North American Grocery Landscape - 2010
CANADA - Grocery Sales
Rank Company
UNITED STATES - Grocery Sales
Store
System Sales
Market
PG Store Count
ACV
Market
Count
Est. ($B)
Share
Rank
Company
(over $2m)
est. ($B)
Share
Loblaw Co.
1,027
$31.3
31%
Wal-Mart
3,001
$143.8
26%
Empire / Sobeys
1,077
$18.1
18%
Kroger
2,460
$63.1
11%
Metro
6%
Top 3 Chain Grocers

4
Safeway Canada
Wal-Mart
Top 5 Retailers
656
$11.0
11%
Safeway
1,461
$35.0
3,107
$60
60%
SuperValu
1,504
$29.4
5%
223
$6.3
6%
Top 3 Chain Grocers
7,206
$175
23%
325
$6.3
6%
3,308
$72.8
72%
Costco
Top 5 Retailers
416
$26.5
5%
8,842
$345.6
53%
Costco
79
$5.4
5%
Ahold USA
746
$25.6
5%
Overwaitea
124
$3.3
3%
Publix Super Mkts
1,035
$22.2
4%
Federated Coop
265
$2.3
2%
Delhaize America
1,641
$19.0
3%
Zellers
273
$1.9
1%
H.E. Butt Grocery
291
$12.4
2%
10
Calgary Co-op
23
$1.3
1%
10
Meijer
195
$8.8
2%
1%
11
North West Co.
12
Shoppers Drug Mart
233
$1.0
2%
11
Whole Foods
293
$8.2
1,238
$0.8
1%
12
A&P
373
$8.1
13
H.Y. Louie
1%
43
$0.6
1%
13
Winn-Dixie Stores
484
$7.8
1%
14
M&M Meat Shops
465
$0.5
15
Atlantic Co-op
107
$0.3
0%
14
Trader Joe's
348
$7.2
1%
0%
15
Target
252
$6.7
1%
Top 15
$90
89%
Top 15
$424
75%
Independents/Other
$11
11%
Independents/Other
$139
25%
100%
$101
100%
TOTAL US Grocery sales
$563
Chain Banners
$43
42%
Chain Grocers
$339
60%
Discount Banners
$40
40%
Discount Grocers
$165
29%
Independents
$11
11%
Independents
$31
6%
TOTAL CDN Grocery sales
Sources: Company Reports, Progressive Grocer, Canadian Grocer, Barclays Capital estimates
12 Months Ending
North West Co.
Metro
Sobeys
Loblaw
Kroger
Safeway
Jan-11
Jan-11
Sep-11
May-11^
Dec-10
Jan-11
National Market share est.
1%
10%
17%
30%
11%
6%
Store Count
230
656
1,337
1,027
2,458
1,694
Retail Square Footage (mlns)
2.1
19.7
28.7
50.7
148.6
79.2
9,122
30,030
21,466
49,367
60,456
46,753
$6.3
$17.4
$11.8
$30.2
$33.4
$24.2
Average sales / sq. ft. / week
$13.27
$11.16
$10.56
$11.76
$10.63
$9.97
Revenue ($ Millions)
$1,448
$11,431
$15,762
$30,997
$82,124
$41,050
Revenue growth (3Yr CAGR)
10.8%
2.1%
4.6%
1.8%
5.4%
-1.0%
2.7%
0.9%
0.2%
-0.5%
2.8%
-2.0%
Gross Margin (%)
29.5%
18.4%
24.3%
24.5%
22.3%
28.2%
EBITDA Margin (%)
8.9%
6.9%
5.1%
6.2%
4.6%
5.7%
Operating Margin (%)
6.5%
5.3%
2.9%
4.1%
2.7%
2.8%
Net Margin (%)
5.6%
3.5%
2.2%
1.4%
1.4%
Capex as a % of Revenue
2.6%
1.3%
3.5%*
4.1%
2.3%
2.0%
Inventory Turns
5.8x
13.1x
17.0x*
11.1x
12.9x
11.5x
Per Store Metrics

Average store size (sq. ft.)
Revenue per Store ($M)
Same Store Sales (%)
Net Debt to EBITDA

Free Cash Flow ex Capex ($M)
FCF Yield (%)
1.3x
1.3x
0.6x*
1.5x
1.7x
1.7x
$88.2
$393
$132*
$314
$1,447
$1,012
9.3%
8.4%
3.6%*
3.0%
10.6%
12.1%
ROE (%)
26.0%
16.2%
4.9%*
10.4%
21.1%
11.8%
ROIC (%)
16.6%
12.1%
10%*
7.5%
9.7%
6.5%
Note: Same store sales excludes gasoline where possible
*Includes Empire's other businesses
Source: Company reports, Barclays Capital estimates
^53 week period
25 January 2012
24
CANADIAN FOOD RETAIL SECTOR OVERVIEW

Canadian Food retail sector in the midst of the perfect storm
The past five years have been
difficult; the next two years will
be challenging, too
2012 and 2013 are expected to be challenging years for the Canadian food retail sector.
The outlook for the Canadian Food Retail sector remains challenged as many of the factors
that have made the past five years progressively more difficult for the three major grocers
remain largely in place and in some cases, such as Wal-Marts Supercenter build-out, are
becoming more of a drain. A brief look back at the past five years highlights three major
factors that have combined to erode the sales and earnings growth capacity of the
Canadian Food retail sector.
1. Wal-Marts rollout of the Supercenter format, which started in 2006 and has quickly
grown to an expected 164 locations by the end of 2011, has strained the growth potential
of the incumbents (flat to declining traffic) and has been a major contributor to intensified
price competition over the past year. In 2007, partly in reaction to Wal-Marts impending
launch of the Supercenter banner, Loblaws initiated large-scale, pre-emptive price
reductions (as much as a 5% decline) to tighten its relative price indices in the conventional
(indexed at 103 to 105) and discount (indexed at 100) segments versus Wal-Mart to
protect its tonnage share and minimize Wal-Marts near-term opportunity gap.
2. The 2008/09 recession and its lingering impediment to discretionary spending
growth. Initially the food retailers benefited from the recession as consumers shifted from
eating out to eating in and traded down toward less expensive, higher margin private-label
products. However, a generally weak, elongated economic recovery (modest employment
improvement after an initial recovery of recession losses, wage growth lagging cost
inflation) has left consumers extremely price sensitive, which in combination with WalMarts Supercenter rollout has increased price competition and increased the percentage of
products sold on deal, pressuring food retailers margins.
3. Volatile food inflation has made margin management challenging. Hyper-inflation in
2009 (CPI measured food inflation peaked at 9.5% in March 2009) shifted into store
measured deflation in 2010 (troughed at 0.08% by June 2010) which quickly returned to
above average inflation of 5.72% as of November 2011. The revaluation of the Canadian
dollar versus the U.S. dollar (increased by 14% in 2009) played a major role in curbing the
level of hyper-inflation in Canada through 2009 relative to what the U.S. consumer
experienced. Through most of 2011, the grocers struggled with above-average COGS
inflation (2H10 wheat +85%, corn +73%, sugar +92%), passing along some but not all of
the increases as they managed the price/volume trade-off. A weakening of the Canadian
dollar in 2H11 has increased inflation pressure on imported produce, which in combination
with intensifying price competition elevated margin risk in 4Q11.
Figure 24: Canadian Grocers: Comp-store-sales and EBITDA margin trends
Calendar Years
CSS- Average
EBITDA Margin Variance
2006
2007
2008
1.7%
2.1%
3.4%
-10 bps -36 bps -13 bps
2009
2010
2011E
2012E
2013E
1.7%
-0.3%
1.1%
0.4%
0.9%
41 bps
26 bps
11 bps
6 bps
25 bps
Note: Calendarized and adjusted for extra weeks

Source: Company reports and Barclays Capital estimates.
25 January 2012
25
1H12: some relative calm before the next storm

While we believe 4Q11 will prove to be the peak period of margin risk, the 2012 and
2013 outlook remains very difficult. As we wait for 4Q11 results and enter 2012 the
Canadian food retail sector is in the midst of a perfect storm, which at best is expected to
evolve into a long stretch of grey skies with intermittent thunderstorms. We expect 4Q11 to
be more challenging than 3Q11, followed by a brief reprieve in 1H12 before Wal-Mart reopens 39 acquired Zellers locations in 2H12 and Target brings on 135 locations starting in
March 2013.
Its a limited/no-growth
environment in food retail right
now
25 January 2012
We do not expect the current challenging environment to get materially easier in 2012,
or even 2013. In the immediate term, a noticeable contraction in consumer spending and
Wal-Marts continued build out of the Supercenter format have conspired to create a limited
to no-volume growth (traffic down, item basket count up, increased % on deal) market
place for the established food retailers with price competition intensifying as 2011 has
progressed (increased promotion depth, combined with unfavourable mix shift toward
promo priced items) just as COGS food inflation has picked up (aided by a weakening
Canadian dollar). Several retailers have indicated that consumers noticeably ratcheted
down their spending habits in 2H11 (similar to what 2008 was like) resulting in flat-todown traffic, trade-down and an increase in the percent of sales sold at a discount.
The food retailers have entered the peak margin risk period as ramping COGS
inflation clashes with increasing price competition. This progression of dynamics
outlined above finally resulted in gross margin erosion in calendar 3Q11 at Metro and
more significantly at Sobeys in its fiscal 2Q12, as its results included the more
promotional month of October. These results and commentary by Metro and Sobeys
has confirmed that margin pressure will be worse in calendar Q4. Holiday period
promotional activity (starting with Canadian Thanksgiving week of October 3)
intensified as retailers fight for volume bringing net realized food inflation down
materially versus Q2. As if these pressures werent enough, a weakening Canadian
dollar versus the U.S. dollar is increasing produce inflation after three quarters of it being
an assist. Our COGS inflation analysis (see Figure 44) suggests that 4Q11 and 1Q12 are
the peak input cost inflation periods. The Canadian dollar headwind is expected to
continue for at least the next two quarters.
Wal-Mart and Target are poised to increase competitive intensity through the
addition of significant new grocery square footage over the next 2-3 years. HBC
Trading Companys sale of 188 of its 273 locations across Canada to Target (retained
149 of 188) and Targets subsequent sale of 39 locations to Wal-Mart is expected to
result in the redeployment of about 14 million square feet of retail space starting in
2H12 with Wal-Marts re-opening of 39 renovated stores, followed by Targets phased
re-opening of 135 locations from March 2013 through to mid-2014. While the food
industry will get a brief reprieve during the Zellers store closure/renovation period (6-9
months per store), ultimately the redeployed square footage is expected to inflict an
increased drain on incumbent sales as the new banners food square footage should
benefit from greater traffic at these stores than what Zellers was able to attract.
26
The Canadian food retail landscape

Three publicly traded retailers
own 60% of the grocery market,
but Wal-Mart is growing its
share of the pie
The Canadian Food Retail sector, with estimated sales of $101 billion, is dominated by the
three publicly traded retailers, which collectively hold almost 60% of the Canadian grocery
market. An emerging fourth player is Wal-Mart Canada (~6% market share), whose 2006
launch of the Supercenter format has significantly increased the companys grocery sales
growth, predominantly at the expense of the three large incumbents.
Loblaw Co.s is the only truly national coast-to-coast competitor, except for Wal-Mart.
Loblaw competes with a mix of conventional and discount formats/banners with industryleading market share in both segments.
Empire Co./Sobeys With the acquisition of British Columbiabased Thrifty Foods (20
stores) in 2007, Sobeys has only recently established itself as a national player with a
toehold in British Columbia. Sobeys is predominantly a conventional store retailer with
more than 90% of sales in that segment.
Metro Inc. has a solid No. 2 position in Canadas two largest provinces following the 2005
acquisition of A&P Canada, operating both conventional and discount banner formats in
each market.
Wal-Mart Canada is the newest major player, having arrived in Canada in 1994 through its
acquisition of 122 Woolco stores. As part of its conventional store build-out, Wal-Mart
aggressively added Pantry sections to all of its conventional stores. In 2006, Wal-Mart
launched its first Supercenter store in Canada.
Figure 25: Canadian Food Retail Market Shares by Region (by estimated system sales)
Atlantic
Quebec
Ontario
West
Canada
Loblaw
Metro
30%
0%
22%
22%
31%
16%
33%
0%
30%
10%
Empire
27%
22%
16%
12%
17%
Safeway Canada
Other Major Grocer
0%
0%
0%
0%
0%
0%
17%
13%
6%
4%
MAJOR FOOD RETAILERS:
Independent
18%
15%
13%
5%
11%
Total Major Food Retailers
75%
80%
77%
80%
78%
Wal-Mart
5%
4%
7%
7%
6%
Costco
4%
5%
6%
4%
5%
Drugstores
3%
4%
5%
3%
4%
Convenience Stores
13%
6%
5%
6%
6%
Total Alternative Grocery
25%
20%
23%
20%
22%
Total
100%
100%
100%
100%
100%
ALTERNATIVE GROCERY:
Source: Barclays Capital estimates, Statistics Canada, Canadian Grocer, Company Reports
Wal-Marts hungry for food sales

Wal-Mart has a 26% share of
the U.S. market...
25 January 2012
You cannot discuss the grocery industry in the United States, or Canada, without
mentioning Wal-Mart, whose appetite for food sales and the related traffic lift of food
shopping frequency have been a major factor in both markets for almost two decades. WalMart holds very different market positions in the U.S. and Canadian grocery markets. In the
United States, Wal-Mart, predominantly through the national rollout of the Supercenter
format, has established itself as the clear national market share leader with an estimated
27
share of 26% (source: Progressive Grocer magazine ACV share) versus the Top 3, more
regional, conventional retailers (Kroger, Safeway, SuperValu) which collectively hold a
national share of 23% share. In Canada, the top three conventional retailers control an
estimated 57% of the market, with Wal-Mart having attained an estimated 6% share of
grocery industry sales, placing it in fifth place behind the top 4 conventional players. In the
United States, the regional nature and absolute size of the regional markets (California is as
big a market as all of Canada) does not make Wal-Marts U.S. presence as dominant as it
appears, with Wal-Mart having a diverse range of regional market shares, but Wal-Marts
absolute size in U.S. grocery does provide it with some cost advantage levers.
but still lacks critical mass in
Canada
In Canada, at its current relative size, Wal-Mart still lacks the critical mass advantage it has
in the United States. Even assuming suppliers are providing Wal-Mart with additional
growth funding, it is doubtful that Wal-Marts grocery expense rates (product and
specialized distribution) are superior to any of the incumbents. We believe this expense rate
differential and Wal-Mart Canadas ROE focus has tended to result in a relatively stable
pricing environment, with the exception of this year, where an increasingly tight-fisted
consumer and accelerating food inflation have increased price competition for volume, and
in 2007 when Loblaws moved to lower its relative price index versus Wal-Mart.
Figure 26: Top 15 Grocery Retailers in Canada and the US by estimated market share
CANADA - Grocery Sales
Rank Company
UNITED STATES - Grocery Sales
Store
System Sales
Market
Count
Est. ($B)
Share
Rank Company
PG Store Count
ACV
Market
(over $2m)
est. ($B)
Share
Loblaw Co.
1,027
$31.3
31%
Wal-Mart
3,001
$143.8
26%
Empire / Sobeys
1,077
$18.1
18%
Kroger
2,460
$63.1
11%
Metro
656
$11.0
11%
Safeway
1,461
$35.0
6%
3,107
$60
60%
SuperValu
1,504
$29.4
5%
223
$6.3
6%
Top 3 Chain Grocers
7,206
$175
23%
Top 3 Chain Grocers

4
Safeway Canada
Wal-Mart
Top 5 Retailers
325
$6.3
6%
3,308
$72.8
72%
Costco
Top 5 Retailers
416
$26.5
5%
8,842
$345.6
53%
Costco
79
$5.4
5%
Ahold USA
746
$25.6
5%
Overwaitea
124
$3.3
3%
Publix Super Mkts
1,035
$22.2
4%
Federated Coop
265
$2.3
2%
Delhaize America
1,641
$19.0
3%
Zellers
273
$1.9
1%
H.E. Butt Grocery
291
$12.4
2%
10
Calgary Co-op
23
$1.3
1%
10
Meijer
195
$8.8
2%
11
North West Co.
233
$1.0
2%
11
Whole Foods
293
$8.2
1%
12
Shoppers Drug Mart
1,238
$0.8
1%
12
A&P
373
$8.1
1%
13
H.Y. Louie
43
$0.6
1%
13
Winn-Dixie Stores
484
$7.8
1%
14
M&M Meat Shops
465
$0.5
0%
14
Trader Joe's
348
$7.2
1%
15
Atlantic Co-op
107
$0.3
0%
15
Target
252
$6.7
1%
Top 15
$90
89%
Top 15
$424
75%
Independents/Other
$11
11%
Independents/Other
$139
25%
100%
$101
100%
TOTAL US Grocery sales
$563
Chain Banners
TOTAL CDN Grocery sales
$43
42%
Chain Grocers
$339
60%
Discount Banners
$40
40%
Discount Grocers
$165
29%
Independents
$11
11%
Independents
$31
6%
Sources: Company Reports, Progressive Grocer, Canadian Grocer, Barclays Capital estimates
Wal-Mart Canadas growth in food has been executed through several different stages since
the companys arrival in 1994 following the acquisition of 122 Woolco stores. Food sales
growth started with the addition of Pantry sections in 1998 (dairy, dry and frozen grocery
products), followed by the launch of the SAMs Club format in 2004 (closed in 2009 with
the sale of locations to Lowes Canada) and more recently through the introduction/rollout
of the Supercenter format starting in 2006. As we have seen in the United States, the
Supercenter banner deployment in Canada has several format variations, all including a
fresh food offering (produce, meats and baked goods):
1.
25 January 2012
Conventional conversions the addition of a fresh offering (produce, meats, baked

goods) within an existing conventional store.
28
2.
Expansions of conventional stores virtually every new Wal-Mart that was opened
since the companys arrival in 1994 was built with expansion space adjacent to the
conventional store to accommodate conversion to the Supercenter format. In some
cases, Wal-Mart has chosen to not expand these stores to ensure they achieve
acceptable store productivity improvement and returns from increased food sales and
traffic.
3.
Greenfield Superstores the first new Greenfield locations (i.e., Stoufville, Ontario)
were modelled on the larger U.S. Supercenters. As we have seen in the United States,
the newer Supercenters tend to be smaller. Wal-Mart is estimated to have opened eight
greenfield Supercenter locations in 2011.
New Urban 90 concept a smaller foot print designed to increase Wal-Marts urban
center presence. In addition to the Supercenter rollout, Wal-Mart is in the process of
launching a new format in Canada in 2012 called the Urban 90 concept. This new, smaller
store concept is designed to allow Wal-Mart to achieve greater penetration of urban
population centers.
Canadas Big 3 are unlikely to
remain passive if they see an
irrational pricing environment
developing
Wal-Marts pragmatic approach to food sales growth in Canada and its relative pricing
stance has been partly, if not largely, in recognition of the Big 3s (Loblaw, Metro and
Sobeys) strong position in Canada and the already highly developed discount grocery
segment in Canada (27% ex WMT vs. less than 10% in the US in the mid-1990s). These
circumstances are significantly different than the world that Wal-Mart faced when it
initiated its attack on the U.S. grocery industry (less market concentration strong regional
players, limited discount segment development, high-priced conventional retailers). Within
the context of some healthy tension, Canadas Big 3 are allowing Wal-Mart to take its share
of the market provided Wal-Mart pursues this growth without creating an irrational pricing
environment that threatens industry profitability beyond a tolerable level.
Figure 27: Canadian Discount Segment Development share of Grocery Sales
Loblaw
Metro
Atlantic
Quebec
Ontario
West
Canada
25%
0%
13%
7%
12%
6%
32%
0%
20%
4%
Empire
3%
0%
3%
0%
1%
Other Major Grocer
0%
0%
0%
4%
2%
28%
20%
22%
37%
27%
Wal-Mart
5%
4%
7%
7%
6%
Costco
4%
5%
6%
4%
5%
37%
29%
35%
47%
38%
Total Major Food Retailers
Canadian Grocery Discount share
Source: Statistics Canada, Canadian Grocer Magazine and Barclays Capital estimates.
Zellers break up: a brief reprieve and then a one-two punch

Enter Target135 stores
scheduled to open in 1Q13
25 January 2012
Canadas retail sector started 2011 off with a big bang when in two separate transactions
the leasehold ownership of 188 of Zellers 273 stores was sold to Target (149) and WalMart Canada (39). On January 13, 2011, Hudsons Bay Trading Company (owned by
private equity firm NRDC Equity partners banners include Lord & Taylor in the United
States, The Bay and Zellers in Canada) and Target announced a real estate deal that is
expected to result in Target opening at least 135 locations in Canada starting in the Greater
Toronto Area (GTA) in 1Q13. Starting in early 2012, Targets acquired/retained Zellers
29
stores (149) will go dark for nine-plus months on a phased basis until Target begins reopening them between March 2013 and mid-2014. The renovation closures will provide a
temporary windfall for Zellers competitors; this will include the potential closure of
pharmacy counters and grocery aisles. Target intends to open stores in clusters over a
period of 5-6 cycles structured to capture as much critical mass efficiency as possible. After
the GTA openings, they intend to head west and then swing back east with most of the
stores re-opened by Q1, or Q2 of 2014.
In a subsequent transaction Wal-Mart announced the acquisition of 39 Zellers stores
from Target. Wal-Mart has indicated that it will convert and reopen the 39 Zellers locations
toward the end of 2012 with limited closure or renovation disruption.
Figure 28: The Sale of Zellers Stores to Target and Wal-Mart
273 Zellers Stores
Target Had the Right to

Purchase up to 220 Zellers
Locations
189 Potential Target Locations - 188 from Zellers

and 1 Undeveloped Site from Wal-Mart
85 Zellers
Stores
Remaining
15 to be
Closed/Sold by
Target
39 Purchased
by WMT
135 to be
Target Stores
Expect an impact as 14mn sq. ft.

of retail space changes
ownership
This change of ownership of over 14 million square feet of retail space will have
significant implications for many of Canadas leading retailers as it places
underperforming square footage in the hands of two best-in-class retailers which are
expected to generate substantially higher sales productivity in several categories that
represents a material threat to many established retailers in Canada.
Figure 29: Estimated sales productivity lift of redeployed Zellers locations
TGT
WMT
Remaining
Zellers
Canada
Canada
Zellers
TOTAL
vs Zellers
Store count
273
135
39
85
259
-5%
Avg store size - sf
78
83
83
68
78
1%
Sales / selling sf.
$189
$440
$545
$189
$385
104%
$4,000
$4,930
$1,764
$1,092
$7,786
95%
Sales estimate
Increase
Most of the Zellers stores have dry grocery merchandise. We estimate that 47% (70) of the
Zellers stores that Target will open have a Neighbourhood Market grocery section
(dry/frozen grocery and dairy), while only 13% (5) of Wal-Marts acquired locations have
full grocery sections. Target has confirmed that it will not have a food offering in all stores
as the Zellers stores are much smaller than Targets typical U.S. footprint. We estimate the
average store size of the acquired locations is almost 30% smaller than a typical Target
store in the United States (83k sq. ft. versus 122k sq. ft.). We expect Wal-Mart to have at
least some element of food in all of its stores when they are re-opened, except where
incumbent leasehold exclusivity agreements prove immovable. Over time, we expect most
of the locations to end up with an expanded food offering.
25 January 2012
30
Figure 30: Zellers Store Network Redistribution

ATL
QUE
ONT
WEST
CANADA
confirmed
19
45
35
105
remaining
16
15
44
11
27
61
50
149
had Rx and Grocery
33
21
61
had Grocery only
had RX only
27
24
64
had neither RX or Grocery
15
WAL-MART locations
19
39
had Rx and Grocery
had Grocery only
had RX only
13
22
TARGET locations
12
ZELLERS remaining locations
12
17
39
17
85
had Rx and Grocery
13
had Grocery only
had RX only
29
11
50
21

3
13
Source: Company Reports, Barclays Capital estimates
WalMarts Grocery growth gets an extraordinary boost in 2012/13

Conversions plus new stores will
make 2012 a bumper year for
single store openings for
Wal-Mart Canada
2012 will be Wal-Mart Canadas biggest year of store activity since 1994. Subsequent to
Targets acquisition of the 188 leases from HBCT/Zellers, Target sold 39 locations to WalMart. These locations are expected to be converted into either the Supercenter format, or
Wal-Marts s new Urban 90 concept with the re-openings planned toward the end of
2012. In addition, Wal-Mart will be opening 34 other Supercenter banner locations
throughout 2012 through a combination of conversions, expansions and Greenfield
locations. This will make 2012 the biggest single year of new store openings for Wal-Mart
Canada since its arrival in 1994.
The addition of the 39 Zellers stores in 2012 accelerates WMT Canadas grocery growth
plan by a full year. We now expect WMT Canada to achieve almost a 10% share of the
Canadian grocery sector by 2015, nearing Metros current 10% market share.
Figure 31: Wal-Mart Canadas Evolution
Calendar Year
1994
2006
Conventional
124
276
201
135
30
124
237
360
325
372
390
Supercenter
SAM's Club
2010
2012E
2015E
Total stores
124
289
WMT share of retail sales (ex auto/gas)
1.4%
5.5%
6.6%
8.5%
9.7%
WMT CDN Grocery share
1.3%
4.7%
5.9%
7.9%
9.7%
Sources: Barclays estimates and Company Reports
Targets grocery threat is limited, for now

Targets near-term incremental grocery sales threat is modest with the company
focussed on its bigger areas of upside: apparel and home fashions/housewares. We
estimate that on average the Zellers stores that Target has acquired are approximately 30%
smaller than Targets conventional discount stores in the United States, at an estimated
average selling space per store of 83k sq. ft. versus Targets 122k sq. feet. This smaller
25 January 2012
31
footprint and the significant sales productivity lift we expect Target to achieve in the higher
margin apparel and home fashions/housewares categories suggests that in the immediate
term (12-24 months), as they have indicated during their September 2011 investor day,
Target will only include food in locations where its feels it needs the additional lift of food
sales/traffic. This is similar to how Target has treated its food offering in the United States,
where it has only been recently that it has committed to adding some element of food to all
of its locations. Within this report we are limiting our analysis of Targets impact to the food
sector as the primary areas of Targets sales growth represent minimal risk to the
companies we are initiating on in this report.
Apparel We expect Sears Canada, Old Navy, Wal-Mart, Joe Fresh (Loblaw), and Winners
(TJMaxx) to be most at risk.
Home fashions/housewares Competitors with the greatest risk are Sears Canada, WalMart, IKEA, HomeSense (TJMaxx) and to a lesser degree Canadian Tire.
Sobeys annualized wholesale
revenues could reach $400mn
by the early part of 2014
We do expect Targets food sales to lift versus Zellers due to increased traffic and
through the addition of some new locations with an expanded food offering. Almost all
of the Zellers stores include at least dry grocery merchandise. We estimate that 70 of the
135 Zellers stores Target is expected to open in 2013/14 already had a Neighbourhood
Market grocery offering (similar to Wal-Marts Pantry department), which adds dairy and
frozen grocery to the base dry grocery offering. There is also a possibility that a majority of
the other 65 locations may not be allowed to materially expand into other mainstream
grocery merchandise due to leasehold exclusivity held by an incumbent food retailer in the
same mall. We suspect that many landlords will go out of their way to allow Target to get
around these restrictions depending on the importance of the incumbent food retailer, or
the legal clarity of the lease terms; many of Zellers leases are long-term legacy agreements
written over 20-30 years ago when Zellers was a better traffic draw. Of note, Target has
signed a supply agreement with Sobeys for dairy and dry grocery products no details have
been provided by either company. We estimate that once Target has fully deployed its
stores that Sobeys annualized wholesale revenues could reach $400mn by the early part of
2014.
Discount segment growth is expected to accelerate through 2015

We expect Discount Grocery sales growth by alternative channel competitors to accelerate
over the next five years primarily due to Wal-Marts continued Supercenter rollout and the
redeployment of 188 of Zellers 273 stores into the hands of Target and Wal-Mart. In
addition, the established food retailers have been skewing their store investments toward
the discount segment to capture a piece of its above-average growth.
25 January 2012
Loblaw has deployed its industry-leading No Frills discount concept to the east and west
and is converting many Loblaw stores in Quebec to Maxi & Cie. Loblaw has taken the
highly successful Ontario-based No Frills banner into Atlantic Canada and the West
predominantly through conversions of less productive banners such as Extra Foods
(west) and the Supervalu banner in the east. Loblaw has also converted several Loblaw
stores in Quebec to the Maxi & Cie discount banner.
Empire/Sobeys launched Fresh Co. in Ontario - a new discount banner. Empire/Sobeys

relaunched the majority of its underperforming Price Chopper stores under the new
FreshCo. banner concept (64 locations) which emphasizes discount prices on fresh
produce. They launched with aggressive grand opening price points which established
32
credibility of the concepts promise but was also a catalyst to a price skirmish in
Ontarios hard discount segment.
Metros new store openings are skewed to discount. In fiscal 2011 Metro opened nine
discount stores versus three conventional stores, with similar plans in F2012.
Figure 32: Conventional vs. Discount segment sales importance by retailer

Atlantic
Loblaw
Quebec
15%
87%
West
Canada
5%
32%
41%
62%
67%
60%
100%
79%
99%
92%
100%
100%
100%
Metro
Empire
Ontario
Safeway Canada
Overwaitea
50%
50%
Calgary Co-op
100%
100%
Independents
100%
100%
100%
100%
100%
Drugstore / Convenience
100%
100%
100%
100%
100%
63%
71%
65%
53%
62%
95%
68%
Total Conventional
Loblaw
85%
Metro
Empire
13%
59%
38%
33%
40%
0%
21%
Overwaitea
subgroup
8%
50%
50%
100%
100%
100%
100%
100%
Costco
100%
100%
100%
100%
100%
37%
29%
35%
47%
38%
100%
100%
100%
100%
Total CDN Grocery retail

100%
Source: Barclays Capital estimates, Company reports
share within the Big 3
36%
1%
Wal-Mart
Total Discount
Loblaw has been losing market
64%
So far, Loblaw has taken the biggest hit; losing share within the top 3 grocery retailer
subgroup. Based on Loblaws relative CSS performance over the past seven quarters,
Loblaw has been losing market share within the Big 3 subgroup, while the group has been
losing share of total market due primarily to Wal-Marts significant grocery sales growth. It
is worth noting that Sobeys, with very limited presence in the discount segment (less than
7% of sales) actually gained share (industry leading real CSS growth through all of 2010)
through 2010 into early 2011 among the Big 3. Given the amount of growth expected in
the discount segment over the next two years it seems highly likely that Sobeys will have to
invest margin to gain share in a segment that will be losing market share overall.
Figure 33: Top 3 Canadian Grocery Retailers CSS Trends
Canadian Grocery Retailers CSS Trends
Canadian Grocery Retailers "Real" CSS Trends
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
1Q09
4%
3%
2%
1%
0%
-1%
-2%
-3%
2Q09
3Q09
4Q09
1Q10
Loblaw
2Q10
3Q10
Metro
4Q- 1Q10
11
2Q11
3Q11
Sobeys
1Q09
2Q09
3Q- 4Q09
09
1Q10
Loblaw
2Q10
3Q10
Metro
4Q10
1Q11
2Q11
3Q11
Sobeys
Wal-Mart and Targets grocery sales growth is estimated to fuel more than $1 billion a
year in discount segment sales growth. We estimate that once fully ramped, Targets
25 January 2012
33
grocery sales in Canada could exceed $1 billion through its network of 135-145 stores
versus our estimate of Zellers current grocery sales of $1.9 billion in 273 stores. We expect
Wal-Marts grocery sales to increase from a 2011 estimate of $5.8 billion to almost $9
billion by 2015. In combination with Zellers remaining stores (85) we estimate that the
total grocery sales coming from Zellers 273 locations could increase by 26% to $2.4 billion
by 2015 versus the current $1.9 billion driven by: 1) more stores with grocery, 2) expanded
grocery offerings, and 3) higher traffic at Wal-Mart and Target than at Zellers.
Figure 34: Wal-Mart & Targets Canadian Grocery Sales Forecast
Wal-Mart, Target Grocery Sales Grab - Sales forecast ($M)
Store Count
2010
2011
2012
2013
2014
2015
WMT Supercenters
124
164
237
277
317
357
Target
Zellers
100
135
135
273
273
164
85
85
85
Stores w Grocery
397
437
401
462
537
577
Sales
Wal-Mart
2010
2011
2012
2013
2014
2015
$5,150
$5,794
$6,580
$7,628
$8,313
$8,953
$216
$775
$1,118
$10,071
Target
WMT & TGT ($M)
$5,150
$5,794
$6,580
$7,844
$9,088
Zellers
$1,892
$1,892
$1,474
$673
$547
$547
Total Grocery Sales ($M)
$7,042
$7,686
$8,053
$8,517
$9,635
$10,618
Source: Company reports and Barclays Capital estimates
2013 could be Wal-Marts

biggest year of grocery sales
growth over the next five years
We estimate that 2013 will be Wal-Marts biggest year of grocery sales growth over the
next five years as the 2H12 Zellers openings (39) and other Supercenter openings (34) in
2012 ramp up and Wal-Mart opens another 40 Supercenter banners in 2013. When
combined with Targets launch timing, the 2013 and 2014 threat is just as daunting for the
incumbent retailers. In an industry struggling to achieve any comparable store sales (CSS)
growth, this level of alternative channel discount sales growth will continue to make it
difficult for the incumbents to grow their sales, particularly in the conventional segment.
With this degree of competition for volume, it will be very difficult to return to normalized
earnings growth (8%-10%) until consumers become less price focussed.
Targets gift to Canadas retailers Zellers 2012 renovations

Grocery retailers could suffer less sales drain in 2012 and 2013 than they did in the past
two years as Target closes/renovates the Zellers stores. It is important to highlight that
Target will be closing all of the Zellers stores for renovation, presumably on a phased-in
basis to accommodate a nine-month renovation of each store before it begins re-opening
them starting in March 2013 through to early 2014.
This renovation blackout period could provide the established grocers with a significant
reprieve in 2012/13 from the relentless sales drain that Wal-Marts Supercenter rollout has
inflicted upon them since 2007. We estimate that, in isolation, these Zellers closures could
reduce the combined grocery sales drain of Wal-Marts Supercenter rollout and Targets
store openings in 2012 and 2013 to levels below the drain that Wal-Mart is estimated to
have brought to the market in 2010 and 2011.
25 January 2012
34
Figure 35: Wal-Mart & Targets Incremental Grocery Sales Growth Y/Y variance
Store Count
WMT Supercenters
Target
Zellers
2010
2011
2012
2013
2014
2015
40
40
73
40
40
40
100
35
-109
-79
40
40
-36
61
75
40
Sales
2010
2011
2012
2013
2014
2015
Wal-Mart
$578
$644
$786
$1,048
$686
$640
$0
$0
$0
$216
$559
$343
$578
$644
$786
$1,264
$1,245
$983
$0
$0
-$419
-$801
-$126
$0
$578
$644
$367
$463
$1,118
$983
Stores w Grocery
Target
WMT & TGT ($M)
Zellers
Group Grocery sales ($M)
Whos most at risk from Wal-Mart and Targets growth?

To establish a sense of relative risk exposure that Wal-Mart and Targets grocery sales
growth represents for each of the Food retailers we have done some directional analysis to
size and trend the risk. This analysis is based on: 1) our forecast of Wal-Mart and Zellers
grocery sales growth from 2011 to 2015, and 2) our estimate of Loblaw, Metro and Sobeys
regional and segmented market share exposure to that growth. We emphasize this analysis
is directional. We have assumed a three-year ramp-up to full sales capacity on the portion
of the food offering that is new at the location. This could push the risk out 6-12 months
later than what actually occurs depending on the timing of new store openings. We have
not made any adjustments for regional nuances that could affect each of the food retailers
exposure to that risk; we have qualitatively outlined some of these on the next page.
EPS risk exposure our major takeaways:
1. Targets closure/renovation of 135 Zellers stores could materially ease the grocers
sales and EPS risk in 2012 and 2013 with Empire likely the biggest absolute benefactor of
the closures. Proportionately, Loblaw should see the greatest easing of EPS risk.
2. Empire/Sobeys is most exposed, proportionately, with a material increase in risk
exposure starting in 2013 once Wal-Mart enters Atlantic Canada. If Targets temporary
renovation closures deliver the eased risk we estimate, Sobeys should feel significantly less
pressure in 2012 vs. 2011 before it gets more challenging in 2013. Sobeys suburban
location skew in Ontario suggests that its risk exposure to the Wal-Mart and Target
conversions of Zellers stores may be greater than we are estimating. Sobeys greater
exposure after 2012 reflects Wal-Marts eased build-out in Ontario after completing the
Zellers conversions, which is Sobeys least developed market. Empires large-scale
productivity and efficiency initiatives should start to contribute by spring 2013 (new Quebec
DC, SAP completion and the Reset initiatives) through to 2015 providing some
meaningful offsets.
3. Metro is the least exposed, as a percentage of EPS, with the risk of Wal-Marts
Supercenter launch in Quebec partly offset by eased pressure in Ontario. So far, Metro has
indicated that the sales drain it has felt from the Supercenter openings in Quebec has been
less than what it experienced in Ontario. If Targets store closures contribute the estimated
benefit, we believe Metro has sufficient EPS risk offsets planned for 2012 to achieve our EPS
forecast. Metros store skew to Torontos urban center also shields it from some of this risk.
25 January 2012
35
Figure 36: Estimated EPS at risk from WMT & TGT Grocery Growth
Loblaw
2008
2009
2010
2011
2012
2013
2014
2015
$0.11
$0.10
$0.11
$0.12
$0.14
$0.11
$0.10
$0.11
$0.12
$0.14
-$0.07
$0.19
$0.04
$0.23
-$0.14
$0.12
$0.09
$0.21
-$0.02
$0.11
$0.06
$0.17
$0.00
EPS at risk
% of EPS
% of EPS pre Zellers
$0.11
5.3%
5.3%
$0.10
3.8%
3.8%
$0.11
4.1%
4.1%
$0.12
4.3%
4.3%
$0.07
2.5%
4.9%
$0.09
2.8%
6.9%
$0.20
5.3%
5.8%
$0.17
4.2%
4.2%
Empire
2008
2009
2010
2011
2012
2013
2014
2015
$0.20
$0.19
$0.24
$0.26
$0.36
$0.20
$0.19
$0.24
$0.26
$0.36
-$0.18
$0.52
$0.09
$0.60
-$0.36
$0.35
$0.26
$0.61
-$0.07
$0.33
$0.17
$0.50
$0.00
EPS at risk
% of EPS
$0.20
4.9%
4.9%
$0.19
4.3%
4.3%
$0.24
5.3%
5.3%
$0.26
5.6%
5.6%
$0.17
3.4%
7.0%
$0.24
4.2%
10.4%
$0.54
8.3%
9.4%
$0.50
7.7%
7.7%
Metro
2008
2009
2010
2011
2012
2013
2014
2015
$0.05
$0.06
$0.06
$0.07
$0.12
$0.05
$0.06
$0.06
$0.07
$0.12
-$0.07
$0.16
$0.03
$0.19
-$0.11
$0.11
$0.09
$0.19
-$0.02
$0.10
$0.06
$0.16
$0.00
EPS at risk
$0.05
$0.06
$0.06
$0.07
$0.05
$0.09
$0.17
$0.16
% of EPS
2.1%
1.8%
1.8%
1.9%
1.2%
1.9%
3.3%
2.8%
2.1%
1.8%
1.8%
1.9%
2.8%
4.2%
3.7%
2.8%
WMT
TGT
WMT/TGT
Zellers
WMT
TGT
WMT/TGT
Zellers
WMT
TGT
WMT/TGT
Zellers
Source: Barclays Capital Estimates and Company reports
Additional risk exposure puts and takes for consideration are:

Ontario: Loblaw is most developed in this largest region, but about 60% of Loblaws
Ontario business is franchised and 37% is discount, which reduces some of the risk.
Metros strong urban Toronto presence (50+ stores) will blunt some of our estimated risk,
while Sobeys bias toward suburban locations will increase its exposure to Wal-Mart and
Targets re-opening of the Zellers stores. Sobeys predominantly franchise (60%) business
in Ontario (lower margin) and significant secondary market presence (Foodland banner)
offsets some of its suburban exposure risk.
Quebec: Loblaws 10+ year struggle to establish a winning banner/format strategy in
Quebec has provided its competitors with a relatively easy source of sales growth.
Although we think Loblaw is heading in a better direction it seems unlikely that it can move
fast enough to avoid the accelerated risk of Wal-Marts and Targets growth. Loblaws EPS
risk exposure in Quebec is further increased by the fact that 80% of its sales are done in
high-margin corporate banners. Metro has a strong discount banner in Quebec, Sobeys has
none; this favours Metro as the discount segment is growing faster than conventional sales,
providing some mitigation of sales decline risk.
Western Canada: Loblaw has significantly improved the quality and price perception of its
mostly discount (>90%) business in western Canada. Sobeys does not have a discount
presence in the West but it has a very strong price perception due to some aggressive price
investments over the past three years.
Atlantic Canada: 2012 is expected to mark the beginning of the Supercenter rollout in
Atlantic Canada with at minimum the conversion of five Zellers stores. We expect the
25 January 2012
36
Atlantic Canada Supercenter rollout to be very gradual at first as Wal-Mart focuses more on
Quebec. This will save Empire from more immediate pressure in its most developed market.
Figure 37: Wal-Mart & Target Regional Sales Growth Forecast
Atlantic
Quebec
Ontario
West
Canada
WMT
$28
$113
$398
$247
$786
TGT
$0
$0
$0
$0
$0
2012 total
$28
$113
$398
$247
$786
WMT
$93
$237
$389
$330
$1,048
TGT
$0
$0
$145
$71
$216
2013 total
$93
$237
$534
$401
$1,264
WMT
$45
$195
$175
$260
$674
TGT
$39
$102
$235
$182
$559
2014 total
$85
$296
$410
$442
$1,233
WMT
$82
$185
$153
$231
$651
TGT
$39
$102
$90
$112
$343
2015 total
$122
$287
$243
$343
$994
2012-15
$327
$933
$1,585
$1,432
$4,277
2012
4%
14%
51%
31%
100%
2013
7%
19%
42%
32%
100%
2014
7%
24%
33%
36%
100%
2015
7%
24%
33%
36%
100%
2012-15
8%
22%
37%
33%
100%
Regional skew
Source: Barclays Capital estimates, Company Reports
25 January 2012
37
Figure 38: Canadian Retail Food Inflation by Province
Canada Retail Food Inflation By Province

Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
1.88%
97 bp
1.96%
138 bp
3.66%
292 bp
3.67%
326 bp
4.23%
399 bp
4.80%
472 bp
5.11%
453 bp
5.04%
381 bp
4.82%
265 bp
4.93%
283 bp
5.72%
473 bp
5.03%
363 bp
1.71%
14 bp
1.78%
72 bp
3.63%
199 bp
4.23%
358 bp
5.44%
438 bp
5.77%
544 bp
6.31%
549 bp
5.91%
367 bp
5.56%
305 bp
5.59%
340 bp
6.70%
571 bp
4.92%
328 bp
2.09%
95 bp
1.68%
104 bp
4.56%
407 bp
3.50%
262 bp
2.85%
229 bp
3.48%
268 bp
4.26%
306 bp
4.29%
284 bp
3.51%
72 bp
4.19%
180 bp
5.47%
474 bp
4.46%
317 bp
2.47%
249 bp
2.29%
254 bp
3.14%
362 bp
3.38%
442 bp
4.54%
638 bp
4.72%
605 bp
4.33%
513 bp
4.18%
456 bp
6.11%
516 bp
5.17%
417 bp
4.75%
391 bp
5.59%
466 bp
1.38%
-32 bp
3.44%
246 bp
3.42%
194 bp
4.27%
336 bp
4.36%
462 bp
5.15%
509 bp
4.84%
370 bp
5.70%
404 bp
3.95%
199 bp
4.95%
158 bp
5.76%
391 bp
6.41%
526 bp
Canada
Y/Y Change
Ontario
Y/Y Change
Quebec
Y/Y Change
West
Y/Y Change
Atlantic
Y/Y Change
Source: Statcan
Figure 39: Canadian Retail Food Inflation by Category

Canada Retail Food Inflation By Category
Total Retail Food CPI Inflation
Y/Y change
Bakery & Cereal Products
Y/Y change
Dairy Products / Eggs
Y/Y change
Fish / seafood
Y/Y change
Fresh Fruits
Y/Y change
Fresh Vegetables
Y/Y change
Fresh / frozen meat (ex-poultry)
Y/Y change
Fresh / frozen poultry
Y/Y change
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
1.88%
188 bps
1.96%
196 bps
3.66%
366 bps
3.67%
367 bps
4.23%
423 bps
4.80%
480 bps
5.11%
511 bps
5.04%
504 bps
4.82%
482 bps
4.93%
283 bps
5.72%
473 bps
5.03%
363 bps
0.72%
72 bps
1.72%
172 bps
2.81%
281 bps
5.81%
581 bps
6.32%
632 bps
6.21%
621 bps
5.97%
597 bps
6.10%
610 bps
6.07%
607 bps
6.38%
566 bps
7.80%
700 bps
5.99%
513 bps
0.93%
93 bps
1.45%
145 bps
2.99%
299 bps
2.46%
246 bps
3.23%
323 bps
3.07%
307 bps
3.08%
308 bps
3.37%
337 bps
3.29%
329 bps
4.01%
284 bps
3.69%
315 bps
3.46%
276 bps
-1.46%
-146 bps
-1.01%
-101 bps
-0.18%
-18 bps
-0.92%
-92 bps
0.28%
28 bps
1.37%
137 bps
0.18%
18 bps
0.72%
72 bps
0.92%
92 bps
1.40%
340 bps
0.83%
193 bps
1.88%
471 bps
2.55%
255 bps
0.49%
49 bps
-3.07%
-307 bps
0.50%
50 bps
4.07%
407 bps
4.01%
401 bps
9.22%
922 bps
7.26%
726 bps
4.90%
490 bps
6.20%
601 bps
6.67%
761 bps
8.25%
653 bps
2.00%
200 bps
7.40%
740 bps
18.62%
1862 bps
4.35%
435 bps
4.52%
452 bps
8.36%
836 bps
12.29%
1229 bps
8.75%
875 bps
13.00%
1300 bps
10.47%
495 bps
13.24%
1759 bps
11.11%
1513 bps
4.27%
427 bps
3.79%
379 bps
6.88%
688 bps
7.48%
748 bps
6.55%
655 bps
7.79%
779 bps
6.89%
689 bps
8.03%
803 bps
7.58%
758 bps
7.09%
401 bps
8.63%
678 bps
7.37%
350 bps
2.76%
276 bps
2.01%
201 bps
1.08%
108 bps
1.83%
183 bps
4.05%
405 bps
2.85%
285 bps
3.19%
319 bps
3.50%
350 bps
5.20%
520 bps
2.22%
152 bps
4.50%
525 bps
2.73%
8 bps
Source: Statcan
25 January 2012
38
Food Inflation a short-lived rally with increased margin risk

Food retailers saw a return to
inflation in 1Q11
As expected, retail food inflation in Canada, as reported by StatsCan, ramped up over the
past 10 months from its June 2010 low of 0.08% to a potential cycle high of 5.7% in
November 2011 driven by major increases in fresh produce, meats, baked goods and, to a
lesser extent, consumer packaged goods (CPG). On a store-level measured basis, the food
retailers started to see a modest easing of deflation in 3Q10 and a return to inflation in
1Q11 as some choppy inflation mostly led by produce was followed by inflation in meats,
grain-based products and eventually CPG.
Figure 40: Canada Retail Food Inflation vs. US Food at Home Inflation
Canada: -1162 bps
US: -879 bps
20%
15%
Canada: -731 bps

US: -366 bps
Canada: -908 bps

US: -922 bps
Canada: +564 bps

US: +670 bps
Canada: -1012 bps

US: -1045 bps
10%
5%
0%
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
-5%
Canada
US
Source: StatsCan, Barclays Capital estimates
Figure 41: Canadian Food Retailers CPI food Inflation vs. Retail measured inflation
2010
Retail Food CPI
Q/Q Change (bps)
2011
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4E
0.7%
0.2%
1.3%
1.5%
2.5%
4.2%
5.0%
4.5%
-81
-49
108
17
100
174
75
-49
1.5%
Loblaw (BarCap Est.)
-1.5%
-2.0%
0.0%
0.0%
0.5%
1.5%
2.0%
Metro
-2.0%
-2.0%
-1.0%
-1.0%
1.0%
0.4%
2.4%
1.9%
Sobeys (BarCap Est.)
-2.0%
-2.5%
-1.0%
-1.5%
0.0%
1.5%
1.5%
1.0%
Retail measured Inflation
-1.8%
-2.2%
-0.7%
-0.8%
0.5%
1.1%
2.0%
1.5%
-67
-33
150
-17
133
63
83
-50
Q/Q Change (bps)
Source: StatsCan, Company reports, Barclays Capital estimates
Unfortunately, this lift in food inflation has not aided margins as the PPI food inflation rate
has continued to outpace the CPI Food retail inflation rate, leaving the CPI/PPI spread in
negative territory right up to September 2011, which, as the chart below shows, typically
results in weakened margins for the food retailers.
We have seen EBITDA margin expansion compress quite materially over the past 2-3
quarters in Canada with Loblaws margins still up 40bps or more, while Metro and Sobeys
have seen their margins held flat y/y. Loblaws margin outperformance has been achieved
despite it having the weakest CSS growth over the past three quarters and significant
IT/supply chains costs. The U.S. grocers have generally had a tougher time, with the
Canadian retailers having some benefit from the strong Canadian dollar versus the U.S.
dollar.
25 January 2012
39
Figure 42: Food Retailer EBITDA Margin Variance vs. CPI/PPI Spread: Canada vs. US
CANADA
UNITED STATES
80
60
40
20
0
-20
-40
-60
-80
400
300
200
100
0
-100
-200
-300
-400
2007
2008
2009
2010
800
600
400
200
0
-200
-400
-600
-800
100
50
0
-50
-100
Q1-07
2011
Q1-08
Q1-09
Q1-10
Q1-11
EBITDA Margin Variance (bps) - Left Axis
EBITDA Margin Var (bps) - Left Axis
Food CPI/Food Wt. PPI Spread (bps) - Right Axis
Food CPI/PPI Spread (bps) - Right Axis
Canadian Food Retailer EBITDA Margin Trends - y/y bps var

2009
2010
US Food Retailer EBITDA Margin Trends - y/y bps var
2011
2009
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Loblaw
85
120
64
71
47
57
51
48
40
45
40
Kroger
Metro
79
47
29
22
35
16
-10
-3
Safeway
-63
-42
-54
Sobeys
10
18
-19
23
24
-5
-1
-9
-63
SuperValu
-20
-73
-79
Group
57
59
37
33
21
32
28
11
12
12
-7
Group
-11
-40
-69
Spread
363
321
175
-9
-54 -100
-9
-149
-119 -18
-6
Spread
415
477
613
2010
Q1
Q2
Q3
Q4
50
-5
-74 -110
2011
Q1
Q2
Q3
Q4
Q1
Q2
Q3
-83
-18
10
12
-8
-47
-37
-84
-73
-79
-37
-23
-23
-52
-32
-30
-69
-166
-89
-26
-6
-75
-75
-29
-9
-59
-40
-42
-25
174
-225 -202 -252 -416
-467 -618 -629
Source: StatsCan, Bureau of Labor Statistics, Company reports, Barclays Capital estimates
The Canadian dollar became a

headwind in 4Q11
The fourth quarter of 2011 was likely the peak margin risk quarter due to intensified
price competition; inflation is expected to ease as 2012 unfolds with lessened margin risk
in 2H12. We estimate that COGS inflation pressure will peak in the 4Q11 to 1Q12 period
and will begin easing as we move further into 2012 with retail price inflation working its
way toward a temporary period of stagflation potentially by 3Q12, before lifting modestly
again in early 2013. While our analysis incorporates Canadian dollar FX impact where
appropriate it is important for investors to take note that after almost two years of being a
tailwind the Canadian dollar has become a headwind as of 4Q11 and will likely be a greater
burden through 1H12.
Figure 43: USD/CAD Exchange Rate Since 2010
$1.10
5%
$1.05
0%
$1.00
-5%
$0.95
-10%
Stronger CAD
USD/CAD Value
Dec-11
Sep-11
Oct-11
Nov-11
Jun-11
Jul-11
Aug-11
Feb-11
Mar-11
Apr-11
May-11
-25%
Jan-11
$0.80
Sep-10
Oct-10
Nov-10
Dec-10
-20%
Jun-10
Jul-10
Aug-10
$0.85
Jan-10
-15%
Feb-10
Mar-10
Apr-10
May-10
$0.90
Y/Y Change
Source: Bloomberg
25 January 2012
40
While this scenario means a potential deceleration of top-line growth, over the next six
months Food retailers should start to experience a gradual easing of COGS margin pressure
as we approach 2H12 when they will lap last years period of high COGS inflation when they
could not pass all of the product cost inflation on to the struggling consumer.
Sales growth is likely to ease
unless consumer traffic picks up
The food retailers will begin to lap volatile produce and meat price inflation starting in
February/March and the steady stream of commodity-induced price increases by the CPG
companies which started in earnest in early 2Q11, which will gradually ease the margin risk
of the impeded pass-through of COGS inflation that occurred between 2Q11 and 4Q11.
Unfortunately, this also means that sales growth will ease unless consumer traffic picks up,
which in combination with Wal-Marts accelerated sales growth in 4Q12 will make
operational earnings growth difficult to achieve. This outlook is based on the following
analysis of expected cost inflation for the food retailers which is a compilation of several
inputs: 1) historical PPI by category, 2) USDA forecasts and futures as appropriate, and 3) a
six-month lagged/Canadian dollar adjusted adaptation of our U.S. Consumer Foods Groups
commodity outlook analysis for the U.S. CPG companies which we are using as a proxy for
the possibility of price increases in the center-of-the-store. For more details about the
CPG input cost outlook, please see the report entitled 3Q11 Commodity Update: Deflation
in 12? Be Careful What You Wish For, published on October 18, 2011.
Figure 44: Canadian Food Retail Product Cost inflation (C$ FX adjusted)
% IMP CY09 CY10 CY11 CY12
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
Vegetables
9%
10%
0%
7%
-2%
3%
4%
12%
10%
5%
5%
-1%
-2%
Fruits
5%
4%
3%
-2%
-2%
0%
-2%
-3%
-1%
6%
6%
0%
-2%
Fish/Seafood
2%
3%
-4%
2%
0%
1%
3%
3%
5%
7%
7%
2%
0%
Fresh Meat
14%
1%
0%
5%
4%
5%
5%
5%
5%
7%
4%
1%
2%
Unlagged Fresh
30%
4%
1%
4%
1%
3%
3%
5%
5%
6%
5%
0%
0%
Deli Meat
6mo. lag
9%
4%
-2%
4%
9%
1%
3%
5%
5%
11%
13%
7%
4%
Bakery (Wheat)
6mo. lag
6%
4%
1%
6%
1%
4%
6%
6%
7%
18%
-4%
-13%
2%
47%
4%
0%
4%
2%
3%
3%
5%
5%
8%
5%
0%
1%
Total Fresh
Dairy
Center of Store
6mo. Lag
11%
2%
1%
2%
2%
1%
2%
2%
1%
2%
2%
2%
2%
44%
13%
-7%
10%
5%
7%
5%
10%
11%
9%
4%
2%
2%
8%
-3%
7%
4%
5%
4%
7%
8%
8%
4%
1%
2%
Weighted Total
US$:C$ exchange rate
Y/Y % chg in US:CN FX rate
Energy (WTI)
$1.14 $1.04 $0.99 $1.00
$0.98 $0.96 $0.99 $1.01 $1.02 $1.00 $0.98 $0.98
6%
-9%
-5%
1%
-6%
-8%
-5%
0%
4%
4%
-1%
-3%
-18%
3%
10%
3%
8%
5%
2%
10%
2%
-1%
11%
-1%
Note 1: Some costs have been lagged six months to reflect the retail price lag of hedging/pass through
Note 2: Where applicable we have applied a C$ FX rate to adjust the US$ commodity inflation for a CDN retailer
Note 3: A negative change in the exchange rate indicates a stronger Canadian dollar
Source: Barclays Capital US Foods Equity Research, USDA, Bloomberg, StatsCan, Barclays Capital estimates.
By mid-2012 the high-risk period

for margin contraction might be
behind us. But retailers may not
be able to recoup losses
25 January 2012
While on average the group has fared well through this challenging period, avoiding any
major contraction in EBITDA margins with the exception of third quarter and potentially
fourth quarter 2011, the current consumer spending environment remains challenging and
competition for the consumers food dollar remains high. This analysis suggests that the
high-risk period for margin contraction could be behind us by mid-2012, although we do
not foresee the retailers being able to recoup what they have lost.
41
Figure 45: Canadian Food Retail COGS Inflation Outlook (C$ FX adjusted)
Food Retail CPI
Barclays' CDN food retailer PPI proxy
12
4Q
12
3Q
12
2Q
12
1Q
4Q
11
11
3Q
11
2Q
11
1Q
10
20
CY
20
09
08
CY
20
CY
CY
CY
20
20
07
06
10%
8%
6%
4%
2%
0%
-2%
-4%
Food - Retail Weighted PPI
Source: Barclays Capital US Food Group estimates, USDA, Bloomberg
Figure 47: Corn Prices in $CAD/bushel
NTM Futures
Source: Bloomberg, Barclays Capital estimates
Y/Y Change
20%
$5.50
0%
Price
NTM Futures
Nov-12
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Price
40%
$6.00
Sep-12
0%
-20%
$5.50
60%
Jul-12
$6.00
$6.50
May-12
$6.50
80%
Mar-12
60%
40%
20%
Jan-12
$7.00
100%
$7.00
Nov-11
$7.50
120%
$7.50
Sep-11
100%
80%
140%
Jul-11
$8.00
$8.00
May-11
140%
120%
Mar-11
$8.50
Jan-11
Figure 46: Wheat Prices in $CAD/bushel
Y/Y Change
Source: Bloomberg, Barclays Capital estimates
Productivity & efficiency gains timing is everything

Productivity and efficiency efforts
have accelerated
All three Canadian food retailers have been implementing productivity and efficiency
initiatives over the past decade that they have used to either improve their relative price
position, offset price/margin pressure, or enhance earnings depending upon market
conditions. These efforts have been stepped up over the past five years as the retailers
prepared for the encroachment of the Wal-Mart Supercenter rollout, or dealt with the
lingering realities of constrained consumer spending.
The two biggest differences in the current outlook versus what the retailers would have
been anticipating two years ago are: 1) a second round of consumer spending contraction,
and 2) the sale of Zellers locations to Wal-Mart and Target. Collectively these elements
have created a much more challenging price/margin outlook for 2012 and 2013 than
anyone would have expected. The earnings implications of this more challenging
environment are different for each of the Food retailers as they are all at different stages of
generating earnings benefits from their productivity and efficiency efforts.
25 January 2012
42
Metro has an arsenal to protect

earnings
Loblaw has been able to

increase EBITDA margins...
but efficiency gains might take

a while to have an impact
Empire has made good progress

on a number of fronts...
...but benefits may not offset risk

due to timing
25 January 2012
Metro appears to be best positioned to protect its earnings in 2012. Metro is the poster
child for the benefits of patience and balance: never too much focus on one thing and just
the right amount of effort against the right initiatives at the right time easier said than
done. Beyond the successful acquisition of A&P Canada, the related generation of over $95
million of synergies and the subsequent rebannering of all of A&Ps Ontario conventional
banners into the Metro banner, the majority of Metros productivity and efficiency
improvements are the result of many sizeable, but smaller, initiatives that are part of an
ongoing evolutionary process. In fiscal 2010 the major earnings enhancement initiatives
were a lower cost Ontario trucking agreement, a new lower cost distribution centre union
contract and the acquisition of GP Marche (incremental sales of $100mn). So far in fiscal
2012 Metros arsenal consists of $2 million of cost reductions (outsourcing of meat
processing and the closure of a small warehouse in Ontario), the acquisition of Adonis (a
Mediterranean ethnic foods retailer and distributor) which is expected to contribute
incremental sales of at least $200mn in fiscal 2012 and the rollout of an improved fresh
produce initiative. We estimate that the $2mn cost reduction and the Adonis acquisition
could contribute EPS of $0.05 in 2012, which is already reflected in our EPS forecast.
Loblaw: at least one more year of incremental expense before the benefits start to scale
up. Despite the challenging marketplace over the past five years and the burden of the
most extensive IT/supply chain infrastructure upgrade among the group, Loblaw has
managed to increase its EBITDA margins by 130bps (to an LTM rate of 7%, or 85% of the
prior peak) predominantly through: 1) procurement savings, 2) improved general
merchandise and private label margins, and 3) reduced shrink rates. These EBITDA margin
gains have been achieved despite an estimated incremental IT/supply chain burden of
$160mn since fiscal 2008, which has eroded EBITDA margin capacity by 34bps as of 2011.
Unfortunately, as Loblaw enters the sixth year of the IT/supply chain infrastructure
upgrades it is still a year or two away from achieving the major cost savings and
productivity gains from these investments. So far profit enhancement has been limited to
the benefits of transportation and warehouse management software and more recently the
deployment of store level labour cost scheduling software (STAS). The big upside for
Loblaw is not expected to be achieved until late 2013 when the stores and distribution
centres (DCs) are linked to SAP, flow through (cross docking) inventory handling is rolled
out more extensively and the incremental IT/supply chain SG&A expenses begin to decline.
For now, investors are waiting for details about the incremental expense in fiscal 2012,
which is expected to be at least $50mn of depreciation expense.
Empire Co. next round of cost reductions is not happening soon enough to deal with
2012: Over the past 5-10 years Sobeys has made significant progress on a broad array of
productivity and efficiency initiatives including banner consolidation (from 22 to 6),
implementation of operational best practices, a regional rollout of the SAP enterprise
system (started in fiscal 2006; will be completed by fiscal 2013) and the opening of
Canadas first fully automated distribution centre in fiscal 2010 which is being followed by
the opening of a similar facility in Quebec in fiscal 2013. The benefits of these programs
have been utilized to either enhance returns or invested into sustaining, or improving, their
competitive price position, which in the current pricing environment has been a critical
need.
Empire continues to have a compelling line-up of earnings enhancement initiatives under
way; unfortunately, however, the benefit timing (2013 and beyond) is not well aligned with
the more immediate timing of price/margin risk. Only a small portion of the benefits from
these programs are likely to impact 2012, namely some administrative streamlining savings
43
from the recently announced Reset program and the acquisition of 250 Shell gas stations.
The rest are more skewed to late fiscal 2013: Quebec SAP implementation, new Quebec
automated DC, the Target wholesale supply agreement and the more sizeable benefits of
the Reset program. Although Sobeys continues to derive benefits from its earlier initiatives
we are sceptical that they are material enough to protect Sobeys from further margin
contraction risk over the next 6-12 months.
Deployment of free cash flow

Metro is the only one of the group that has materially and consistently used free cash flow
to buy-back shares as a meaningful assist to earnings growth while also increasing its
dividend every year.
Figure 48: Canadian Food Retailers Free Cash Flow Summary ($ mn)
Loblaw Free Cash Flow
Fiscal Year (Dec)
2006
2007
2008
2009
2010
2011E
2012E
2013E
Operating Cash Flow

Change in W/C
Cash from Operations
Capex
Free Cash Flow
$1,249
-$69
$1,180
-$937
$243
$1,288
-$43
$1,245
-$613
$632
$1,237
-$282
$955
-$750
$205
$1,238
$707
$1,945
-$971
$974
$1,550
$73
$1,623
-$1,280
$343
$1,822
-$48
$1,774
-$1,000
$774
$1,602
$18
$1,619
-$800
$819
$1,721
$4
$1,725
-$750
$975
Dividends
Net Change in Share Capital
Acquisitions
Net Change in Debt
Remaining cash flow
-$173
$0
$0
$49
$119
-$230
$0
$0
-$241
$161
-$288
$0
$0
-$309
-$392
-$112
-$56
-$204
-$7
$595
-$65
$0
$0
$83
$361
-$76
-$6
$0
$247
$939
-$253
$0
$0
-$77
$490
-$276
$0
$0
-$419
$280
Metro Free Cash Flow Management

Fiscal Year (Sep)
2007
2008
2009
2010
2011
2012E
2013E
2014E
Operating Cash Flow

Change in W/C
Capex
Free Cash Flow
$437
-$74
$363
-$230
$134
$435
$7
$442
-$176
$265
$521
-$1
$520
-$235
$285
$580
-$33
$547
-$165
$382
$566
-$25
$542
-$148
$393
$580
$13
$593
-$215
$378
$586
-$7
$578
-$225
$353
$617
-$1
$616
-$225
$391
Dividends
Acquisitions
Net Change in Debt
Remaining cash flow
-$52
-$21
$0
-$82
-$21
-$55
-$110
-$7
-$28
$64
-$59
-$99
$0
-$5
$122
-$69
-$151
-$152
-$7
$2
-$77
-$188
-$74
-$4
$50
-$84
-$213
$0
$0
$81
-$92
-$233
$0
$0
$28
-$102
-$231
$0
$0
$58
Empire Free Cash Flow Management
25 January 2012
Fiscal Year (Apr)
2007
2008
2009
2010
2011
2012E
2013E
2014E
Operating Cash Flow

Change in W/C
Capex
Free Cash Flow
$605
-$137
$468
-$539
-$72
$670
-$26
$644
-$549
$94
$612
$48
$660
-$431
$229
$665
$125
$790
-$447
$343
$678
$8
$687
-$554
$133
$710
-$78
$631
-$700
-$69
$747
$0
$747
-$500
$247
$795
$23
$818
-$500
$318
Dividends
-$40
-$43
-$46
-$2
-$1
$128
Acquisitions
-$150
-$1,341
-$41
Net Change in Debt
-$9
$653
-$288
Remaining cash flow
-$272
-$638
-$18
Source: Company Reports, Barclays Capital Estimates.
-$51
$0
-$34
-$89
$170
-$54
-$28
-$17
-$64
-$31
-$61
-$28
-$20
-$50
-$228
-$67
-$56
$0
$0
$124
-$66
-$56
$0
$0
$197
44
25 January 2012
45
Figure 50: Metro Share Price vs. Historical Fwd. P/E
Figure 49: Loblaw Share Price vs. Historical Fwd. P/E

$45
$40
$35
$30
$25
$20
2008
2009
2010
Stock Price
2011
18x
17x
16x
15x
14x
13x
12x
11x
10x
9x
8x
2012
$60
14x
$55
13x
$50
$45
12x
$40
11x
$35
10x
$30
$25
9x
$20
$15
2008
NTM Fwd P/E
2009
2010
Stock Price
2011
8x
2012
NTM Fwd P/E
Source: FactSet, Barclays Capital estimates
Figure 51: Empire Share Price vs. Historical Fwd. P/E
Figure 52: North West Share Price vs. Historical Fwd. P/E
$65
14x
$24
17x
$60
13x
$22
16x
$20
15x
14x
$18
13x
$16
12x
$14
11x
10x
$12
9x
$55
12x
$50
11x
$45
10x
$40
9x
$35
$30
2008
2009
2010
Stock Price
2011
8x
2012
$10
2008
NTM Fwd P/E
2009
2010
Stock Price
2011
8x
2012
NTM Fwd P/E
Figure 53: Kroger Share Price vs. Historical Fwd. P/E
Figure 54: Safeway Share Price vs. Historical Fwd. P/E
$32
15x
$30
14x
$28
$24
$22
15x
$35
12x
$30
11x
$25
$20
10x
$18
9x
2009
2010
Stock Price
25 January 2012
16x
14x
13x
$26
$16
2008
$40
2011
NTM Fwd P/E
8x
2012
13x
12x
11x
10x
$20
9x
$15
2008
2009
2010
Stock Price
2011
8x
2012
NTM Fwd P/E
46
Recommendation & Valuation Summary

Of the food retailers, we favor
Metro, Loblaw, and Empire, in
that order
The Food retail segment is the most challenged segment in our coverage universe with a
confluence of growth constraints converging into a perfect storm in the second half of
2011. As we await 4Q11 results the food retailers are in the midst of what appears to be the
highest earnings risk period. We expect the next three years to be difficult for the
incumbent food retailers with 2012 and early 2013 being the most challenging period as
there are several earnings risk factors at play (weak demand, continued inflation margin
risk, accelerated Wal-Mart Supercenter rollout in 2H12).
Overall, we recommend that investors minimize their exposure to the Canadian food retail
sector in 2012. For investors looking for relatively defensive positions with attractive price
appreciation potential we prefer Tim Hortons and Dollarama. For investors who are more
focussed on downside risk protection we view the drugstore sector as more appealing than
the food retail sector as the earnings drain of drug reform should gradually ease through
2012 and both players have re-established earnings growth.
Within the food retail sector our rank order preference over the next 12 months is Metro,
Loblaw, North West Co. and then Empire.
Figure 55: Canadian Food Retailers: Recommendation Summary

Market
Company
Ticker

Actual
FY1
FY2
P/E
FY1
FY2
Dividend
DPS
Yield
Current
Price
Price
Potential
Target Ttl Return
FOOD RETAILERS/MANUFACTURERS
Empire
EMP-A.TO
2-EW
Apr-30
$3,837
$4.98
$4.58
$5.10
12.3x 11.1x
$0.90
1.6%
$56.43
$57.00
2.6%
Loblaw
L.TO
2-EW
Dec-31
$10,519
$2.58
$2.84
$2.91
13.1x 12.8x
$0.84
2.3%
$37.30
$39.00
6.8%
George Weston
WN.TO
2-EW
Dec 31
$8,536
$4.33
$4.86
$4.89
13.6x 13.5x
$1.44
2.2%
$66.12
$69.00
6.5%
Metro
MRU-A.TO
2-EW
Sep-30
$5,235
$3.92
$4.29
$4.62
12.0x 11.2x
$0.77
1.5%
$51.58
$54.00
6.2%
North West Co.
NWC.TO
2-EW
Jan-31
$965
$1.66
$1.23
$1.32
16.2x 15.1x
$0.96
4.8%
$19.95
$20.00
5.1%
Source: Company reports, FactSet, Barclay Capital estimates. Priced as of January 20, 2012.
Metro (MRU/A CN/MRU-A.TO; 2-EW/Neu; $54 price target): least earnings risk exposure
of the group to Wal-Mart in 2012 and the best earnings growth track record. Metro is
currently trading at 12.1x FY1 consensus EPS, 5% above its long-term average, 9% above
its 2011 trough (10.7x) and 31% above its LT trough of 8.9x. As we have seen over the past
few years, investors comfort with Metros ability to deliver EPS growth should ensure first
mover advantage within the group, especially given its reasonable valuation.
Our preference for Metro is supported by the following:
25 January 2012
Least proportionate EPS risk exposure (~3%) to Wal-Marts Supercenter openings in

2012 and 2013, despite their recent Quebec entry. We have estimated Metros fiscal
2012 EPS risk at $0.12, or 3% of forecast EPS (only 1% if we include the favourable
impact Targets renovation closures could have), this compares to Loblaw at 5% and
Empire at 7% EPS risk.
Strongest line-up of EPS risk offsets in 2012. We estimate that Metros announced
incremental earnings activities (meat processing plant closure and Adonis acquisition)
will generate up to $0.05 of incremental EPS in fiscal 2012.
47
We see 2013 into 2014 as the

more compelling investment
horizon for Loblaws shares
We believe Empires 2012

outlook is the most challenged of
the group
Share buyback program is expected to contribute earnings growth of 4%, or 42% of

total fiscal 2012 EPS growth which minimizes EPS downside risk. Metro is the only one
of the Big three Food retailers with a meaningful buyback program. Over the past six
years it has repurchased more than 19% of shares outstanding.
Best earnings and dividend track record of the group. Metro has increased earnings in
20 of the past 21 years and increased the dividend every year for 18 years. In the last
two years Metros dividend has increased 40%.
Loblaw (L CN/L.TO; 2-EW/Neu; $39 price target): potential valuation lift from depressed
levels but 2012 fundamentals remain challenged. Loblaws valuation contraction in 2011
has pushed its NTM forward P/E multiple down to 12.2x which is well below our estimate of
the stocks normalized P/E of 14.7x and only 9% above Metro and Empires forward P/E of
11.2x versus its historical valuation premium of 28%. While we expect that any
meaningfully positive catalyst (e.g., 4Q11 results come in better than expected, 2012
incremental IT/supply chain spend lower than expected, announcement of new
merchandising initiatives to improve sales trends) could push Loblaws shares back toward
a valuation premium of at least 14x representing potential upside of 13%, the fundamental
concerns we have about the companys near- to intermediate-term earnings outlook are
likely to remain unchanged. For now, we will maintain a cautious stance on the stock given
the industry-wide challenges and Loblaws continued infrastructure upgrade constraints.
We see 2013 into 2014 as the more compelling investment horizon for Loblaws shares.
Empire (EMP/A CN/EMP-A.TO; 2-EW/Neu; $57 price target): greatest EPS risk exposure
to competitive square footage growth, with the least offsets in 2012. Empire has suffered
the greatest pullback among the group (-14% from the mid-September peak) but its NTM
forward P/E of 11.3x is only modestly below Metros 11.9x multiple. According to our
estimates, Empire faces the greatest EPS drain risk (7% of EPS) to Wal-Marts accelerated
Supercenter openings in 2012 before giving consideration to the favourable benefit Targets
renovation closures could have (reduces risk to 3.4%). Given Empires weak margin
performance in its 2Q12 results and a lack of meaningful cost savings available to the
company until late fiscal 2013 (April YE), we believe Empires 2012 outlook is the most
challenged of the group.
Recent share price trend and valuation perspective

Metros shares achieved solid price appreciation in 2011 (+16%; S&P/TSX -11%)), however,
so far into 2012 the shares have contracted 4.5% lagging pullbacks over the past two
months by Empire (-8%) and Loblaw (-2%) following Empires Q2 release (S&P/TSX -11%).
We attribute the pullback to increased Q4 margin concerns following Metro (1Q12) and
Empire/Sobeys (2Q12) most recent quarterly releases. Loblaws shares declined 7% in
2011, driven by a 15% multiple contraction from a 14.3x peak in 2011 to 12.2x at the end of
December in response to three factors: 1) lagging real CSS growth, 2) Q4 margin concerns,
and 3) Targets potential impact on Joe Fresh.
25 January 2012
48
Figure 56: Canadian Food Retailers 2011 Price appreciation and Forward P/E trend
Canadian Food Retailer 2011 Share Performance
Food Retailers Forward P/E
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
25x
20x
15x
10x
5x
0x
2/11/2011
5/06/2011
L
7/29/2011
10/21/2011
MRU.A
EMP.A
1/13/2012
2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
L
MRU.A
EMP.A
Source: FactSet/Reuters
Despite the challenges facing the

group, we still forecast EPS
growth
After a recent pullback we believe food retailers valuations adequately reflect the 4Q11
and fiscal 2012 earnings challenges unfortunately multiple expansion seems unlikely in
the immediate term. Metros NTM forward P/E multiple has pulled back toward its longterm average while Loblaw (-16%) and Empire (-12%) are below theirs. Although the 2012
outlook is challenged we are still forecasting EPS growth for the group which we believe is
supportive of the current valuations. If price/promotion margin concerns ease we expect
Metros shares to be the first to see a rebound, followed by Loblaw given its depressed
premium versus the group. We expect that Empires greater WMT/TGT risk exposure and
lack of immediate-term cost savings offsets, combined with its lower trading volume, will
likely suppress the shares performance relative to the group.
Figure 57: Canadian Food Retailer P/E Contraction Risk and Upside Potential
P/E Contraction
Historical Cycle P/E's
Current Cycle PE's
Loblaw
Metro
Peak
17.3x
15.0x
Trough
9.8x
8.9x
AVG
14.7x
11.3x
January 2011 to 2012

P/T
Peak
Trough
% Chg
14.3x
11.9x
-16.8%
12.4x
10.7x
-13.7%
Empire
Average
14.6x
15.6x
9.3x
9.3x
12.6x
12.9x
12.4x
13.0x
11.0x
11.2x
-11.3%
-13.9%
risk to Trough
P/E Expansion
upside to
LT Trough
Recent
LT Avg
Recent Peak
Current
12.2x
11.7x
% Chg
-19.7%
-23.9%
% Chg
-2.5%
-8.5%
% Chg
20.5%
-3.4%
% Chg
17.2%
6.0%
11.3x
11.7x
-17.7%
-20.4%
-2.7%
-4.6%
11.5%
9.5%
9.7%
11.0%
Source: FactSet, Barclays Capital Estimates.
25 January 2012
49
Figure 58: North American Food Retailers Comparable Forward PE Valuations

FOOD RETAIL COMPARABLE VALUATIONS: PROJECTED EPS, P/E MULTIPLES - FISCAL BASIS
Ticker
Price
SOS
Market
20/01/2012
(M)
Cap ($M)
PY
Fiscal EPS
FY1
FY2
PY
FY1
P/E
EPS Growth
FY2
PY-FY1 FY1-FY2 PY-FY2
Loblaw
$37.30
281.4
$10,496
$2.59
$2.84
$3.01
14.4x
13.1x
12.4x
10%
6%
8%
Metro
MRU.A
$51.58
100.5
$5,182
$3.87
$4.28
$4.65
13.3x
12.1x
11.1x
10%
9%
10%
Empire
EMP.A
$56.43
67.9
$3,834
$4.31
$4.57
$5.14
13.1x
12.3x
11.0x
6%
13%
9%
NWC
$19.95
48.4
$965
$1.66
$1.21
$1.34
12.0x
16.5x
14.9x
-27%
11%
-10%
9%
9%
9%
North West Co.
Canadian Grocer Average (ex-NWC)

Kroger
13.6x 12.5x 11.5x
KR
$23.91
574.8
$13,743
$1.74
$2.00
$2.22
13.7x
12.0x
10.8x
15%
11%
13%
Safeway
SWY
$21.85
339.9
$7,427
$1.55
$1.72
$1.82
14.1x
12.7x
12.0x
11%
6%
8%
Supervalu
SVU
$6.88
212.3
$1,460
($7.13)
$1.23
$1.23
-1.0x
5.6x
5.6x
na
0%
na
Whole Foods Mkt
WFM
$76.30
179.5
$13,696
$1.93
$2.26
$2.59
39.5x
33.7x
29.4x
17%
14%
16%
16.6x 16.0x 14.5x
14%
8%
12%
Loblaw (Barclays Capital Est.)
$37.30
281.4
$10,496
$2.59
$2.84
$2.91
14.4x 13.1x 12.8x
10%
2%
6%
Metro (Barclays Capital Est.)
$51.58
100.5
$5,182
$3.87
$4.28
$4.65
13.3x 12.1x 11.1x
11%
9%
10%
Empire (Barclays Capital Est.)
$56.43
67.9
$3,834
$4.64
$4.72
$5.23
12.2x 12.0x 10.8x
2%
11%
6%
North West (Barclays Capital Est.)
$19.95
48.4
$965
$1.66
$1.24
$1.37
12.0x 16.1x 14.6x
-25%
10%
-9%
U.S. Grocer Average
Source: FactSet and Barclays Capital estimates; EPS figures are consensus from FactSet.
25 January 2012
50
LOBLAW COMPANIES
Loblaw Cos., Ltd.(L.TO): Quarterly and Annual EPS (CAD)
L CN / L.TO
2010
Stock Rating
2-EQUAL WEIGHT
FY Dec
Sector View
2-NEUTRAL
Price Target
CAD 39.00
Price (20-Jan-2012)
CAD 37.30
Potential Upside/Downside
+5%
2011
2012
Actual
Old
New
Cons
Old
New
Q1
0.48A
N/A
0.57A
N/A
N/A
Q2
0.71A
N/A
0.74A
N/A
N/A
Q3
0.76A
N/A
0.86A
N/A
N/A
Q4
0.64A
N/A
0.67E
N/A
N/A
Year
2.58A
N/A
2.84E
2.84E
N/A
P/E
14.5
13.1
Change y/y
Cons
2011
2012
N/A
N/A
19%
N/A
N/A
N/A
4%
N/A
N/A
N/A
13%
N/A
N/A
N/A
5%
N/A
2.91E
3.01E
10%
2%
12.8
Source: Barclays Capital

Consensus numbers are from Thomson Reuters
Recommendation & Valuation

We are initiating coverage of Loblaw Companies (L CN/L.TO) with a 2-Equal Weight/2Neutral rating and a $39 price target, offering a total potential return of 5% from recent
levels. Our 12-month price target is supported by a 13.5x P/E multiple (below its historical
average of 17x) on our 2012 EPS forecast of $2.91. Loblaws shares are trading at 12.2x
NTM consensus EPS, which is 3% above its five-year trough multiple. This places Loblaw at
a 3% and 7% premium to Metro and Empire, respectively, compared with an average
premium of 28%-29% over the last five years. While this may be an attractive entry point
for long-term value investors, the immediate-term backdrop limits the likelihood of
sustainable upside over the next year, in our view.
We expect price discounting
took a toll on sales and margins
in 4Q11
Frugal consumers are unlikely to begin more lucrative food spending for a while and the
sales growth pressure being applied by Wal-Mart is poised to increase as it redeploys 39
Zellers stores in late 2012. Loblaws extensive IT upgrade and supply chain transition will
not be sufficiently complete until late 2013 as it works through the critical linking of stores,
distribution centers (DCs) and merchandise data to SAP and rolls out the inventory flow
processes. We expect that 4Q11 sales and margins experienced material deceleration due
to increased price discounting. We may miss out on a relief rally from the near-trough
levels, but we need to see more positives before we get excited about sustainable upside.
Figure 59: Loblaw P/E Valuation Range
2012
2013
BarCap est
BarCap est
Valuation References
EPS range
$2.80
$2.91
$3.10
$3.15
$3.24
$3.30
Y/Y % chg
-1.3%
2.8%
9.3%
8.1%
11.3%
13.2%
P/E Multiples
8.0x
$22
$23
$25
$25
$26
$26
9.0x
$25
$26
$28
$28
$29
$30
10.0x
$28
$29
$31
$32
$32
$33
11.0x
$31
$32
$34
$35
$36
$36
12.0x
$34
$35
$37
$38
$39
$40
13.0x
$36
$38
$40
$41
$42
$43
13.5x
$38
$39
$42
$43
$44
$45
14.0x
$39
$41
$43
$44
$45
$46
15.0x
$42
$44
$47
$47
$49
$50
16.0x
$45
$47
$50
$50
$52
$53
<= SFWY/Kroger trough fwd P/E's
<= Loblaw's historical trough P/E

<= BarCap target multiple
<= Loblaw's Avg. normalized P/E
Source: Company Reports, Barclays Capital estimates. EPS range is for illustrative purposes only.
25 January 2012
51
Despite increased earnings pressure over the past five years and the lengthy disruption of
the 5+ year renewal program, Loblaws valuation multiple has typically remained industry
leading. In 2011, Loblaws shares experienced a significant deterioration in their relative
valuation, which we attribute to three factors:
1. Implied market share losses based on the weakest CSS in the group
2. An extension of the markets understanding of how long it will be before the IT systems
implementation is no longer a risk factor and impediment to growth
3. Targets announced entry into Canada, which is modestly negative for Loblaw on two
fronts: i) Targets apparel sales appeal with consumers could hurt Joe Fresh, and ii) Targets
food sales growth (2013E/14E) when combined with the sales growth pressure of WalMarts accelerated growth will make it even harder for the incumbents to grow sales.
We dont expect Loblaws
valuation to revert to historical
levels for some time
Near-term catalysts/key dates that could provide a boost to Loblaws valuation include its
4Q11 results release on February 23. Should Loblaw be able to convince the market that it
can sustainably stem the loss of market share (i.e., grow real CSS) or continue to offset
gross margin pressure through further cost savings, we expect a modest re-valuation in the
stocks multiple toward the 14x P/E level (consistent with the valuation level at which
Loblaw was trading at prior to the deterioration in mid-2011). However, given the abovementioned medium- to long-term risks (i.e., ongoing supply chain renewal; Targets
entrance), we do not expect Loblaws valuation to immediately revert back to its long-term
mean.
Figure 60: Loblaws Historical Forward P/E
Loblaw Forward P/E
33x
30.0x
28x
Normalized Avg: 14.7x

27.4x
23x
18.3x
15.5x
11
20
09
05
20
03
20
01
20
99
19
97
19
95
19
19
91
19
89
19
87
19
19
85
8x
14.1x
12.1x 12.5x 12.1x
13.1x
12.1x
93
9.8x
16.9x 16.4x
17.0x
13x
10.5x
19.1x
18.1x
19.9x
20
17.0x
07
15.9x
20
18x
Note: Avg. PE Normalized to exclude M&A Speculation period from 1997-2003

Source: FactSet
We could see relative

outperformance in 2013
25 January 2012
Towards late 2013, we expect Loblaws earnings and share price performance to begin
outperforming the group as it completes, and begins to benefit from, its significant
infrastructure renewal (2007 to mid-2013), reduces IT expenses, and improves its
merchandising execution. In the immediate term (2012/13), we expect Loblaws earnings
performance to continue to be constrained by increased infrastructure expenses in 2012
(unknown increment), expenditures on four new growth initiatives (e.g., PC Financial, Joe
Fresh) and intensely competitive market conditions. Over the longer term, we expect
Loblaws productivity and efficiency upside to drive superior returns versus the group. We
note that despite adding estimated IT/supply chain infrastructure related G&A expense of
52
roughly $38mn so far this year ($160mn since 2008), Loblaw has managed to hold total
SG&A relatively flat this year.
Under these circumstances, we believe Loblaws valuation premium could potentially revert
back to its historical mean versus its peers. At a 28% premium (5-year average versus
Metro and Empire), Loblaw would command a 15x forward P/E multiple.
Figure 61: Loblaw Valuation Premium to Metro and Empire
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
2006
2007
2008
2009
Loblaw vs Metro
2010
2011
2012
Loblaw vs Empire
Source: FactSet/Reuters
Corporate Profile: Loblaw is Canadas leading food retailer

Loblaw is Canadas largest retailer and the leading food retailer, with an estimated
national market share of around 30% (almost twice that of its nearest competitor) through
an industry-leading national network of 1,403 stores (corporate 576, franchised 451 and
affiliated 376) under 22 banners, which combined represents 50.7 million retail square feet.
Loblaw owns 74% of its corporate and 46% of its franchised square footage, which
compares to less than 9% ownership by Metro and 15% by Sobeys.
Loblaw operates in the conventional and hard discount segments. Loblaws conventional
business consists of three primary conventional banners (Loblaw, Fortinos and Zehrs in
Ontario) and three primary discount segment banners (No Frills - East/West, Maxi and Maxi
& Cie. Quebec, and the Real Canadian Superstore West). Loblaw also owns and operates
PC Financial (bank loans and credit cards), which represents roughly 5% of EBITDA.
Loblaw is 62.9% owned by George Weston (WN), which is 62.5% owned by the Weston
family. This leaves investors with a free float market cap of approximately $4bn versus the
total market cap of $10bn.
Loblaw is in the midst of transition in the presidents office under the supervision of Galen
Weston. Allan Leighton (a long time Weston Family advisor) is departing after guiding
Loblaw through five years of renewal. He is passing the reins to Vicente Trius, another
experienced International retailer, who comes to Loblaw from Carrefour and prior to that
Wal-Mart International. Mr. Trius has had extensive retail experience from many markets,
many sectors and a variety of growth strategies which we believe will be beneficial to
Loblaw.
25 January 2012
53
Figure 62: Loblaw Corporate Profile

Loblaw Companies - Store Network Profile
Market Share
30%
Revenue
EBITDA
% Margin
$31 bln
$2 bln
6.2%
Corporate
Franchise
Total
Primary Banners
Conventional
174
238
412
Ontario: Loblaw, Zehrs, Fortinos; Quebec: Loblaw, Provigo
Soft Discount
182
182
Real CDN Superstore (West, Ont), Maxi & Cie (Que), Atlantic Superstore
Hard Discount
185
Specialty stores
24
Other
213
11
398
No Frills (Ont, Atlantic, West), Maxi (Que)
24
T&T - Asian specialty (20 stores); Joe Fresh standalone stores (1)
11
Real Canadian Wholesale Club and Others
576
451
1027
Total Sq. Footage
37.3 mln
13.5 mln
50.8 mln
Owned locations
74%
46%
69%
Total stores
Affiliated stores
376
Source: Company Reports, Barclay Capital estimates
A brief history lesson before looking forward

After many years of industry-leading growth, driven primarily by the build-out of large box
food and everyday general merchandise retail stores (average size of 65k to 120k sq. ft.),
Loblaws new store growth strategy hit a wall with incremental growth capital failing to
generate adequate returns. In a slower-growth environment, dated/inefficient supply chain
and IT systems proved to be a cumbersome burden that could no longer be ignored,
especially with the pending arrival of Wal-Marts Supercenter format in Canada. As the
company attempted to shift gears, the new store growth oriented management team
lacked the skills necessary to deal with these new challenges, which resulted in significant
changes in the senior management ranks.
After an extensive review process with external consultative support, Loblaw launched a
multifaceted five-year renewal program, which was designed to return the organization to
best-in-class status. As we enter year five of Loblaws renewal program, the company has
made significant progress but still has a lot of heavy lifting to do. In the meantime, the
marketplace has become more competitive than ever with retailers battling aggressively on
price just to hold volume.
Growth strategy & Outlook Renewal is an ongoing process

Making strides, but renewal program remains in high risk period, which when
combined with challenging market conditions and the growing pains of a new
organizational structure and a new president warrants caution. Loblaw will enter the final
phase of its huge SAP enterprise system installation in 2012/13 with the integration of the
stores (first stores to be linked in 3Q12) and distribution network, having just completed the
merchandise category on-boarding process in 3Q11. Related incremental IT/supply chain
expenses, which currently total $305mn since 2008, will have one more year of an unknown
incremental amount (at least $50mn in depreciation) in 2012 before easing off in 2013.
Margins could remain at risk
until at least the second half of
2012
25 January 2012
Loblaw needs to re-establish real same-store sales growth to stop market share
erosion and establish sustainable earnings growth outlook. In the immediate term, all of
the Canadian food retailers will see their CSS improve due to an assist from increased food
inflation. However, we expect the competitive environment and easing commodity cost
pressure to allow food inflation to decelerate from 4Q11 through to the end of 2012.
Loblaw needs to show real CSS growth driven by volume and a favourable mix shift (more
traffic, increased basket counts and favourable trade up mix) if its hopes to establish
stronger earnings growth. We believe this will require another step up in the shopping
54
experience through continued improvements in merchandising, new private label

innovations and store design. We are encouraged by some of the new elements at the
Maple Leaf Gardens test store that could selectively be expanded chain-wide such as
improved Home Meal Replacement (HMR) extensive cheese offering, sampling booths,
new/unique ACE bakery artisan breads and the tea emporium.
Figure 63: Top 3 Canadian Grocery Retailers CSS Trends
Canadian Grocery Retailers CSS Trends
Canadian Grocery Retailers "Real" CSS Trends
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
1Q09
4%
3%
2%
1%
0%
-1%
-2%
-3%
2Q09
3Q09
4Q09
1Q10
Loblaw
2Q10
3Q10
Metro
4Q- 1Q10
11
2Q11
3Q11
Sobeys
1Q09
2Q09
3Q- 4Q09
09
1Q10
Loblaw
2Q10
3Q10
Metro
4Q10
1Q11
2Q11
3Q11
Sobeys
Margins could remain at risk

until at least 2H12
4Q11 was likely the peak margin risk period due to increased price competition. As
Loblaw and Metros 3Q11 results showed, a return to food inflation does not always mean
margins are safe. The competitive environment, consumers frugality and commodity cost
pressures suggest that margins could remain at risk until at least 2H12. Metro has
confirmed that increased price discounting had reduced measured food inflation through
Canadian Thanksgiving shopping, which we expect continued into the Holiday period. This
will increase the margin risk versus 3Q11 as COGS inflation remains high.
Competitive square footage growth in the discount segment is expected to continue to
strain organic growth of all the food retailers. Wal-Mart is continuing its Supercenter rollout with a planned addition of 34 new/rebannered Supercenters in 2012, plus the opening
of 39 converted Zellers locations toward the end of 2012. This will be Wal-Marts biggest
year of new store openings/rebannerings since its arrival in 1994 and the year of greatest
growth drain for the incumbents since Loblaws substantial price reductions in 2007/08.
Loblaws extensive presence across Canada and industry-leading market share (30%)
represents the greatest exposure to Wal-Marts Supercenter rollout, although from a
proportionate stand point, Empire faces greater risk (5%-11% EPS risk exposure vs. Loblaw
at 4%-7%). This risk is only partially mitigated by Loblaws industry-leading discount
segment development (65% of system sales, 53% of Canadas discount segment) and
predominantly franchise operations in Ontario. Its important to note that Wal-Marts future
growth is expected to be more focussed on markets where Loblaws business is skewed to
Corporate system sales (Western Canada - 90%, Quebec- 80%, Atlantic - 72%).
25 January 2012
55
Figure 64: Sales and Earnings risk exposure to WMT & TGT Grocery Growth
Loblaw
WMT
TGT ($M)
WMT/TGT
Zellers ($M)
Sales at risk ($M)
WMT
TGT
WMT/TGT
Zellers
EPS at risk
% of EPS
2008
$176
2009
$162
2010
$201
2011
$221
2012
$258
$176
$162
$201
$221
$258
-$129
2013
$334
$69
$403
-$243
2014
$216
$169
$385
-$35
2015
$200
$100
$300
$0
$176
$162
$201
$221
$129
$160
$350
$300
$0.11
$0.10
$0.11
$0.12
$0.14
$0.11
$0.10
$0.11
$0.12
$0.14
-$0.07
$0.19
$0.04
$0.23
-$0.14
$0.12
$0.09
$0.21
-$0.02
$0.11
$0.06
$0.17
$0.00
$0.11
5.3%
5.3%
$0.10
3.8%
3.8%
$0.11
4.1%
4.1%
$0.12
4.3%
4.3%
$0.07
2.5%
4.9%
$0.09
2.8%
6.9%
$0.20
5.3%
5.8%
$0.17
4.2%
4.2%
Source: Barclays Capital estimates, Company reports.
We dont expect investment

spending to decrease for at least
the next two years
Loblaws new growth initiatives arent expected to be meaningful contributors for some
time. Completion of the Renewal program and implementation of new growth initiatives
means continued investment spending for at least the next two years. IT/supply chain
spending will be up by an unknown amount again in fiscal 2012 before declining by an
unknown amount in 2013 and Loblaw is investing in its PC Financial business and Joe Fresh
apparel test in the United States.
Five-year renewal program nearing completion

In 2006, Loblaw embarked on a five-year renewal program. The goal of this initiative was to
make Loblaw the best again by: 1) bringing the IT/supply chain infrastructure up to best
in class so the company can better leverage its critical mass advantage, and 2) enhancing
the shopping experience through renovated stores, a rejuvenated industry-leading premium
private label program (Presidents Choice) and improved merchandising.
Centralized services supporting segmented business operations. Early in the renewal

process Loblaw moved to centralize its procurement, marketing, Control label
management and real estate into a new head office. In January 2011, Loblaw decided to
create two separate business units for its Conventional and Discount operations in
recognition of their distinctive characteristics and needs.
Infrastructure investment in IT systems and Supply chain. This has been a major focus
of the renewal efforts in the areas of IT platform upgrades and supply chain
improvements. On the IT front, these investments include SAPs largest enterprise
system installation, Transportation and Warehouse management systems (TMS and
WMS), a Store Time and Attendance system (STATS) and a new forecasting tool called
IPFR (integrated planning forecasting replenishment).
25 January 2012
SAP is entering the final on-boarding phase in 2012/13, which involves the
integration of the distribution network and the stores onto the platform this stage
is as, or more, risky than the merchandise category listing stage, which was
successfully completed in 3Q11 as planned. The DC integration will occur
throughout 2012 with the first store integration planned for 4Q12. Throughout
2013 and into early 2014, Loblaw plans to bring its entire store network onto the
SAP platform.
56
The TMS rollout was completed in 2Q11 and 90% of the DC network will be on
WMS by early 2012 with the addition of three more facilities. Per the company,
benefits from both systems are already being achieved.
STATS will be in all corporate stores (570+) by year-end 2011 and is already
contributing to labour productivity improvements as noted over the past few
quarters.
As of 3Q11, 70% of Loblaws purchases were on the new IPFR forecasting system,
involving 130 users from various categories.
Test of supply chain transition to flow system is under way. The next stage of
distribution efficiency is the test/rollout of a flow (cross docking) inventory
process versus the current warehousing system. Loblaw began testing flow through
handling in its Ajax and Maple Grove DCs earlier this year with good labour cost
results. The company expects the flow rollout to ramp up toward the end of 2012
into 2013. Directionally we estimate that inventories could drop by at least 35% as
they reduce the need for buffer stock.
Store renovation and revitalization program is nearing completion. By the end of

2011 Loblaw will have renovated more than 500 of its stores (almost 50%) since 2008
after years of neglect at a capex cost of approximately $1.7bn.
No Frills in Western Canada and the Atlantic In addition to renovations of existing
banners, Loblaw has been expanding the use of its highly successful No Frills discount
banner into Western Canada and more recently Atlantic Canada. It has opened eight
new No Frills in the west since 2007 and converted 25 stores (primarily Extra foods,
some RCWC) with more to be done. In Atlantic Canada it has completed seven
conversions involving the Supervalu banner and smaller Atlantic Superstores with plans
to have at least 20 No Frills locations over time.
Private label renewal the brand thats worth switching supermarkets for is back.
Although Loblaws control label program remains the largest in Canada, over the past
10 years the brands loyalty draw has weakened materially. An increased emphasis on
innovative and differentiated new products has definitely been noticed by consumers.
Also over the past two years, Loblaw has significantly improved the profitability of its
private label program through a rationalization of the supplier base and formulas/SKUs.
Through this period, despite the high disruption risk, Loblaw has managed to
25 January 2012
Hold revenue essentially flat, although this means it has lost market share, which,
given competitive inroads and the amount of internal change, has been impressive.
Increase consolidated EBITDA margin by 130bps over 12 consecutive quarters to a

3Q11 LTM rate of 7%, bringing margins 85% of the way back to the 2004 peak of 8.2%
(pre IFRS). Most recently this has been achieved through SG&A cost containment
despite the estimated addition of $160mn of incremental IT SG&A expense since 2008.
57
Figure 65: Loblaw Financial Performance Summary

Loblaw - Financial Statement Summary
GAAP
2009A
IFRS
2010A
IFRS
2011F
IFRS
2012F
IFRS
2013F
Estimated Co. food inflation (%)
1.6%
-0.8%
1.4%
0.5%
0.7%
Same Store Sales Growth (%)
-1.1%
-0.6%
0.5%
0.0%
0.8%
Real CSS growth
-2.7%
0.2%
-0.9%
-0.6%
0.1%
Square Footage Growth (%)
1.7%
(0.4%)
0.5%
0.6%
1.0%
0.0%
0.8%
0.4%
1.5%
$30,312
$30,563
$30,697
$31,155
Retail Revenue Growth (%)

Retail Revenue ($Millions)
Financial Services Revenue ($Millions)
Financial Services Revenue Growth (%)
Total Revenue ($ Millions)
$524
$527
$573
$602
0.0%
0.6%
8.8%
5.0%
$30,735
$30,836
$31,090
$31,270
$31,757
Total Revenue Growth (%)
-0.2%
0.3%
0.3%
0.6%
1.6%
Total Gross Margin Variance
na
27 bps
-6 bps
28 bps
20 bps
Total Adj. SG&A Variance
na
-42 bps
-26 bps
4 bps
-18 bps
62 bps
49 bps
20 bps
24 bps
37 bps
6.0%
6.7%
6.9%
7.2%
7.5%
Total Adj. EBITDA Variance

Total Adj. EBITDA Margin
Net Debt/EBITDA (LTM)
1.7x
2.2x
1.7x
1.3x
1.1x
Capex as a % of Sales (LTM)
3.2%
4.2%
3.2%
2.6%
2.4%
Free Cash Flow ($M, after Divs & Capex)
$862
$278
$698
$567
$699
Return on Equity
10.9%
11.9%
12.1%
13.1%
12.7%
Return on Invested Capital
7.0%
6.6%
8.1%
8.7%
9.3%

Note: Growth rates/variances comparing 2010 /2009 use GAAP figures, while 2010 raw figures are presented in IFRS
Getting ready to shift gears toward pursuing growth

Although improved comp-store sales growth within the Canadian grocery business is its top
priority as it prepares to move beyond the five-year renewal program, Loblaw has identified
four areas of growth that leverage existing strengths and can enhance total company
growth.
1. Joe Fresh US test represents Loblaws biggest upside strategy. Joe Fresh is Loblaws
owned label apparel brand, led by Joe Mimram, co-founder of Club Monaco. Joe Fresh sells
stylish clothing for less for children, women and men which is a similar proposition to
Target (entering Canada in 2013) and Old Navy. The majority of this apparel is sold through
the Real Canadian Superstore banner, with 12 stand-alone stores now open in Canada.
Loblaw intends to open up to 20 stand-alone stores in Canada and has opened five test
stores in the United States to gauge the potential in that market (as of 3Q11 it has opened
two pop-up stores, two mall-based stores and one flagship store on Fifth Avenue in New
York). Loblaw doesnt expect to get a good read on the U.S. test until sometime in 2012.
Loblaw sees the potential for 500 to 800 stores if the test is successful.
2. Health & Wellness leverage food traffic to take share of valuable Rx sales and other
healthy offerings. Loblaw has extended some of its Rx counter hours, is adding in-store
pharmacies to its discount store network and has been expanding its healthy foods offering.
3. Ethnic capitalizing on Canadas diverse population growth. Almost all of Canadas
population growth is coming from new immigrants, with the Asian population making up a
large proportion. Loblaws acquisition of T&T Supermarkets in 2009 (a 19-store chain in
25 January 2012
58
metropolitan BC, Alberta and Ontario markets) provides a modest new store growth vehicle,
but more importantly an incubator that can guide Loblaw to a well informed deployment of
an enhanced Asian food offering in their established network, which has just begun in
earnest. Over the next four years, Loblaw plans to double T&Ts store count while pursuing
the establishment of similar platforms for South Asian, East African, and Middle Eastern
segments.
4. PC Financial The PC Financial business represents about 1.5% of Loblaws sales but has
been as high as 9% of Loblaws EBIT on a quarterly basis. PC Financial offers bank accounts,
mortgages, insurance and credit cards. The largest portion of this business is the Presidents
Choice Financial MasterCard, which has 2.5mn card holders. Loblaw has recently added
mobile phone kiosks to the PC Financial offering through in store kiosks/pavilions.
Risks
25 January 2012
Margin risk of increased price/promotion intensity.

A slow economy, high
unemployment, above-average inflation and unsustainable square footage growth in
the hard discount segment as Wal-Mart builds out its Supercenter stores.
IT and supply change implementation risk is high as Loblaw begins to link the
distribution and store network to the centralized merchandise platform. This risk is
modestly heightened by a change in the company presidents position and a
reorganization of the business units that was implemented over the past two quarters.
Stronger-than-expected 4Q11 results, or any number of pronouncements by Loblaw

that address current uncertainties (e.g., incremental IT/supply chain spending for 2012
lower than expected; provision of estimated expense reductions for 2013, in-store
merchandising improvements for 2012) could provide a catalyst to an improved
valuation.
59
COMPANY SNAPSHOT
Canadian Consumer & Retail
Loblaw Companies
Income statement ($mn)
Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (adjusted) ($)
Diluted shares (m)
Dividend per share ($)
Margin and return data (%)
EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROIC
ROA
ROE
2010A
30,997
1,924
1,269
996
744
2.58
285
0.84
2011E
31,090
2,111
1,418
1,091
828
2.84
292
0.84
2012E
31,270
2,243
1,492
1,173
851
2.91
292
0.92
2013E
31,757
2,397
1,622
1,306
947
3.24
292
1.00
CAGR
0.8%
7.6%
8.5%
9.4%
8.4%
8.0%
0.8%
5.9%
6.2
4.1
3.2
2.4
6.9
4.4
10.4
6.8
4.6
3.5
2.7
8.1
4.7
12.1
7.2
4.8
3.8
2.7
8.7
4.8
13.1
7.5
5.1
4.1
3.0
9.3
5.2
12.7
Average
6.9
4.6
3.6
2.7
8.2
4.8
12.0
Balance sheet and cash flow ($mn)

Tangible fixed assets
9,123
Total assets
15,919
Short and long-term debt
8,065
Total liabilities
9,039
Net debt/(funds)
2,982
Shareholders' equity
6,880
Change in working capital
73
Operating cash flow
1,623
Capital expenditure
1,280
Free cash flow
343
Valuation and leverage metrics
P/E (x)
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
Total debt/capital (%)
Total Debt/EBITDA (x)
14.5
7.1
3.2
0.3
1.5
2.3
54.0
4.2
8,682
17,413
9,111
11,214
3,573
6,199
(48)
1,774
1,000
774
13.2
6.8
7.1
0.4
1.8
2.3
59.5
4.3
8,731
17,968
9,069
11,172
3,027
6,796
18
1,619
800
819
12.8
6.2
7.5
0.3
1.6
2.5
57.2
4.0
8,706
18,291
8,721
10,824
2,697
7,467
4
1,725
750
975
11.5
5.7
9.0
0.3
1.5
2.7
53.9
3.6
CAGR
-1.5%
4.7%
2.6%
6.2%
-3.3%
2.8%
-63.0%
2.1%
-16.3%
41.7%
Average
13.0
6.4
6.7
0.3
1.6
2.4
56.1
4.0
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
2-EQUAL WEIGHT
2-NEUTRAL
$37.30
$39.00
L.TO
Investment case
The immediate term outlook for Loblaw is
dominated by a lack of volume growth, margin risk
from rising food costs and increasing price
competition as well as 2 more years of IT/supply
chain implementation risk. Our target is based on a
P/E multiple of 13.5x our F2012 EPS estimate.
$44
Upside case
Loblaw is able to pass through COGS inflation
mitigating related margin risk. Our upside case
would be 15x our F2012 EPS estimate.
$29
Downside case
Price discounting intensifies due to a further
weakening of demand and margins contract. Our
downside case would be 10x our F2012 EPS
estimate.
Upside/downside scenarios
54
$39
(4.5%)
44
$29
(-22.2%)
34
D own s ide
Cas e
24
Price
Target
$44
(17.9%)
Ups ide
Cas e
14
1/ 27/ 2011
1/ 20/ 2012
Source: FactSet
Selected operating metrics
Same store sales growth (%)
Square footage growth (%)
Inventory growth (%)
Capex/sales (%)
Same Store Sales vs. Sq. Ft. Growth

-0.6
-0.2
5.7
4.1
0.5
0.2
2.0
3.2
0.0
0.3
0.7
2.6
0.8
0.5
2.5
2.4
0.2
0.2
2.7
3.1
1.0%
Same Store Sales
Sq. Ft. Growth
0.5%
0.0%
-0.5%
-1.0%
2010A
Source: Company data, Barclays Capital
25 January 2012
2011E
2012E
2013E
Note: FY end Dec.
60
25 January 2012
61
Figure 66: SNAPSHOT: Canadian Bakery Industry Overview

Canadian Commercial Bread Sales
Commercial bread sales ($M)
2004
2005
2006
2007
2008
2009
2010
2011
$1,559
$1,661
$1,760
$1,874
$2,040
$2,230
$2,260
$2,340
6.5%
6.0%
6.5%
8.9%
9.3%
1.3%
3.5%
Growth
Source: Canadian Grocer, Nielson (Year End July), Barclays Capital estimates
Canadian Commercial Bread Segmentation
2010
2011
Sales ($M)
$ Share
Sales ($M)
$ Share
Growth
Share
Change
White bread
$523
23.1%
$545
23.3%
4.3%
17 bps
Grain bread/organic / diet
$323
14.3%
$337
14.4%
4.4%
12 bps
Buns & rolls
$331
14.6%
$337
14.4%
1.9%
-23 bps
Specialty
$308
13.6%
$335
14.3%
8.5%
65 bps
Whole wheat bread
$286
12.7%
$278
11.9%
-2.6%
-75 bps
Bagels
$132
5.8%
$140
6.0%
6.2%
15 bps
Tortillas & wraps
$134
5.9%
$138
5.9%
2.7%
-5 bps
Pita & Naan
$73
3.2%
$75
3.2%
2.7%
-3 bps
English nuffins
$65
2.9%
$63
2.7%
-3.4%
-19 bps
Fruit/sweet/raisin Bread
$50
2.2%
$51
2.2%
3.0%
-1 bps
All other
$35
1.5%
$40
1.7%
15.0%
17 bps
$2,260
100.0%
$2,340
100.0%
3.5%
Commercial bread
Canadian Dollars Spent on Bread per Buyer and Trip
Dollars per Trip Spent on Bread
2010
$4.16
2011
$4.30
Growth
3.4%
Number of Trips (M)
543.3
544.2
0.2%
Dollars per Buyer Spent on Bread Annually
$85.72
$85.91
0.2%
26.4
27.2
3.3%
Number of Buyers (M)
Canadian Commercial Bread Innovation (SKU Count Importance)
White bread
Established Items
98.2%
New Items
1.8%
Whole wheat bread
96.7%
3.3%
Grain bread/organic/diet
78.4%
21.6%
Buns & rolls
99.3%
0.7%
Bagels
97.8%
2.2%
Tortilla & wraps
98.3%
1.7%
Commercial bread
94.8%
5.2%
25 January 2012
62
GEORGE WESTON
George Weston Ltd.(WN.TO): Quarterly and Annual EPS (CAD)
WN CN / WN.TO
2010
Stock Rating
2-EQUAL WEIGHT
FY Dec
Sector View
2-NEUTRAL
Price Target
CAD 69.00
Price (20-Jan-2012)
CAD 66.12
+4%
2011
2012
Actual
Old
New
Cons
Old
New
Q1
0.81A
N/A
1.07A
N/A
N/A
Q2
1.24A
N/A
1.34A
N/A
N/A
Q3
1.26A
N/A
1.44A
N/A
N/A
Q4
1.01A
N/A
1.01E
N/A
N/A
Year
4.33A
N/A
4.86E
4.67E
N/A
P/E
15.3
13.6
Change y/y
Cons
2011
2012
N/A
N/A
32%
N/A
N/A
N/A
8%
N/A
N/A
N/A
14%
N/A
N/A
N/A
0%
N/A
4.89E
4.77E
12%
0.62%
13.5


We are initiating coverage of George Weston (WN.TO) with a 2-Equal Weight/2-Neutral
rating and $69 target price. WN owns 63% of Loblaw, with approximately 38% of Weston
Foods sales coming from Loblaw. Our fiscal 2012 valuation is supported by a NAV of $69
consisting of: 1) our $39 Loblaw price target, which carries a per Weston share value of $54,
and 2) a Weston Foods (WF) valuation of $17/WN share based on an 7x EV/EBITDA
multiple (below LT industry average of 8x, but above Canada Bread at 6x) applied to our WF
F2012 EBITDA forecast of $329mn. Loblaws share price within WN is currently $51 (as of
January 20, 2012), or 78% of the WN share price, which implies an EV/EBITDA multiple for
the Weston Foods stub of 7x, which is in line with the current average bakery industry
range.
We dont see potential catalysts
in 2012 as yet, but cash could be
put to use
With Loblaw struggling to achieve volume growth, Wal-Mart accelerating its Supercenter
rollout in 2012 and WFs valuation in a reasonable range it is difficult to see any material
upside to WN shares over the next 12 months despite Weston Foods impressive
management of commodity cost pressure so far in 2011. WN through Weston Foods
continues to review uses for its $2bn cash position with the preferred deployment being
acquisitions that enhance the prospects of the current businesses.
Figure 67: George Weston Net Asset Value (NAV) 2012E
Loblaw
Weston Foods
Target
WN Shares
Total
Value per
Price
Owned
Value ($M)
WN Share
% of NAV
$39.00
177.4
$6,918
$53.58
78%
EBITDA
$329.2
EV/EBITDA
Multiple
7.0x
Less: Weston Foods Debt
$2,304
$17.85
26%
-$1,588
($12.30)
-18%
Less: Weston Foods Pref. Shrs
-$817
($6.33)
-9%
Add: Weston Foods Cash
$2,037
$15.78
105%
-19%
Net debt + WN preferred shares
-$368
($2.85)
Total Weston Foods
$1,936
$15.00
22%
WN NAV
$8,854
$68.58
100%
25 January 2012
63
Figure 68: Weston Foods Implied EV/EBITDA
Weston Foods - Implied Stub Value

WN Share Price
2011E
$66.12
Less: L Share Price Per WN Share
$51.25
$51.25
Implied Weston Foods Share Price
$14.87
$14.87
Implied Weston Foods Mkt Value (mln)
$1,919.9
$1,919.9
Add: WF Debt (mln)
$1,588.0
$1,588.0
Add: WF Preferred Shares (mln)
2012E
$66.12
$817.0
$817.0
Less: WF Cash (mln)
$2,037.0
$2,037.0
Implied Weston Foods EV (mln)
$2,287.9
$2,287.9
$311.0
$329.2
7.4x
7.0x
Weston Foods EBITDA (mln)

Implied Weston Foods EV/EBITDA
Source: FactSet, Company reports, Barclays Capital estimates.
Figure 69: North American Bakery Valuations Consensus Estimates

Price
EV
Ticker 20/01/12
($M)
CBY
$43.95
$1,100
WN
$66.12
$13,420
FLO
$19.98
$3,047
RAH
$85.91
$6,876
SLE
$19.24
$11,947
BIMBOA $28.99
$138,729
Canada Bread Co.

George Weston Ltd.
Flowers Foods Inc.
Ralcorp Holdings Inc.
Sara Lee Corp.
Grupo Bimbo (MX)
Average
George Weston (BarCap Est.)
$66.12
$13,420
Fiscal EBITDA ($M)

PY
FY1
FY2
$161
$159
$178
$2,306
$2,363
$2,512
$291
$302
$333
$772
$872
$921
$1,142
$1,227
$1,345
$11,723 $15,541 $18,426
$2,306
$2,450
$2,551
EV/EBITDA
PY
FY1
FY2
6.8x
6.9x
6.2x
5.8x
5.7x
5.3x
10.5x 10.1x 9.2x
8.9x
7.9x
7.5x
10.5x 9.7x
8.9x
11.8x 8.9x
7.5x
9.1x 8.2x 7.4x
5.8x
5.5x
5.3x
EBITDA Growth
PY-FY1 FY1-FY2 PY-FY2
-1%
12%
5%
2%
6%
4%
4%
10%
7%
13%
6%
9%
7%
10%
9%
33%
19%
25%
10%
10%
10%
6%
4%
5%
Source: FactSet, Barclays Capital Estimates. EBITDA figures are consensus from FactSet except where noted.
Corporate Profile
George Weston is a vertically integrated food company with operations in food retailing
through its 63% stake in Loblaw (95% of revenue, 88% of EBITDA in 2010) and in the North
American Bakery industry through its wholly owned subsidiary Weston Foods (WF), which
manufactures and distributions Fresh, Frozen, and Specialty Bakery products in Canada and
the United States. The Weston family controls 62.5% of George Westons shares which
implies a 39% ownership of Loblaw.
Weston Foods is one of two national players in the Canadian Bakery industry (the other
being Canada Bread, majority owned by Maple Leaf Foods) with 31 production facilities in
Canada and 11 in the United States. The company sells products under the Wonder,
Country Harvest, and Gadoua brands and is a supplier of ice cream cones to the dairy
industry and sandwich wafers for Girl Scout cookies. In 2010, the company purchased
Keystone Bakery Holdings, a supplier of frozen cupcakes, donuts, and cookies for $188
million which strengthened its U.S. frozen bakery networks reach and productivity. Also in
2010, Weston acquired Canada-based ACE Bakery Limited, an artisan bread manufacturer,
for $110 million, which has provided Westons with a stronger/specialty artisan fresh bread
offering in Canada and a growth vehicle the United States.
25 January 2012
64
Figure 70: George Weston Company Snapshot

Business Unit
Loblaw Companies Limited
Description
Leading Canadian food retailer with ~30% national
market share; Strong presence in Conventional and
Discount formats; owner of the President's Choice
Brand
Weston Foods (WF)
Fresh Bakery - Canada
Frozen Bakery - Canada & U.S.
Biscuits & Other - U.S.
Branded and private label fresh baked bread, rolls,

bagels, tortillas, sweet goods; operates a large DSD
network, servicing the retail and foodservice channels;
one of two national players
Frozen & par-baked bread, rolls, sweet goods; portfolio
is largely private label, servicing the retail and
foodservice channels
Wafers, ice cream cones, crackers, cookies (largest
supplier of Girl Guide cookies in the U.S); majority of
products are private label
Total ($M)
% of Sales
% of EBITDA
Margin (%)
95.0%
87.6%
6.5%
5.0%
12.4%
17.4%
38.0%*
na
na
46.0%*
na
na
16.0%*
na
na
$32,008.0
$2,339.0
7.3%
*Percent of Weston Foods sales

Source: Company reports, Barclays Capital estimates.
Growth Strategy & Outlook

As we are initiating coverage of Loblaw in this report as well (Loblaw: 2-EW/Neu rating with
a $39 target price) we will limit our review of George Weston to Weston Foods and the use
of the companys still sizeable cash position of $2bn, or $15.80/share.
Loblaws performance improvement is the key driver of WNs upside potential over the
longer term. Loblaw represents 78% of George Westons NAV and 88% of EBITDA. As
such, proportionately over the long term Loblaw is the predominant earnings and value
driver for George Westons share price performance. Given our tepid view of Loblaws nearterm growth prospects (WMTs growth inroads, stagnant volumes, intense price
competition and IT/supply chain upgrade constraints/risk) which affects almost 40% of
Weston Foods, we are estimating limited valuation lift from either business over the next 12
months. While Weston Foods can contribute to WNs upside Loblaw remains the largest
swing factor, as we estimate that each $1.00 change in Loblaws share price represents a
$1.37 change in George Westons share price, or a 2% impact on the current WN share
price value.
Figure 71: George Weston Sources of Possible Upside to our 2012 Valuation
WN - Potential Upside Analysis
Current value per WN Share
Loblaw
$51.25
Weston Foods
$14.87
Total
$66.12
BarCap Target Value per WN Share - F2012E
$68.58
$53.58
$15.00
Upside Potential (%)
4.5%
0.9%
3.7%
Upside Potential ($)
$2.33
$0.13
$2.46
% of Total Upside / downside
95%
5%
100%
Upside Potential (%) - weighted
3.5%
0.2%
3.7%
Source: FactSet, Barclays Capital estimates.
25 January 2012
65
Figure 72: George Weston Valuation Sensitivity to Weston Foods
Weston Foods EV/EBITDA

Multiple
Weston Foods - f2012 EBITDA Margin, y/y Margin Change, EBITDA

17.6%
17.7%
17.8%
17.9%
18.0%
18.1%
18.2%
10 bps
20 bps
30 bps
40 bps
50 bps
60 bps
70 bps
$68.58
$323.7
$325.5
$327.3
$329.2
$331.0
$332.8
$334.7
8.5x
$72.04
$72.16
$72.28
$72.40
$72.52
$72.64
$72.76
8.0x
$70.78
$70.90
$71.01
$71.13
$71.24
$71.35
$71.47
7.5x
$69.53
$69.64
$69.74
$69.85
$69.96
$70.06
$70.17
7.0x
$68.28
$68.38
$68.48
$68.58
$68.68
$68.77
$68.87
6.5x
$67.02
$67.12
$67.21
$67.30
$67.39
$67.49
$67.58
6.0x
$65.77
$65.86
$65.94
$66.03
$66.11
$66.20
$66.28
5.5x
$64.52
$64.59
$64.67
$64.75
$64.83
$64.91
$64.99
5.0x
$63.26
$63.33
$63.40
$63.48
$63.55
$63.62
$63.69
Source: Barclays Capital estimates.
Loblaw P/E Multiple
Figure 73: George Weston Valuation Sensitivity to Loblaw

$68.58
$2.60
$2.70
Loblaw - f2012 EPS

$2.80
$3.00
$2.91
$3.10
$3.20
16.5x
$73.54
$75.81
$78.08
$80.57
$82.61
$84.88
$87.14
15.5x
$69.97
$72.10
$74.23
$76.57
$78.49
$80.62
$82.75
14.5x
$66.40
$68.39
$70.38
$72.57
$74.37
$76.36
$78.35
13.5x
$62.83
$64.68
$66.54
$68.58
$70.24
$72.10
$73.95
12.5x
$59.25
$60.97
$62.69
$64.58
$66.12
$67.84
$69.56
11.5x
$55.68
$57.26
$58.84
$60.58
$62.00
$63.58
$65.16
10.5x
$52.11
$53.55
$54.99
$56.58
$57.88
$59.32
$60.76
9.5x
$48.54
$49.84
$51.15
$52.58
$53.76
$55.06
$56.37
Strategic tuck-in acquisitions are the top priority for use of the remaining cash war
chest.
In terms of acquisition potential,
Canadian opportunities seem
limited
but U.S. frozen bakery industry

could present opportunities
Following the tuck-under acquisitions of Keystone and Ace Bakery, and a $1bn special
dividend, Weston Foods cash war chest is now at $2bn as of 3Q11 (excluding $1.8bn of
cash held at Loblaw). Management has reiterated that the preferred use of the remaining
cash is to enhance the prospects of the current businesses. Given the high market share
concentration of the fresh/frozen business in Canada, which is almost equally shared
between Weston Foods and Canada Bread, acquisition potential in Canada is limited.
The highly fragmented U.S. frozen bakery industry provides considerably greater
opportunity and we could see Weston aggressively pursuing more acquisitions like the 2010
Keystone purchase. The U.S. frozen opportunity could allow Weston to generate enhanced
value in several ways: 1) extended geographic reach, access to new customers and possibly
new product offerings; 2) production and distribution efficiencies/synergies; 3) leverages its
strong capital position and operational expertise; and 4) provides potential valuation
leverage of private company acquisitions into public company earnings, which typically
represents a valuation lift of 25% to 30%.
Possible alternative uses of the cash: WN or Loblaw minority purchase seem unlikely.
The Weston Family already controls 62.5% of George Westons shares which implies 39%
ownership of Loblaw. Given its ownership stake, it is possible that the Weston Family could
seek to capture a greater portion of Loblaws pending turnaround through:
1.
25 January 2012
A George Weston purchase of the Loblaw minority, or

66
2.
A Weston Family purchase of the George Weston minority, leaving Loblaw as the sole
public entity.
In either scenario, the Weston Family would end up owning approximately 60% of Loblaw.
However, we believe neither scenario is likely, especially after WN decided to pay out a $1bn
special dividend in fiscal 2010, as each scenario would likely lead to higher leverage ratios,
with minimal synergies. We estimate that the take-in of the Loblaw minority or George
Weston minority would increase WNs net debt/EBITDA ratio to over 3.5x versus its current
ratio of 2.1x, which could potentially put WNs debt rating at risk. Management has stated
that they wish to maintain the current investment grade rating; as such we do not expect
the company to take on significantly more debt.
We do not expect the company

to take on significantly more
debt
Repurchasing WN shares through the normal course issuer bid process would be a
slow/indirect way for the Family to increase its stake. However, so far management has
indicated that the company will not be active in buying back shares other than to offset the
dilutive impact related to exercising of stock options.
Hedging strategy provides some certainty on costs. Weston Foods production process
involves wheat flour (~60% of commodity costs), natural gas and heating oil (15-20%,
includes fuel for delivery fleet), soy (~10%), and sugar (<10%). Weston Foods employs a
fairly consistent, systematic approach to hedging its commodity cost exposure 6-9 months
out. The companys hedging strategy is primarily to lock-in cost certainty rather than trying
to opportunistically enhance profits. This strategy enables Weston Foods to more
effectively plan and execute price increases. Weston Foods relies on price increases and
cost reduction initiatives in order to mitigate higher commodity and energy costs.
Commodities should become less of a headwind in 2H12. As a result of the significant
run-up in commodity and energy costs in 1H11, Weston Foods likely faced an incremental
$60 million in costs in the second half of the year. Through price increases and cost
reduction initiatives, management hopes to achieve flat operating margins for F2011
compared to F2010. As the commodity pressures have eased management expects the
incremental commodity/energy costs to be about $15mn in 2H12. As shown in Figure 74,
the spot price of wheat (WFs largest input cost) has retreated from the record highs
reached mid-2011. Front month futures suggest near-term prices could decline further but
longer dated contracts suggest more increases in 2012.
Figure 74: Wheat prices have stabilized, but futures prices suggest more increases in 2012
$8.50
$8.00
$7.50
$7.00
$6.50
$6.00
Price in $CAD
Max
Min
Average
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Jan-11
$5.50
NTM Futures Prices
Source: Bloomberg, Barclays Capital Estimates
25 January 2012
67
Figure 75: George Weston Financial Performance Summary

Loblaw Revenue ($Millions)
Loblaw Revenue Growth (%)
Weston Foods Revenue ($Millions)
Weston Foods Revenue Growth (%)
Weston Foods Revenue Growth ex FX (%)
Fresh Foods Revenue Growth (%)
Frozen Foods Revenue Growth (%)
Biscuits Revenue Growth (%)
Weston Foods Gross Margin
Adj. Weston Foods SG&A as a % of Retail Revenue
Adj. Weston Foods EBITDA Margin
Weston Foods Gross Margin Variance
Adj. Weston Foods SG&A Variance
Adj. Weston Foods EBITDA Variance
Total Gross Margin
Total Adj. SG&A as a % of Total Revenue
Total Adj. EBITDA Margin
Total Adj. SG&A Variance
Total Adj. EBITDA Variance
Free Cash Flow ($ Millions, After Capex/WC)
Return on Equity
GAAP
F2009
IFRS
F2010e
IFRS
F2011e
IFRS
F2012e
IFRS
F2013e
$31,820
-0.2%
$30,735
-0.2%
$1,686.0
-23.3%
-23.3%
-2.0%
-1.5%
23.2%
$31,847
0.9%
$30,836
0.9%
$1,624.0
-3.7%
0.3%
-1.0%
-5.5%
-7.0%
$32,221
0.8%
$31,090
0.8%
$1,774.1
9.2%
9.2%
0.5%
22.9%
0.5%
$32,427
0.6%
$31,270
0.6%
$1,836.1
3.5%
3.5%
2.0%
5.8%
1.7%
$32,954
357.1%
$31,757
357.1%
$1,900.9
3.5%
3.5%
1.5%
5.5%
1.0%
74.9%
61.9%
13.0%
75.7%
58.5%
17.9%
69.7%
52.2%
17.5%
71.7%
53.8%
17.9%
72.0%
53.8%
18.2%
377 bps
137 bps
240 bps
421 bps
-10 bps
432 bps
-600 bps
-629 bps
-33 bps
200 bps
160 bps
40 bps
30 bps
0 bps
30 bps
24.7%
18.0%
6.4%
24.9%
18.1%
7.3%
24.6%
17.0%
7.7%
25.0%
17.1%
7.9%
25.2%
16.9%
8.3%
113 bps
14 bps
75 bps
116 bps
63 bps
77 bps
-23 bps
-115 bps
32 bps
38 bps
12 bps
26 bps
23 bps
-17 bps
38 bps
3.3x
3.2%
$947
6.6%
12.2%
3.4x
4.4%
$1,551
10.5%
14.5%
3.6x
4.3%
$317
11.6%
12.6%
3.4x
4.3%
-$468
10.9%
11.5%
3.2x
4.2%
$553
11.1%
12.1%

Note: Growth rates/variances comparing 2010/2009 use GAAP figures, while raw figures are presented in IFRS
Risks
25 January 2012
High commodity prices, particularly wheat, could continue to impact margins in 2012.
Increased pricing to offset higher input costs is unlikely to occur given the promotional
intensity of the food retailer environment. Management estimates that a 10% increase
(decrease) in commodity prices would result in a net loss (gain) of $8 million in net
earnings before income taxes and minority interest.
Wal-Mart is in the midst of the rollout of its Supercenter format in Canada which is
adding considerable fresh category square footage (produce, meats, baked goods) to a
modest growth industry, resulting in slowed growth for incumbents and intensified
price competition.
With the majority of George Westons value and WF sales coming from Loblaw, Weston
generally faces the same slow growth earnings prospects as Loblaw and the
risk/uncertainty of two more years of IT/supply chain upgrades (see details in Loblaw
company section).
The primary upside risk to our valuation is upside at Loblaw through either a valuation
lift and/or better-than-expected earnings. As outlined in our Loblaw risk section,
Loblaws currently depressed valuation could achieve a recovery if Loblaw achieves
68
stronger-than-expected 4Q11 results, or the company makes any number of

pronouncements that address current uncertainties (e.g., incremental IT/supply chain
spending for 2012 lower than expected; provision of estimated expense reductions for
2013, in-store merchandising improvements for 2012). Weston Foods valuation could
improve as well if Loblaws growth prospects improve.
25 January 2012
69
COMPANY SNAPSHOT
George Weston
Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS ($)
Diluted shares (m)
2010A
31,847
2,219
1,536
1,064
420
4.33
130
1.44
2011E
32,221
2,405
1,647
1,298
620
4.86
129
1.44
2012E
32,427
2,572
1,757
1,420
631
4.89
129
1.44
2013E
32,954
2,738
1,898
1,562
688
5.33
129
1.44
CAGR
1.1%
7.3%
7.3%
13.7%
17.9%
7.2%
-0.2%
0.0%
7.0
4.8
3.3
1.3
14.5
2.9
10.5
7.5
5.1
4.0
1.9
12.6
3.1
11.6
7.9
5.4
4.4
1.9
12.4
3.0
10.9
8.3
5.8
4.7
2.1
13.0
3.1
11.1
Average
7.7
5.3
4.1
1.8
13.1
3.0
11.0
9,493
1,554
1,121
20,958
8,036
15,373
5,287
5,585
(290)
1,717
1,400
607
10,078
1,554
1,079
21,531
8,036
15,579
5,329
5,952
(147)
1,690
1,400
437

EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROIC
ROA
ROE

8,823
Intangible fixed assets
1,554
Cash and equivalents
1,453
Total assets
21,696
8,198
Total liabilities
16,472
Net debt/(funds)
3,492
5,224
62
Operating cash flow
1,741
Capital expenditure
1,400
Free cash flow
828
CAGR
10,638
6.4%
1,554
0.0%
1,274
-4.3%
22,403
1.1%
8,036
-0.7%
16,027
-0.9%
5,134 13.7%
6,376
6.9%
(5)
NA
1,961
4.0%
1,400
0.0%
565 -11.9%
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
2-EQUAL WEIGHT
2-NEUTRAL
$66.12
$69.00
WN
Investment case
With Loblaw (75% of NAV) struggling to achieve
volume growth and Weston Foods fairly valued, we
do not see material upside to WN shares over the
next 12 months. Strategic tuck-ins are a priority for
WN's $2B in cash; however, we expect management
to remain patient/prudent on its deployment. Our
implied target P/E is 14x our F12E EPS.
Upside case
$78.00
Our upside scenario reflects a stronger, quicker-thanexpected turnaround at Loblaw. In this case, we
apply our Upside case for Loblaw of $44, which
generates a WN NAV o f $78.
Downside case
$57.00
Our Downside case reflects weaker margins at
Loblaw due to intensified price competition.
Applying our Downside case for Loblaw of $29
would yield a $57 NAV for WN.
P/E (x)
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
Total debt/EBITDA (x)
15.3
5.4
9.6
0.3
1.6
2.2
61.1
3.7
13.6
5.8
7.1
0.3
1.5
2.2
59.0
3.3
13.5
5.4
5.1
0.3
1.4
2.2
57.5
3.1
12.4
5.0
6.6
0.3
1.3
2.2
55.8
2.9
Average
13.7
5.4
7.1
0.3
1.5
2.2
58.3
3.3
98
88
78
68
58
48
38
28
$57
(-13.7%)
Downside
Case
1/27/2011
$69
$71
(7.3%)
(4.3%)
Price
Target
$78
(17.9%)
Upside
Case
1/20/2012
Source: FactSet

Volume growth (%)
Price growth (%)
Capex/sales (%)
Volume vs. Price Growth

-0.1
-1.9
-0.1
4.4
2.8
2.8
4.8
4.3
2.2
1.5
0.6
4.3
2.7
0.6
2.6
4.2
1.9
0.7
2.0
4.3
4%
3%
2%
1%
0%
-1%
-2%
-3%
Volume Growth
2010A
25 January 2012
2011E
Price Growth
2012E
2013E
Note: FY end Dec.
70
This page intentionally left blank
25 January 2012
71
METRO INC.
Metro Inc.(MRU-A.TO): Quarterly and Annual EPS (CAD)
MRU/A CN / MRU-A.TO
2011
Stock Rating
2-EQUAL WEIGHT
FY Sep
Sector View
2-NEUTRAL
Price Target
CAD 54.00
Price (20-Jan-2012)
CAD 51.58
+5%
2013
Change y/y
Old
New
Old
New
Cons
Old
New
Cons
2012
2013
Q1
N/A
0.89A
N/A
0.94E
N/A
N/A
N/A
N/A
6%
N/A
Q2
N/A
0.82A
N/A
0.88E
N/A
N/A
N/A
N/A
7%
N/A
Q3
N/A
1.22A
N/A
1.32E
N/A
N/A
N/A
N/A
8%
N/A
Q4
N/A
1.00A
N/A
1.16E
N/A
N/A
N/A
N/A
16%
N/A
Year
N/A
3.92A
N/A
4.29E
4.28E
N/A
4.62E
4.65E
9%
8%
P/E
2012
12.0
13.2
11.2


Metro has been perceived as a
go to defensive stock for
good reason and risk to
earnings could actually decrease
in 2012
We are initiating coverage of Metro with a 2-Equal Weight/2-Neutral rating and a $54
price target for total return potential of 6% from recent levels. Metros consistent
earnings growth regardless of market conditions makes it one of the leading go-to
defensive names in our coverage, in our view. Metros share price appreciated 16% in 2011
despite margin risk in the sector (S&P/TSX -11%), as renewed financial crisis concerns and
economic slowdown pushed investors back into defensive names. Metro offers investors a
long-term track record of consistent earnings growth (20 of the past 21 years saw growth),
dividend increases (18 consecutive years) and share buybacks (approximately 4% of float in
each of past four years). Despite Wal-Marts launch of the Supercenter format in Quebec in
2011, we estimate that proportionately Metro faces the least EPS risk of the CDN Food
retailers, and if Targets temporary closure of the Zellers stores contributes as much of a
windfall gain this year as we estimate, Metros EPS risk in F2012 (September) could actually
be lower than it was in F2011 at only 1.5% to 2%.
Figure 76: Metros P/E Valuation Range
YE: Sept 30
EPS range:
y/y % growth
f2012 (extra week)
f2013
BarCap est
BarCap est
$4.25 $4.29 $4.35

8.5%
9.5% 11.0%
$4.55 $4.62 $4.70

6.1%
7.6%
9.6%
Comments
NOTE: extra week in f2012
adj growth is 7.2%
P/E Multiples
8.0x
$34
$34
$35
$36
$37
$38
<= SFWY/Kroger trough fwd P/E's
9.0x
$38
$39
$39
$41
$42
$42
<= Metro's avg TROUGH fwd P/E
10.0x
$43
$43
$44
$46
$46
$47
11.0x
$47
$47
$48
$50
$51
$52
11.5x
$49
$49
$50
$52
$53
$54
12.0x
$51
$51
$52
$55
$55
$56
12.5x
$53
$54
$54
$57
$58
$59
13.0x
$55
$56
$57
$59
$60
$61
13.5x
$57
$58
$59
$61
$62
$63
14.0x
$60
$60
$61
$64
$65
$66
15.0x
$64
$64
$65
$68
$69
$71
Metro's LT avg. fwd P/E = 11.3x

<= Barclays Price Target Multiple
<= Metro's Avg PEAK fwd P/E
Source: Barclays Capital estimates. EPS range is for illustrative purposes only.
25 January 2012
72
Our $54 price target is supported by a 12.5x P/E multiple on our F2012 EPS forecast of
$4.29, which is above Metros long-term smoothed average of 11.3x, but below the most
recent cycle peak of 14x. Metros share price appreciated 16% in 2011 in part driven by a
7% increase in the forward P/E multiple from 11.5x to 12.4x (S&P/TSX -11%). Unless the
Target renovation closures contribute as much EPS offset as we have estimated ($0.07 in
2012 and $0.11 in 2013) we dont see any other sales/earnings drivers contributing to a
material higher earnings outcome in 2012. A more plausible outcome is that investors
hunger for defensive names lifts Metros P/E toward 14x from the current 12.1x FY1; this
would generate a very respectable 11% gain on top of the 16% lift the shares achieved in
2011.
Figure 77: Metro Historical Forward P/E
Metro Forward P/E
18x
17.0x
16x
15.5x
15.0x
14.3x
15.8x
14.3x
14x
12.4x
12x
10x
10.0x
9.6x
8.9x
9.1x
8x
8.9x
8.0x
6x
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
4x
Note: Avg. PE Normalized to exclude A&P acquisition period from 2005-2007

Source: FactSet, Reuters
Metro is our pick among the

Canadian food retailers
but within the broader sector

wed suggest DOL & THI as
defensive stocks
Overall we recommend that investors minimize their exposure to the food retail space.
Within that stance Metro would be our top pick among the Canadian food retailers. We
believe that Metros growth and cost-containment initiatives and share buybacks from fiscal
2011 and fiscal 2012E can mitigate the estimated EPS risk (impact of $0.05-$0.12, by our
estimates) of Wal-Marts Supercenter rollout in Quebec, which combined with another
dividend increase could provide investors with a relatively respectable return in 2012.
Despite our confidence in Metros ability to achieve EPS growth in 2012, for investors
looking for relatively defensive investments we prefer Dollarama and Tim Hortons despite
their higher valuations because of their superior growth prospects and less intense
competitive environment.
Metro has already announced two major initiatives that we estimate could contribute as
much as $0.05 to EPS growth in F2012, with the repurchase of 4.5mn shares under the new
Normal Course Issuer Bid (NCIB) increasing EPS by another $0.11. Some additional
considerations are:
25 January 2012
1.
Metro has already dealt with Wal-Marts impact in Ontario;
2.
Wal-Mart has a smaller presence in Quebec (4% share of market vs. 7% in Ontario)
and the per store impact so far has been less than Metro experienced in Ontario;
3.
Metros market position and store network in Quebec is stronger than in Ontario;
73
4.
Metros exposure to the WMT/TGT Zellers store redeployment will be muted in Ontario
by Metros urban location skew.
Metros estimated sales/EPS risk exposure to Wal-Marts grocery growth in 2012 is

proportionately the Lowest of the Big 3. Despite Metro now facing Wal-Marts
Supercenter build-out in both Ontario and Quebec with six Supercenter openings (3
expansions, 3 conversions) in Quebec this year, we estimate that the EPS risk in 2012 may
only be $0.12, or 2.8% of our F2012 EPS estimate of $4.29. If we include the potential onetime windfall gain that Targets temporary renovation closures might represent the EPS risk
exposure drops to $0.05, which is below the risk level Metro has had to deal with in each of
the past four years from Ontario.
Figure 78: Sales and Earnings Risk of WMT & TGT Grocery Sales Growth
Metro
2008
$51
2009
$52
2010
$53
2011
$58
2012E
$90
$51
$52
$53
$58
$51
$52
$53
$0.05
$0.06
$0.05
EPS at risk
% of EPS
WMT ($M)
TGT ($M)
WMT/TGT
Zellers ($M)
Sales at risk ($M)
WMT
TGT
WMT/TGT
Zellers
$90
-$50
2013E
$117
$22
$139
-$76
2014E
$73
$58
$131
-$16
2015E
$67
$36
$103
$0
$58
$40
$63
$114
$103
$0.06
$0.07
$0.12
$0.06
$0.06
$0.07
$0.12
-$0.07
$0.16
$0.03
$0.19
-$0.11
$0.11
$0.09
$0.19
-$0.02
$0.10
$0.06
$0.16
$0.00
$0.05
$0.06
$0.06
$0.07
$0.05
$0.09
$0.17
$0.16
2.1%
1.8%
1.8%
1.9%
1.2%
1.9%
3.3%
2.8%
2.1%
1.8%
1.8%
1.9%
2.8%
4.2%
3.7%
2.8%
Note: Negative figures means a sales/EPS gain

Source: Barclays Capital estimates, Company Reports
Corporate Profile: in a word, consistent

Metro Inc. is Canadas third-largest food retailer with an estimated market share of 10%
nationally, holding the No. 2 position in Canadas largest provinces Quebec and Ontario.
Metro is a Quebec-based retailer and wholesaler in the food and drugstore sectors with a
mix of corporate and franchise food retail operations in Quebec and a corporate-only
network in Ontario. Metro entered the Ontario market in 2007 through the acquisition of
A&P Canada. Metro operates food retail banners in the conventional and discount
segments and in retail pharmacy as outlined below. McMahon Distributeur is a pharmacy
distribution subsidiary which supplies pharmacies, supermarkets and health-care
institutions, including hospitals and treatment centres in Quebec. Metro recently acquired
Adonis, a Mediterranean specialty retailer and distributor based in Montreal that will be their
lead ethnic market platform.
Metro owns 11.3% (20.7 million multiple voting shares; 11% economic interest and 23%
voting interest) of Alimentation Couche-Tard (ATD.b-TO, rated 2-Equal Weight/2-Neutral)
which it accounts for on an equity income basis. In fiscal 2011, Couche-Tard equity income
of $43mn represented 5% of Metros EBITDA, 11% of EPS and approximately 18% of
Metros F2011 EPS growth. The market value of this holding is currently approximately
$600mn.
Metro currently has two classes of shares, 99% of which are the single voting class A shares
(101.8mn) and the remaining being class B shares (577 shares) which have 16 votes each,
or 8% of the votes. Metro will be seeking shareholder approval to a conversion of the class
25 January 2012
74
B shares to class A shares on a one-for-one basis at their annual meeting on January 31,
2011, which we expect to be approved.
Figure 79: Metro Inc.s Store Network Profile
Metro Inc. - Store Network Profile
Market Share
Revenue
EBITDA % Margin Stores
10%
$11 bln
794 mln
6.9%
Quebec
Ontario
Total
821
Conventional
216
154
370
Total Sq.
Ft.
12.9 mln
Hard Discount
79
115
194
6.8 mln
Total Food stores
295
269
564
19.7 mln
Pharmacies
179
78
257
Owned Food retail square footage (est.)
Primary Banners
Metro - Ontario & Quebec
Food Basics (Ont), Super C (Que)
In-store (Ont), Brunet & Clini Plus (Que)
~ 8%
Owns 20.7 million shares of Alimentation Couche Tard (ATD.B) representing 11% economic interest and 23%
voting interest
Growth Strategy & Outlook: Metro can handle the heat in Quebec
Metros solid results and track
record tell the story but are
investors still listening?
Metro is known as a company that consistently delivers results driven by a relentless

focus on cost reduction/efficiency and a balanced deployment of free cash flow. Metros
growth strategy sounds so simple that it can make some investors looking for more torque
lose interest, but the results speak for themselves. With the exception of the acquisition of
A&P Canada in 2007 and the subsequent rebannering of A&Ps conventional stores in
Ontario in 2008/09, Metro rarely relies on a silver bullet to deliver earnings growth. Rather,
the company prides itself on a culture of continuous improvement and a balanced mix of
growth drivers: revenue growth, productivity and efficiency improvements, and innovation.
The results speak for themselves: Metro has one of the best long-term track records of any
retail/consumer company in Canada, if not North America. These results have been
achieved through a myriad of initiatives over the years. Fiscal 2010 contributions included a
new Ontario trucking agreement, a lower-cost collective agreement with the union for its
four warehouses in Ontario and the launch of its new proprietary loyalty program in Quebec
through its joint venture with Dunnhumby.
25 January 2012
Metro has increased earnings every year for 21 years, with the exception of F2008 when
Loblaw dropped prices in advance of Wal-Marts Supercenter launch.
Return on equity has exceeded 14% for 18 years coming in at 16% in F2011 despite
very challenging market conditions.
The dividend has been increased every year for 18 years. In the last two years the
company has increased its annualized dividend by 40%.
Metro has repurchased more than 19% of its shares since F2005, or nearly 20mn shares
at an approximate cost of more than $650mn.
75
Figure 80: Metro: Company-Generated Growth/Returns for Shareholders
Fiscal Year (Sept)
2007
2008
2009
2010
2011
Net earnings growth
14.6%
-4.9%
27.9%
6.5%
6.1%
8.3%
4.6%
2.7%
Share count EPS impact
-0.6%
2.9%
2.3%
3.8%
4.0%
3.3%
4.8%
5.0%
Total EPS growth
14.0%
-2.0%
30.2%
10.2%
10.1%
11.6%
9.4%
7.7%
Dividend yield
1.2%
1.9%
1.5%
1.6%
1.7%
1.6%
1.7%
2.0%
Company generated returns
15.2%
-0.1%
31.8%
11.9%
11.8%
13.2%
11.2%
9.4%
TSX return (incl. dividends)
22.8% -14.4%
0.4%
11.6%
-3.6%
3.2%
ROE
16.1%
14.0%
16.6%
16.2%
16.0%
16.0%
15.8%
1.4x
1.3x
1.0x
1.0x
1.3x
0.8x
0.8x
Net debt to EBITDA
CAGR 2012E 2013E
Source: FactSet, Bloomberg, Company Reports, Barclays Capital estimates
Wal-Marts Supercenter concept has arrived in Quebec

WalMarts rollout of the Supercenter format in Quebec will expose Metro to an additional
growth constraint. After dealing with the impact of Wal-Marts Supercenter rollout in
Ontario, Metro is now facing them in Quebec the other half of its business. Wal-Mart
brought its Supercenter concept to Quebec this year, five years after opening its first
Canadian Supercenter in 2006, with the opening of six stores (3 conversions, 3 expansions)
out of 55 existing stores in Quebec. In addition to its normal store conversion plan, WalMart has also acquired the leases for eight Zellers stores in Quebec, which we expect to be
re-opened as Supercenters toward the end of 2012 if the leases allow the addition of food
products. If Wal-Mart sustains the same pace of Supercenter openings in Quebec that we
have seen in other parts of Canada, we expect the majority of the conventional stores to be
converted within five years.
Wal-Mart ramp-up in Quebec
adds more pressure to an
already intensely competitive
landscape...
Of the three major food retailers, Metro faces the greatest exposure to Wal-Marts Quebec
entry with more than 51% of its sales in that province (17% from discount sales) and an
even greater percentage of its profits, which compares to 18% of Loblaws total sales and
31% of Sobeys sales. So far Metro has indicated that the impact from Wal-Marts
Supercenter openings has been more modest than it experienced in Ontario and less than it
had expected in most locations. Regardless of the current severity, it is obviously not
helpful for the food retailers to be battling for customer traffic when the consumer is
already very cautious. As outlined in our sector overview, the competitive environment in
Canada remains intense and is expected to remain so for the foreseeable future.
And then theres Target

but Target entry is a mixed
bag
25 January 2012
Target will enter Quebec with an estimated 27 stores starting sometime in mid- to late 2013
with Metro having 27 stores in proximity to these openings. According to our due diligence,
12 of the predecessor Zeller stores had Neighbourhood Market grocery sections (dairy, dry
and frozen grocery) with Metro having lease agreement exclusivity for food in the remaining
15 locations, which could preclude Target from adding food to most of these locations. In
addition, with most of these stores being smaller than Targets average conventional
discount stores (83k sq. ft. vs. 122k) in the United States, the amount of space they are
likely to commit to food will be very constrained. In the immediate term, as Target has
already told investors at its annual investor day, its primary upside is in the apparel and soft
home categories. Finally, Targets opening is expected to materially increase customer
traffic at these strip malls, potentially increasing Metros customer traffic at the same time.
This has been Metros experience in Ontario as they dealt with the impact of Wal-Marts
Supercenter rollout.
76
Combining the sales and EPS risk of Wal-Mart and Targets growth we estimate Metros EPS
risk exposure to be in the range of $0.12 to $0.19, before taking into consideration the
potential reprieve Metro might experience from Targets closure of the Zellers stores they
will be renovating in 2012/13. This EPS risk compares to an estimated run rate of $0.06 in
each of the previous four years. If Targets temporary closure of its acquired Zellers
locations contributes as much of a benefit as we have estimated, Metros EPS risk drops to
$0.05-$0.07 in F2012 which is in line with the risk we estimate it faced in each of the
previous four years.
Figure 81: Metros Sales and EPS risk to WMT & TGTs Grocery Sales Growth
Metro
2008
$51
2009
$52
2010
$53
2011
$58
2012E
$90
$51
$52
$53
$58
$51
$52
$53
$0.05
$0.06
$0.05
EPS at risk
% of EPS
WMT ($M)
TGT ($M)
WMT/TGT
Zellers ($M)
Sales at risk ($M)
WMT
TGT
WMT/TGT
Zellers
$90
-$50
2013E
$117
$22
$139
-$76
2014E
$73
$58
$131
-$16
2015E
$67
$36
$103
$0
$58
$40
$63
$114
$103
$0.06
$0.07
$0.12
$0.06
$0.06
$0.07
$0.12
-$0.07
$0.16
$0.03
$0.19
-$0.11
$0.11
$0.09
$0.19
-$0.02
$0.10
$0.06
$0.16
$0.00
$0.05
$0.06
$0.06
$0.07
$0.05
$0.09
$0.17
$0.16
2.1%
1.8%
1.8%
1.9%
1.2%
1.9%
3.3%
2.8%
2.1%
1.8%
1.8%
1.9%
2.8%
4.2%
3.7%
2.8%
Note: Negative figures means a sales/EPS gain

Source: Barclays Capital estimates and Company Reports.
3. Metros planned offset arsenal in 2012 provides reasonable comfort that it has right
sized the risk and has adequate plans to sustain growth. Metros revenue and earnings
enhancement arsenal for F2012 consists of several larger than usual contributors, which are
aptly timed to minimize the negative impact of Wal-Marts Supercenter rollout in Quebec:
Over the long term Metros earnings growth plan remains: achieve top-line growth of 2%4% per year, EBIT growth of 4%-6% through operating leverage with EPS growth of 8%10% achieved through share buybacks. Excluding the extra week, F2012 may prove to be
slightly below this intended delivery but 6%-8% in this sector is expected to be industry
leading.
25 January 2012
Restructuring benefit of $2mn, or $0.02/share in F2012, from the closure of noncore assets. Metro announced the 4Q11 closure of a meat processing facility in Quebec
and a small satellite Grocery warehouse in Ontario at a cost of $20mn with expected
annual savings of $2mn in F2012, or an after tax benefit of $0.01 to $0.02 per share .
Renewal of Normal Course Issuer Bid expected to lift F2012 EPS by $0.11, or 4%.
Metro renewed the NCIB program at the beginning of September with intentions to buy
back at least 4mn shares out of the 6mn allowed. We are forecasting repurchase of
4.5mn shares in F2012 and again in F2013, which would lift EPS by $0.04 and enhances
earnings growth by roughly 4%.
March Adonis/Phoenicia acquisition Metros first ethnic venture could add up to

$0.03 to EPS in F2012. In October, Metro announced a 55/45 partnership agreement
with March Adonis/Phoenicia, an established independent ethnic food retailer with
four stores (one more scheduled to open shortly on Montreals south shore) located in
Montreal that specialize in fresh and Mediterranean products and prepared meals. Net
77
revenues (after intercompany eliminations) were approximately $200mn the highest

sales productivity Metro has seen for any food retailer. The Adonis stores average 35k
square feet with a much heavier skew to fresh sales than a typical grocery store which is
believed to generate margins above Metros consolidated average. Through this
partnership, Metro will own 55% of the March Adonis retail operations and its
distributor Phoenicia Products.
While this is not a large acquisition it serves several purposes: 1) it provides Metro with
access to ethnic food learning that can be applied to its existing store base, 2) it
provides Metro with a modest, high-margin new store growth vehicle; Metro plans to
open 1-2 new Adonis stores per year in Ontario or Quebec building toward 12-15
locations within five years; 3) it should serve as a slight offset to the sales and earnings
drain of Wal-Marts Quebec roll-out. The founders will continue to operate the business
with Metro providing Adonis with capital to pursue growth and cost savings to enhance
profitability where possible. The purchase price was not disclosed. More details will be
disclosed as part of the F2Q12 quarterly release.
25 January 2012
Pending fresh produce warehouse union contract. Metro is in the midst of completing
an early renegotiation of the union contract at it fresh produce warehouse in Quebec
with plans to upgrade that facility if it gets the necessary labour concessions.
Eased expense drain as Metro laps Dunnhumby and Metro & Moi start-up costs.
Metro will begin to lap extraordinary expenses from the Dunnhumby joint venture startup and fall 2010 loyalty program roll out in Quebec starting in 1Q12, which should ease
y/y SG&A expense growth. Separate from the launch costs Metro has issued $26mn of
coupon savings to its 1mn members this year, which if fully redeemed equates to a
25bps expense drain, or in isolation a $0.25 per share EPS investment in F2011.
Roll-out of the fresh produce initiative in F2012 which has been implemented at only
105 of Metros 570 or so stores (25 stores in Quebec, 80 stores in Ontario) so far with
strong sales gains in the test stores. The fresh initiative involved an extensive reworking
of Metros fresh supply chain management (e.g., from push to pull system in Ontario),
merchandise offering (e.g., 20% to 25% more SKUs, streamlined grades) and in-store
presentation of fresh produce (new tables which carry less stock with improved turns).
The Dunnhumby loyalty program Metro demonstrated its agility and desire for
innovation by establishing a Canadian joint venture with Dunnhumby, an industry leader
in database management/marketing and loyalty program development in November
2009. Dunnhumbys experience and sophistication in this area has been developed over
many years of working with such leading food retailers as Tesco and Kroger which have
achieved significant sales and profit improvement through their work with Dunnhumby,
while managing to share the costs with major suppliers. In Krogers case it was able to
generate sufficient support from its supplier base to cover all of the programs run rate
costs within 2-3 years of the programs startup. As Metro enters F2012, it is now two
years into the start-up of the program, having rolled out its proprietary loyalty program,
Metro & Moi in Quebec in fall 2010. Metro will lap these extraordinary expenses
which should ease its drain on earnings growth while it works its way to breakeven
through supplier funding over the next 1-2 years. The Metro & Moi program is now up
to 1mn members.
78
Figure 82: Metro Financial Performance Summary

f2009
f2010
2011A
f2012e
f2013e
$11,196 $11,343 $11,431 $12,069 $12,020
4.4%
1.3%
0.8%
5.6%
1.5%
1.9%
0.4%
0.6%
-0.4%
1.0%
Company Reported Food Inflation (%)
2.8%
-1.5%
0.2%
1.1%
0.6%
4.2%
-0.5%
0.9%
1.5%
1.0%
Gross Margin
17.7%
18.3%
18.4%
18.2%
18.4%
SG&A as a % of Revenue
11.3%
11.7%
11.8%
11.7%
11.7%
Retail EBITDA Margin
6.4%
6.6%
6.6%
6.5%
6.6%
Gross Margin Variance
61 bps
58 bps
10 bps
-14 bps
15 bps
SG&A Variance
2 bps
38 bps
12 bps
-9 bps
5 bps
59 bps
20 bps
-2 bps
-5 bps
10 bps
Retail EBITDA Variance

1.0x
1.0x
1.0x
0.8x
0.8x
2.1%
1.5%
1.3%
1.8%
1.9%
Free Cash Flow ($ Millions, After Capex/WC, LTM)
$226
$313
$316
$294
$261
Return on Equity
16.6%
16.2%
16.2%
16.0%
15.7%
11.8%
11.8%
12.1%
12.4%
12.4%
Source: Company Reports, Barclays Capital estimates.
Risks
25 January 2012
Metro is exposed to margin risk driven by increased price/promotion intensity. Factors

that exacerbate this risk include a slowing economy, high unemployment, aboveaverage food commodity inflation and unsustainable square footage growth in the hard
discount segment as Wal-Mart builds out its Supercenter stores.
There is also risk of failed union contract negotiations that could delay expected savings,
which the company may need to offset increasing competitive pressures.
79
COMPANY SNAPSHOT
Metro
Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (reported) ($)
Diluted shares (m)
2011A
11,431
794
603
562
406
3.92
104
0.77
2012E
12,069
830
631
588
424
4.29
99
0.89
2013E
12,020
844
646
604
436
4.62
94
1.02
2014E
12,351
890
688
646
466
5.15
91
1.17
CAGR
2.6%
3.9%
4.5%
4.8%
4.8%
9.5%
-4.3%
15.0%
6.9
5.3
4.9
3.5
12.1
16.2
6.9
5.2
4.9
3.5
12.4
16.0
7.0
5.4
5.0
3.6
12.4
15.7
7.2
5.6
5.2
3.8
13.0
16.1
Average
7.0
5.4
5.0
3.6
12.5
16.0

EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROIC
ROE

1,321
256
Total assets
4,959
1,035
Total liabilities
2,391
Net debt/(funds)
779
2,568
(25)
Operating cash flow
542
Capital expenditure
148
Free cash flow
393
P/E (x)
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
13.2
7.7
7.4
0.5
2.1
1.5
28.7
1.3
1,337
4,789
700
2,095
700
2,727
13
593
215
378
12.0
7.0
7.4
0.4
1.9
1.7
20.4
0.8
1,365
4,884
672
2,080
672
2,838
(7)
578
225
353
11.2
6.6
7.3
0.4
1.7
2.0
19.1
0.8
CAGR
1,388
1.7%
NA
4,989
0.2%
614 -16.0%
2,051
-5.0%
614
-7.6%
2,971
5.0%
(1)
NA
616
4.4%
225 14.9%
391
-0.2%
10.0
5.9
8.4
0.4
1.6
2.3
17.1
0.7
Average
11.6
6.8
7.6
0.4
1.8
1.9
21.4
0.9
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
Investment case
Metro consistently delivers earnings growth and midteens ROE, despite challenging market conditions.
We believe Metro has sufficient revenue growth and
cost savings initiatives for 2012 to deliver forecast
earnings growth despite WMT's Supercenter rollout
in Quebec. Our target is based on a 12.5x PE on our
F2012 EPS estimate.
Upside case
$60
Metro successfully passes on COGS inflation while
maintaining
market
share
vs.
Wal-Mart's
SuperCenter buildout in Quebec. Our upside case
would be a P/E multiple of 14x our F2012 EPS
estimate.
Downside case
$43
Wal-Mart's Quebec SuperCenter buildout takes
market share from Metro and increases promotional
intensity even further, straining margins. Our
downside case would be a P/E multiple of 10x our
F2012 EPS estimate.
71
61
$43
(-16.6%)
51
41
Downside
Case
31
0.9
-0.2
4.1
1.3
1.5
0.6
2.0
1.8
1.0
1.0
2.0
1.9
2.0
1.0
2.8
1.8
1.3
0.6
2.7
1.7
$54
$56
(8.5%)
(4.6%)
Price
Target
$60
(16.3%)
Upside
Case
21
1/27/2011

Capex/sales (%)
2-EQUAL WEIGHT
2-NEUTRAL
$51.58
$54.00
MRU-A.TO
1/20/2012
Source: FactSet

3%
Same Store Sales
Sq. Ft. Growth
2%
1%
0%
-1%
2011A
25 January 2012
2012E
2013E
2014E
Note: FY end Sept.
80
25 January 2012
81
EMPIRE COMPANY
EMP/A CN / EMP-A.TO
Empire Co., Ltd.(EMP-A.TO): Quarterly and Annual EPS (CAD)

2011
Stock Rating
2-EQUAL WEIGHT
Sector View
2-NEUTRAL
Price Target
CAD 57.00
Price (20-Jan-2012)
CAD 56.43
+1%
FY Apr
2012
2013
Change y/y
Actual
Old
New
Cons
Old
New
Cons
2012
2013
Q1
1.28A
N/A
1.26A
N/A
N/A
N/A
N/A
-2%
N/A
Q2
1.10A
N/A
1.08A
N/A
N/A
N/A
N/A
-2%
N/A
Q3
1.36A
N/A
1.14E
N/A
N/A
N/A
N/A
-16%
N/A
Q4
1.23A
N/A
1.10E
N/A
N/A
N/A
N/A
-11%
N/A
Year
4.98A
N/A
4.58E
4.57E
N/A
5.10E
5.14E
-8%
11%
P/E
11.3
12.3
11.1


Pending margin risk and
Empires lower trading volume
may impede valuation
We are initiating coverage of Empire Company (EMP-A.TO) with a 2-Equal Weight/2Neutral rating and a $57 price target, which offers a total potential return of 3% from
recent levels. Empire was the second best performer in our food retail coverage in 2011
with a decline of 1% (S&P/TSX -11%). In an environment with little to no volume growth,
investors were generally attracted to Sobeys industry-leading real CSS growth. However,
the shares have fallen nearly 8% since Empire reported its fiscal 2Q12 (October) results on
December 15, 2011 (S&P/TSX +8%), as it provided further confirmation of what 4Q11
results are likely to be for the group greater gross margin pressure. Although Sobeys has
announced a number of productivity/cost reduction initiatives, we are concerned that the
benefits may not arrive soon enough to offset the earnings drain during the period of
maximum margin risk. At 4.9x forward EV/EBITDA, Empire remains attractively valued
relative to Metro (7.4x) and Loblaws (6.9x); however, we are concerned that pending
margin risk combined with Empires relatively thin trading volume will impede the valuation.
Our NAV is based on the following: 1) $61.70 at Sobeys (5x our F2013 EBITDA, or 85% of
NAV), 2) $7.67 for Crombie based on its current market price of $14.28, and 3) a 10%
holding company discount.
Figure 83: Empire Co. Net Asset Value F2012 (April year end) and F2013
f2012E
Sobeys - EBITDA
Theatres & Other - EBITDA
Genstar (FFO est.)
Crombie REIT
Gross Value
Less: EMP Debt

Less: Preferreds & Min. Int.
Add: EMP Cash
Total Net Asset Value
Less: 10% Hold-co Discount
EMP Target NAV / Share
$M
$806
$17
$17
Multiple
5.00x
6.50x
8.50x
$1,095
$40
$638
$4,251
$425
f2013E
Value/sh
$59.29
$1.60
$2.08
$6.91
$69.89
$16.12
$0.59
$9.39
$62.57
$6.26
$56.31
$M
$838
$17
$17
$1,098
$37
$509
$4,342
$434
Multiple
5.00x
6.50x
8.50x
Value/sh
$61.70
$1.64
$2.12
$7.67
$73.13
$16.17
$0.54
$7.49
$63.91
$6.39
$57.52
Source: Barclays Capital estimates and Company Reports.
25 January 2012
82
Sobeys next round of initiatives

doesnt kick in until toward the
end of F2013
Empires next round of cost reductions is not happening soon enough to offset the
increasing challenges of F2H12. Sobeys F2Q12 quarterly release on December 15, 2011,
which included the month of October, provided investors with a more detailed glimpse of
Q4 margin risk. After removing the impact of an accounting change, which was not
restated in the prior year, Sobeys adjusted gross margin dropped 41bps (-81bps on a
reported basis) and thats just with Thanksgiving in the quarter. Sobeys, consistent with
Metros commentary, has indicated that the competitive environment was getting more
promotional as calendar Q4 progressed (Metro Investor day was held November 24) toward
December 25. Unfortunately, after a long run of substantial offsets from the completion of
several major productivity and efficiency programs (Ontario and West SAP install, Vaughn
DC opening), Sobeys next round of initiatives doesnt kick in until toward the end of F2013.
While this is well timed to deal with when we estimate the Wal-Mart/Target grocery drain
risk will be peaking, we think it may be too late to provide any meaningful offset to the
current price/margin risk period. We do note that our preliminary EPS forecast of $0.07 for
the pending 250 store Shell gas station/C-store acquisition could reduce Sobeys 2012 EPS
risk toward the 2011 level.
Sobeys next round of productivity/efficiency initiatives are :
1.
Reset program involves a streamlining of the organization to capture productivity

and efficiency opportunities once the Quebec SAP installation is completed in
F2013.
2.
Quebec SAP installation to be completed by end of F2013 becomes a major enabler to

the pursuit of new cost reduction and productivity improvement projects.
3.
New, fully automated Quebec distribution center opening by spring 2013 (F4Q13).
4.
Target wholesale supply agreement for frozen, dairy and dry grocery products
inclusive of branded and Targets private label products is expected to begin ramping
up in 1Q13 with estimated sales potential of up to $400mn.
5.
Increased focus on the convenience store operations to drive growth outside of WalMarts reach acquisition of 250 Shell Canada gas station/c-stores and the Needs
banners revitalization.
Corporate Profile
Empire is a holding company with over 85% of its net asset value derived from Sobeys,
its wholly owned food retailer. Sobeys is Canadas second largest food retailer with a
national market share of 17%. Sobeys is based in Nova Scotia but has a national presence
through a store network of 1,337 corporate and franchised stores. Of the Big 3 Canadian
food retailers, Sobeys is the most concentrated in the conventional segment (92% of sales),
though it does operate in the hard discount segment under the FreshCo and Price Chopper
banners in Ontario. The company also has a food distribution business and will be the dairy
and dry grocery supplier for Targets Canada stores.
Empire owns 40% (diluted) of Crombie REIT (CRR.UT), a commercial real estate trust
which predominantly manages grocery-anchored retail properties in which Sobeys is one of
the key tenants. Over 78% of Crombies rentable space is comprised of grocery- or drug
storeanchored shopping plazas, or freestanding grocery stores. Sobeys represents over
36% of rents generated. During F2011, Empire shifted its property development operations
into Sobeys through the sales of 12 properties from ECL Properties. The reorganization
gives Sobeys direct control over real estate development. As in the past, future
25 January 2012
83
development projects are expected to be anchored by a Sobeys store with the properties
sold to Crombie REIT when they are ready for third-party leasing.
Empire also owns 41% of Genstar Development Partnership, a residential development
partnership focused in Ontario and Western Canada. Empire Theatres is wholly owned by
the company and is Canadas second largest movie exhibitor with 386 screens in 51
locations.
Other smaller investments and operations consist of Kepec Resources which, through a JV
with APL Oil and Gas Ltd., has ownership interests in various oil and gas properties in
Alberta.
Empire has a dual share structure with 33.7mn (49.5%) non-voting class A shares and
34.3mn (50.5%) class B voting shares. The Sobey family controls approximately 89% of
the votes through the ownership of the class B voting shares. The class A shares are
treated equally in the case of a takeover offer.
Figure 84: Sobeys store network in Canada
Empire Co. / Sobeys - Store Network Profile

Market Share
Revenue
EBITDA
% Margin
17%
$16 bln
$846 mln
5.3%
Corporate
Franchise
Total
Primary Banners
Conventional
584
651
1,235
Sobeys, IGA, Foodland, Thiftys
Hard Discount
45
57
102
629
708
1,337
12.8 mln
15.8 mln
28.7 mln
Total
Square Footage
Owned square footage
FreshCo, Price Chopper
14.8%
Growth Strategy & Outlook:

Sobeys has invested more than
$2bn over the last five years in
the store and distribution
network
25 January 2012
Sobeys has implemented a significant number of productivity and efficiency initiatives

that enhanced earnings power and allowed it to maintain a competitive price position.
Since the acquisition of Oshawa Foods (a large, but least-in-class retailer) in December
1998, Sobeys has been working diligently to improve the productivity and efficiency of its
operations with the expectation that it would potentially need to reinvest the benefits of
these efforts into sustaining, or improving its competitive price position. These productivity
and efficiency initiatives involved an extensive ten-year banner consolidation program (from
22 banners to six), benchmarking and operational best practices implementation, a regional
rollout of the SAP enterprise system which started in fiscal 2006 and is expected to be
completed by fiscal 2013 (started in Ontario, then moved to the West and is now midway
through a Quebec rollout) and the opening of Canadas first fully automated distribution
centre in fiscal 2010 which is being followed by the opening of a similar facility in Quebec in
fiscal 2013. Sobeys has invested more than $2bn over the last five years in the store and
distribution network, which has allowed it to achieve best-in-class results on these critical
assets through a balanced deployment of the benefits into price as necessary, or to
earnings.
84
Sobeys major initiatives have included:

1. An extensive seven-year store upgrade/expansion and banner rationalization program
was largely completed in F2011 over 75% of the network is to standard. Sobeys has
significantly rationalized the number of banners it operates, disposing of 16 banners since
2000. The rebannering/upgrade program has provided Sobeys with a significantly
simplified network of banners and newer/larger stores that are more productive and cost
effective. As shown in Figure 85, Sobeys total square footage has increased approximately
9% over the last five years, while total store count has remained fairly stable.
Figure 85: Sobeys total sq. ft. has grown while store count has remained flat
29.0
increased approximately 9%
28.5
over the last five years
28.0
27.5
Sq. Ft. (millions)
Sobeys total square footage has
1,400
1,300
27.0
26.5
1,200
26.0
25.5
25.0
1,100
24.5
24.0
1,000
F2007
F2008
Store Count (right)
F2009
F2010
F2011
Square Footage (left)
Source: Company reports
The banner realignment initiative included the rollout of the Sobeys banner into Ontario and
Western Canada (replaced IGA Extra) and the conversion of the Sobeys banner to IGA Extra
in Quebec complementing its already extensive network of smaller IGA stores. The final
piece of the national banner streamlining was put in place in F2001 with the conversion of
the IGA franchise agreement to the new Foodland program that caters to smaller
communities in Ontario. The IGA legacy agreement was known to have been too
favourable to the franchisees economically and operationally, making Sobeys Ontario
market profitability inadequate.
In F2010, Sobeys tackled the remaining weak link in its store network with the launch of the
new FreshCo discount banner. The FreshCo banner was designed to replace the
underperforming Price Chopper discount banner in Ontario (~60 stores). The FreshCo
banner was differentiated versus the established discount players by promising customers
Fresher. Cheaper. The conversion rollout was completed over a 12-month period with
aggressive grand opening price points to ensure the new banner achieved improved sales
productivity versus the underperforming Price Chopper stores. We believe the conversion
program has been successful and that the proposition should be defendable. There are
currently 64 FreshCo stores in Ontario.
Management now views the core food retailing banners as Sobeys, IGA, IGA extra, Thrifty
Foods, Foodland and the new FreshCo. Banner. If the FreshCo stores sustain improved
performance we believe that Sobeys may be consider converting the Price chopper stores in
Atlantic Canada and then possibly testing them in Western Canada and Quebec. The
drawback would be entering as the third player in the market with less store presence.
25 January 2012
85
Figure 86: Sobeys Store Network

Atlantic
Quebec
Ontario
Prairies
Sobeys (82)
IGA Extra (107)
Sobeys (102)
Sobeys (105)
Foodland (41)
IGA (163)
Foodland (152)
IGA (50)
Conventional
Discount
BC
Thriftys (27)
Price Chopper
(20)
FreshCo. (64)
Source: Company reports.
2.
Ontario/West business process and IT system upgrades continue to deliver benefits

with Quebec on track for F2013 completion: Following the acquisition of Oshawa
Group, Sobeys operated a number of different regional legacy information systems and
different franchise practices across the country. Following a successful revamping of
the IT platform plan in Atlantic Canada, Sobeys began upgrading the IT infrastructure
in Ontario in F2006 and then in Western Canada in F2007. These projects were
completed in F2007 and F2008. Following each of these implementations, Sobeys
achieved some immediate cost savings from headcount reduction and, over time,
improved productivity. The Quebec transformation is currently under way with
completion expected by 2013, marking the end of a long cautiously implemented
systems upgrade. Commensurate with banner rationalization and the IT systems
upgrade process Sobeys has also implemented a shared best practices program which
has been rolled out across the regions.
3.
More recently, Sobeys has begun to add several SAP-enabled productivity tools to
improve productivity and lower costs that are expected to impact 2H12 and F2013
such as:
Workforce Management allows Sobeys to draw upon past shopping behaviour to

optimize service levels and control labour costs.
Fresh Item Management helps reduce shrink and enhances consistency and
quality of fresh offering.
Computer Assisted Ordering forecasting system that helps manage inventory

more precisely and improve in-stock performance.
4. Distribution and supply chain upgrades: In F2010, Sobeys opened a state-of-the-art

fully automated distribution centre in Vaughan, Ontario. The launch was touted as being
highly successful with no reported issues despite the significant technological
advancements employed. More importantly, the new automated DC resulted in significant
productivity improvements and reduced costs due to lower labour requirements. As a
result of the Vaughan DCs success, Sobeys committed to building a similar facility in
Quebec which is expected to open in early F2013. We suspect the same technology will
eventually be deployed in Western Canada.
Unfortunately, Empires next round of cost reductions is not happening soon enough, or
in a material enough way to offset the mounting challenges of 2012:
Unfortunately, after a long run of substantial offsets from the completion of several major
productivity and efficiency programs (Ontario and West SAP install, Vaughn DC opening),
Sobeys next round of initiatives doesnt kick in until toward the end of F2013 which is well
aligned with when we see the Wal-Mart/Target grocery drain risk peaking but too late to
provide any meaningful offset to the current price/margin risk period.
25 January 2012
86
1.
Reset program involves a streamlining of the organization to capture productivity

and efficiency opportunities. In mid-October 2011 Sobeys implemented a more
streamlined organizational structure that is expected to result in the elimination of
functional overlap/redundancy starting in F2013. Sobeys will have two business units:
Quebec (IGA - mostly franchised) and Sobeys multi-format versus the previous four
regions (Atlantic, Quebec, Ontario and the West) and two business units (Thriftys and
Lawtons). We expect administrative savings within the next 6-9 months but the larger
benefits are not expected for at least another 12-24 months with the major savings
occurring in F2014 following the completion of the Quebec SAP installation.
2.
Quebec SAP installation to be completed by end of F2013 which brings the entire
Sobeys organization onto the same IT platform for the first time. This becomes an
enabler for Sobeys to pursue a number of cost reduction and productivity improvement
projects that will be outlined as part of the new Reset initiative.
3.
New, fully automated Quebec distribution center to be operational by spring 2013.
4.
Target wholesale supply agreement for frozen, dairy and dry grocery products
inclusive of branded and Targets private label products. We expect shipments will
begin in earnest in Sobeys F3Q13. We estimate that once fully ramped Sobeys could
achieve annual wholesale revenues from the agreement of at least $400mn.
5.
Sobeys convenience store strategy is evolving with the acquisition of 250 Shell
Canada gas station/c-store locations in Quebec (80%) and Atlantic Canada (20%). A
little over a year ago Sobeys announced that it was initiating a major store renovation
program for its126 store Needs C-store business in Atlantic Canada. Now it has
announced the acquisition of 250 Shell locations, mostly based in Quebec. We
estimate these stores could generate annualized sales of approximately $700mn and
EPS of $0.07. These locations will be synergistic with Sobeys existing C-store
wholesale and retail operations in Quebec and the Atlantic. It will also leverage IGA
and Shells participation in the Air Miles loyalty program through cross-promotional
opportunities.
Sobeys is the leading Conventional segment retailer in Canada. Sobeys is the leading
conventional segment retailer in Canada with an estimated market share of almost 40%, or
30% if we include independent retailer sales. Sobeys store network is the most heavily
skewed to the conventional segment of the Big 3 with over 92% of system sales in the
segment compared to 32% of Loblaws sales and 64% of Metros.
25 January 2012
87
Figure 87: Conventional Segment Market Share Major Food Retailers

Atlantic
Quebec
Ontario
West
Empire
84%
48%
31%
31%
39%
Loblaw
16%
20%
46%
4%
23%
Metro
0%
32%
22%
0%
16%
Safeway Canada
0%
0%
1%
44%
15%
Overwaitea
0%
0%
0%
12%
4%
Other Major Grocers
0%
0%
0%
9%
3%
Conventional - Majors only
100%
100%
100%
100%
100%
Total Conventional
44%
48%
50%
58%
52%
Unaffiliated Independents
18%
15%
13%
5%
11%
Total Discount
37%
29%
35%
47%
38%
100%
100%
100%
100%
100%
Total CDN Grocery retail
Canada
Sobeys has performed relatively well despite challenging market conditions over the past
three years. Over the past five years, despite discount sales growth dramatically outpacing
conventional segment growth, Sobeys has been able to adapt pricing and promotion
activity as necessary to sustain its appeal with a cash-strapped consumer and defend its
market position despite aggressive square footage growth in the discount segment which
has increased competitive price intensity. Sobeys has been able to lower prices, as needed,
funded predominantly by the savings and productivity gains it has achieved through the
programs outlined above. Over the past 12 quarters Sobeys has achieved some of the
strongest results in the group, although there has been a noted relative deterioration over
the past year.
Figure 88: Sobeys has generated consistent, industry-leading real CSS
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
Loblaw
1Q10
Metro
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
Sobeys
25 January 2012
88
Figure 89: Canadian Food Retailer EBITDA Margins

7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Loblaw
4Q09
1Q10
Metro
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
Sobeys
Aging shoppers shop smaller,

closer to home
Over the long term, being a big fish in the smaller pond may prove to be a good place to
be as an aging populations preference for smaller, conveniently located stores drives
demand. Although Sobeys near-term relative performance has weakened, we attribute a
significant portion of this to the extraordinary challenges the sector is facing. Over the
longer term, we believe that Sobeys primary focus on the conventional segment could
prove to be an acceptable default strategy as it could be the dominant player in a
proportionately smaller segment with less direct competition. As the table below shows, as
Wal-Marts Supercenter expansion phase in the United States draws to a close, the Chain
Supermarket segment (conventional stores) has lost almost seven share points over the
past 10 years, but its dollars sales have increased at a 2.7% CAGR. One additional factor to
consider is that over the next ten years we could see a meaningful change in shopping
habits by the aging baby boomer population as it moves toward retirement. Studies
suggest that aging shoppers have shown a tendency toward smaller stores that are
conveniently located.
Figure 90: US Grocery Industry Sales Segment trends 2000 - 2010
Grocery Industry Sales (US$B)
Chain Supermarkets
Economy Formats
Independent Supermarkets
Other
All Grocery sales
2000
$261
$54
$70
$4
$388
2010
$339
$165
$31
$28
$563
CAGR
2.7%
11.9%
-8.0%
22.7%
3.8%
Market Share
2000
2010
67.1%
60.2%
13.9%
29.4%
18.1%
5.5%
0.9%
5.0%
100.0% 100.0%
Pt Var
-6.9
15.5
-12.7
4.0
0.0
Source: TD Linx, Progressive Grocer, Barclays Capital estimates
Genstar 2012 rebound in demand will help but margins are under pressure. Empire
owns 41% of Genstar which is a residential housing development company focussed
primarily on development in Western Canada. At only 2% of Empires NAV, Genstars
performance does not typically move the needle on Empires valuation. Canadas strong
housing market has supported generally favourable earnings trends at Genstar with the
exception of the pullback in 2008-2009 and more recent trends. Given the decline in single
unit starts over the past year it has not been a surprise that Genstars results have
weakened. Single unit starts (LTM) in Alberta are down approximately 14% as of December
2011. CMHC is forecasting a strong recovery of 15% in 2012. Lower oil prices and the
lowest migration growth in Alberta in over 15 years cooled demand for homes in 2011.
CMHC expects demand to improve in 2012 aided by a rebound in oil prices and related job
creation. Given recent developments in the economic outlook we are not as optimistic
25 January 2012
89
about the degree of rebound in Alberta. Margin pressure is expected to continue even if
demand improves as Genstar cycles into the development of more expensive properties.
Over the past 10+ years Genstar has cycled through significantly lower cost land purchases
made prior to Albertas housing boom. As these inventories have been used, Genstar has
been accumulating land at higher costs, which is currently impeding margins given
weakened housing demand and a related constraint to higher sale prices. We believe a
cautious forecast stance is warranted.
25 January 2012
90
Figure 91: Single Unit Alberta Housing Starts, All Centres 10k+,LTM
21,000
100%
19,000
80%
60%
17,000
180
175
170
165
160
155
150
145
140
135
130
2007
40%
15,000
20%
0%
13,000
-20%
-40%
11,000
9,000
2008
Figure 92: Calgary Home Price Index
-60%
2009
2010
2011
80%
60%
40%
20%
0%
-20%
2008
2009
2010
2011
Single Unit Starts - LTM (Left Axis)
Home Price Index (Left Axis)
Y/Y Growth (Right Axis)
Y/Y Growth (Right Axis)
Source: CMHC
Source: NB Teranet House Price Index
Figure 93: Empire Financial Performance Summary
GAAP
GAAP
IFRS
IFRS
IFRS
F2009
F2010
2011A
2012F
2013F
$15,016
$15,519
$15,960
$16,125
$16,321
3.3%
2.8%
1.0%
1.2%
$14,765
$15,243
$15,750
$15,912
$16,103
7.2%
3.2%
3.3%
1.0%
1.2%

Sobeys Revenue ($Millions)
Sobeys Revenue Growth (%)
1.1%
2.2%
2.1%
2.0%
1.5%
5.2%
1.9%
0.2%
1.5%
0.2%
$251
$276
$210
$214
$218
9.7%
-23.7%
1.7%
3.7%
Other Revenue ($Millions)

Other Revenue Growth (%)
Sobeys Gross Margin
23.9%
23.8%
24.2%
23.8%
24.0%
Sobeys SG&A as a % of Sobeys Revenue
19.0%
18.9%
18.9%
18.8%
18.8%
Sobeys EBITDA Margin
4.9%
5.0%
5.3%
5.1%
5.2%
-8 bps
44 bps
-36 bps
20 bps
Sobeys Gross Margin Variance

Sobeys SG&A Variance
-11 bps
34 bps
-10 bps
5 bps
24 bps
4 bps
10 bps
-26 bps
-11 bps
5.2%
5.2%
5.0%
5.1%
5.3%
Total EBITDA Variance
-26 bps
0 bps
-17 bps
5 bps
10 bps
1.4x
1.0x
0.6x
0.9x
0.7x
3.1%
Sobeys EBITDA Variance

Total EBITDA Margin
2.9%
2.9%
3.5%
4.3%
Free Cash Flow (OCF ex WC/Capex)
$229
$343
$133
-$69
$247
Return on Equity
4.7%
4.8%
5.2%
4.7%
5.0%
7.4%
7.8%
10.9%
7.8%
8.0%

Note: Growth rates/ variances comparing 2011/ 2010 use GAAP figures, while 2010 raw figures are presented in IFRS
25 January 2012
91
Risks
25 January 2012
Empire is exposed to margin risk driven by increased price/promotion intensity. Factors

that exacerbate this risk include a slowing economy, high unemployment, aboveaverage food commodity inflation and unsustainable square footage growth in the hard
discount segment as Wal-Mart builds out its Supercenter stores.
The companys investments in residential real estate (Genstar Partnership) exposes it to

the Canadian housing market and could impact earnings should the housing market
further deteriorate.
Upside risk to our valuation could be driven by greater-than-expected cost savings from
the first round of Empires new Reset program expected to be announced as part of
Empires 4Q12 release which could increase our comfort with Sobeys margin risk
offsets.
92
COMPANY SNAPSHOT
Empire
Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (reported) ($)
Diluted shares (m)

2011A
15,957
814
477
561
401
4.98
68
0.90
2012E
16,114
817
474
467
322
4.58
68
0.90
2013E
16,310
870
510
491
342
5.10
67
1.00
2014E
17,295
932
561
543
382
5.81
66
1.00
5.1
3.0
3.5
2.5
10.9
6.2
5.2
5.1
2.9
2.9
2.0
7.8
4.8
4.7
5.3
3.1
3.0
2.1
8.0
4.9
5.0
5.4
3.2
3.1
2.2
8.8
5.2
5.3
2,675
446
385
6,723
1,104
3,290
720
3,391
(78)
631
700
(69)
2,815
446
509
6,999
1,104
3,212
596
3,662
(0)
747
500
247
Average
EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROIC
ROA
ROE
Total assets
Total liabilities
Net debt/(funds)
Operating cash flow
Capital expenditure
Free cash flow
CAGR
2.7%
4.6%
5.6%
-1.1%
-1.6%
5.3%
-1.2%
3.6%
5.2
3.1
3.1
2.2
8.9
5.3
5.0
CAGR
2,398
449
616
6,477
1,140
3,309
524
3,168
8
687
554
133
2,945
446
705
7,401
1,104
3,250
399
3,943
23
818
500
318
7.1%
-0.3%
4.6%
4.5%
-1.0%
-0.6%
-8.7%
7.6%
40.4%
6.0%
-3.4%
33.9%
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
2-EQUAL WEIGHT
2-NEUTRAL
$56.43
$57.00
EMP-A.TO
Investment case
Sobeys has had industry leading SSS and square
footage growth over the past year. Productivity and
cost savings initiatives are expected to support EPS
growth; however, the benefits may not materialize
soon enough to help offset near-term gross margin
pressures. Our target is based on an NAV which
incorporates a 5x EV/EBITDA on Sobeys.
Upside case
$63.00
Promotional intensity eases and the company is able
to pass along COGS inflation and expand margins
through its concentration in conventional grocery
stores. Applying a 5.5x EV/EBITDA on Sobeys would
yield an Upside case of $63.
Downside case
$52.00
Competition continues to increase the level of
promotional activity, shrinking margins. Residential
real estate declines, lowering the income of the
Genstar Development Partnership. Applying a 4.5x
and 7x multiple on Sobeys and Genstar, respectively,
generates a Downside case of $52.

P/E (x)
11.3
12.3
11.1
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
5.4
3.4
0.2
1.2
1.6
26.5
1.4
5.6
-1.8
0.2
1.1
1.6
24.6
1.4
5.0
6.5
0.2
1.0
1.8
23.2
1.3
Average
9.7
11.1
4.4
8.6
0.2
0.9
1.8
21.9
1.2
5.1
0.0
0.2
1.1
0.0
0.2
1.3
75
$52
(-7.85%)
(-7.86%)
65
55
45
Downside
Case
35
$57
(0.9%)
(1.0%)
Price
Target
$63
(11.6%)
Upside
Case
25
1/27/2011
1/20/2012
Source: FactSet

Capex/sales (%)
Same Store Sales vs. Square Ft. Growth

0.2
1.5
0.2
0.7
0.6
2.1
-7.9
3.5
2.0
-1.2
4.3
1.5
0.7
3.1
1.5
5.9
2.9
1.8
-0.6
3.4
2.5%
Same Store Sales
Sq. Ft. Growth
2.0%
1.5%
1.0%
0.5%
0.0%
2011A
25 January 2012
2012E
2013E
Note: FY end Apr.
93
NORTH WEST CO.

NWC CN / NWC.TO
North West Co., Inc.(NWC.TO): Quarterly and Annual EPS (CAD)

2011
Stock Rating
2-EQUAL WEIGHT
Sector View
2-NEUTRAL
Price Target
CAD 20.00
Price (20-Jan-2012)
CAD 19.95
+0%
FY Jan
2012
2013
Change y/y
Actual
Old
New
Cons
Old
New
Cons
2012
2013
Q1
0.37A
N/A
0.26A
N/A
N/A
N/A
N/A
-30%
N/A
Q2
0.42A
N/A
0.31A
N/A
N/A
N/A
N/A
-26%
N/A
Q3
0.45A
N/A
0.35A
N/A
N/A
N/A
N/A
-22%
N/A
Q4
0.19A
N/A
0.31E
N/A
N/A
N/A
N/A
63%
N/A
Year
1.43A
N/A
1.23E
1.21E
N/A
1.32E
1.34E
-14%
7%
P/E
14.0
16.2
15.1

Consensus figures are from Thomson Reuters
Recommendation & Valuation a fairly valued defensive

investment
We are initiating coverage of North West Co. (NWC.TO) with a 2-Equal Weight/2-Neutral
rating and $20 price target. Our price target provides a total potential return of 5% from
current levels, including NWCs dividend yield of 4.8%. Our 12-month price target of $20 is
supported by an 8.5x EV/EBITDA multiple applied to our F2013 (January) earnings forecast,
which has an implied P/E valuation of 15x. These valuation multiples carry a premium to
the Metro and Empire of 40% on an EV basis and 30% on a P/E basis, which we feel
adequately reflects NWCs superior defensive characteristics while recognizing the
companys near-term earnings growth constraints.
Our forecast is for 1.5% EBITDA
growth this year; 5.4% next year
The shares are trading at an EV/EBITDA multiple of 8.2x which is above NWCs long-term
average of 7.7x on consensus earnings and at a 34% premium to the average for
Metro/Empire of 6.1x, which is in line with NWCs historical premium to these peers. We
are forecasting EBITDA growth of only 1.5% for NWC this year and 5.4% next year. As
NWC struggles with profit pressures at Giant Tiger and Cost-U-Less while digesting new
initiative costs we do not believe the shares warrant a higher valuation multiple. NWC is
pursuing corrective action and implementing initiatives to improve the earnings power of its
core food business, but these efforts will take time.
Figure 94: North West Company EV/EBITDA Valuation Range
EBITDA ($M)
y/y growth
EV/EBITDA Multiple
7.0x
7.5x
8.0x
8.5x
9.0x
9.5x
10.0x
f2013E
BarCap est
$122
$134
$142
-5%
5%
11%
f2014E
BarCap est
$130
$141
$150
-3%
5%
12%
$14
$15
$17
$18
$19
$20
$22
$15
$17
$18
$19
$21
$22
$23
$16
$17
$19
$20
$21
$23
$24
$17
$19
$20
$21
$23
$24
$26
$17
$18
$20
$21
$23
$24
$26
$18
$20
$21
$23
$24
$26
$27
Comments
<=== NWC LT Average

Barcap valuation multiple
Source: Company Reports, Barclays Capital estimates. EBITDA range is for illustrative purposes only.
25 January 2012
94
Corporate Profile: North West Co. Canadas retailer to the north

Established in 1668, the North West Company is one of Canadas oldest companies and is
the leading retailer to remote/underserved rural and urban markets in Northern Canada,
Western Canada, rural Alaska, and the South Pacific/Caribbean with population bases from
500 to 7,000 people. These small, remote markets and unique logistics requirements
provide NWC with above-average barriers to entry. NWC offers a broad range of products
(food, general merchandise) and services (e.g., post offices, tax returns, cheque cashing,
money transfers) with grocery sales representing 76% of sales through several formats and
banners (e.g., Canada: Northern-126, Northmart-7; Alaska: AC Value centers-30,
Pacific/Caribbean: 12 Cost-U-less stores).
Figure 95: North West Company Corporate Profile
North West Co. - Store Network Profile
Grocery Mkt. Share
Revenue
EBITDA
% Margin
Stores
<1%
$1.4 bln
$130mln
9.3%
233
Canada
US
Other
Total
Food Focused
133
30
163
Northern, AC Value
General Merch. Focused
34
12
46
Giant Tiger, Cost-U-Less
Other
19
24
Includes Art, Fur, Pharmacy, Convenience,

and Food Distributor stores
Total
186
34
13
233
Retail Square Footage
1.5
0.3
0.3
2.1 mln
Owned stores
Primary Banners
58%
NWC has been a go-to defensive

name over the past five years
North West Company converted from an income trust structure back to a corporation in
January 2011. Partly due to a relatively conservative payout ratio, NWC was able to establish
its annual dividend at an after tax value that has maintained an attractive yield of 4.8%.
Several well-known attributes of the companys markets have made it a go-to defensive
name over the past five years:
High barriers to entry and low price elasticity. NWCs primary customer base is
located in remote markets in the northern parts of Canadas provinces and Alaska.
Many of its markets can be as small as 500 people, requiring unusual distribution
approaches to deal with extended harsh winter conditions. This limits inroads by
competitors and allows NWC to pass on COGS inflation with more certainty than a
typical retailer.
Population growth at nearly twice the rate of more populated markets. NWCs
organic growth capacity is aided by forecast average population growth of 1.3% versus
0.7% in the rest of Canada (source: StatsCan population forecast estimates).
Resource development is supporting above-average local market growth. Mine

exploration/development and related resource royalties have bolstered spending
capacity in many remote markets.
More than 75% of sales are in grocery products, providing investors with relatively
stable earnings/cash flow support to dividends.
NWC is a modest-growth company offering investors relatively stable earnings and an

above-average yield (currently 4.8%) versus other food retailers, supported by its core
Canadian and Alaskan operations. The company has attempted to enhance growth
25 January 2012
95
prospects through the rollout of franchised Giant Tiger stores (starting in 2001) in western
Canada and through the 2007 acquisition of Cost-U-Less (a Pacific Island warehouse club
style retail format), with mixed results partly due to the prolonged economic slowdown.
Over the past five years, NWC has been able to materially improve its food performance,
which represents the majority of sales (72% in Canada; 86% in International Operations),
through better sourcing, increased private label and improved store-level capabilities (best
practices and new technology). This has been augmented by the opportunistic addition of
complementary everyday products and services such as financial services, post offices, fuel
and pharmacies. Modest new store growth has been achieved by acquiring independent
stores in northern Canada and Alaska, Giant Tiger store growth in western Canada (from 20
to 34) and the acquisition of Cost-U-Less (CUL) in late 2007.
Growth Strategy & Outlook More growth in store

Productivity opportunities
include improved labour
scheduling, reduced energy
usage and reduced inventory
shrinkage
Like many retailers that are facing the prospect of slowed consumer demand, NWC has
shifted its earnings growth focus toward improving the productivity and efficiency of core
operations while working to improve the profitability of the underperforming Giant Tiger
and CUL operations. Productivity opportunities include improved labour scheduling,
reduced energy usage and reduced inventory shrinkage. NWCs major initiatives include:
1. Improve perishable food performance (produce, meat, chilled and frozen foods). NWC
started its produce improvement program in 2010 with new assortment and waste
management plans following an extensive review of past practices and products. It has
achieved good results on a reduced produce assortment and is now working on the meats
program (shelf ready), with plans to work on food service next year. The company expects
to see a sales lift of more than $3mn this year from these initiatives.
2. Optimize in-stock position and shrink As with many retailers, the companys efforts at
maintaining consumer-friendly in-stock positions to maximize sales and keeping shrink at
acceptable levels are ongoing battles. In 2010, as part of the companys increased focus on
getting better returns out of its existing assets, NWC initiated a major by-store push on
these two measures. After just six months, NWC was achieving material improvement in its
in-stock positions as it continued to roll the initiative out to the rest of the northern store
network and it has targeted a 92% in-stock rate with management bonuses tied to
achievement. It has also made significant progress on better shrink control over the past
year.
3. Increase store team stability Recognizing the performance benefits of maintaining
strong management teams in one location for extended periods of time, NWC has made a
concerted effort to encourage greater longevity in its store management teams, which has
involved incentives, better pay and more extensive training. This program will take several
years to establish its success.
4. Build supply chain advantage NWC is on track with planned savings and operational
improvements but this years savings were reinvested into Nutrition North as part of the
program agreement. Its aspirational intentions of leveraging its logistics skills as a thirdparty provider will take time to explore.
Fixing the problems: Giant Tiger (GT) and Cost-U-Less (CUL)

These two newer businesses were supposed to be growth contributors. Instead they
have become a drain to growth and returns as the weak economy, Wal-Marts Supercenter
25 January 2012
96
rollout in western Canada and poor performing softgoods at GT have eroded sales and
profit margins, while CUL is struggling with weakened tourism in its markets.
Giant Tiger not a quick fix. Giant Tigers sales were approximately $285mn in F2011, just
under 30% of the Canadian operations sales. Although the first 15 locations achieved
strong results, the next five were just to plan and the next 14 have done considerably worse.
GTs softgoods business has been struggling for a while now and needs a revamp. As part
of its Master franchise agreement, NWC pays GT a fee for general merchandise assortment
selection and buying. Industry sources suggest that GT is struggling in the east to a similar
degree as it is in the west. It will potentially take 6-12 months for GT to execute a new
approach to these categories before we see any material improvement. GTs food business
has also been hurt by Wal-Marts Supercenter rollout with 20 of GTs 35 locations in similar
trading areas. Lapping weakened sales and becoming more promotionally aggressive seem
like the only solutions to this problem. If NWC doesnt get a reasonable effort from GT to fix
the softgoods problem, we could see the relationship deteriorate further, but a more farreaching solution feels a ways off yet.
Cost-U-Less the core problem is weak tourism, which is unlikely to achieve any material
improvement for at least another year or longer given worldwide economic circumstances.
The good news is CUL is beginning to turn the corner on drained sales and is implementing
a number of strategies to improve profits (using Alaskan turnaround as template
expanding food offering to attract non warehouse club customers, opportunity buys).
Unfortunately, these elements wont allow the business to get back to previously expected
growth for some time but at least an end to the drain on earnings may be close at hand.
Figure 96: Same Store Sales by Banner
Northern Banners*
Giant Tiger
Cost-U-Less
Q1 2011
3.2%
-1.7%
1.2%
Q4 2010
4.3%
-2.1%
-1.8%
Q3 2010
5.7%
-0.2%
-4.1%
Q2 2010
4.8%
1.4%
-4.5%
Q1 2010
8.0%
5.3%
-5.9%
Q4 2009
2.5%
6.1%
-4.9%
Q3 2009
-2.6%
6.9%
-3.8%
Q2 2009
-1.2%
3.9%
0.6%
*Includes Northern, NorthMart, and AC Value stores

Investing in the future is constraining immediate term earnings

As they say timing is everything and right now North West Company is in the midst of
investment spending SG&A and Capex dollars on longer term payback programs that are
not expected to generate any meaningful lift in sales, or earnings until at least late next year.
25 January 2012
SG&A has ramped up to support several of the companys strategic initiatives such as
a change to incentive programs (transition from a loan program to stock based
compensation with significant payouts expected this year in Canada and Alaska), store
team recruitment and retention programs, consulting fees to explore the supply chain
advantage opportunity and transportation management software expenses.
97
Higher than usual capex spending expected over the next two years, above the
depreciation run rate, is likely to increase depreciation expense. We estimate capex at
$54mn for F2012 and expect it could possibly be as high as $65mn in F2013 versus a
run rate of $35-$45mn. NWC expects to spend $8-$9mn on upgrading staff housing
and replacing two stores that were destroyed by fire versus a more typical run rate of
$3-$3.5mn per year, plus $6mn for the opening of a new CUL store in Barbados late
next year. IT spending will be higher than usual by $4-$6mn for the implementation of
transportation management software which should deliver immediate benefits once
installed.
Risks
1. Government policy changes that impact the funding of aboriginal communities.
2. Reduction of resource development in the north. NWC experiences a meaningful lift in
sales during the exploration phase of major resource development and a sustained lift if the
projects become viable. The aboriginal communities also benefit from the royalties that
mining companies pay to access the land.
3. Unseasonable weather that can interfere with NWCs distribution capability; i.e., warm
weather that makes the ice roads inoperable.
4. An upside risk to our valuation could be faster-than-expected earnings recovery at Giant
Tiger and/or Cost-U-Less.
Figure 97: North West Company Financial Performance Summary
Total Revenue ($M)

growth (%)
Total Same Store Sales (%)
Canadian Revenue ($M)
growth (%)
Canadian Same Store Sales (%)
International Revenue ($M)
growth (%)
GAAP
GAAP
IFRS
IFRS
IFRS
2009A
2010A
2011A
2012E
2013E
$1,393
$1,444
$1,448
$1,483
$1,516
30.8%
3.7%
0.3%
2.4%
2.3%
2.7%
0.1%
2.7%
2.7%
2.3%
$899
5.5%
2.2%
$922
2.5%
0.8%
$979
6.2%
4.2%
$1,022
4.5%
3.1%
$1,054
3.1%
3.1%
$493
133.0%
$523
5.9%
$469
-10.2%
$460
-2.0%
$462
0.4%
International Same Store Sales (%)
7.3%
-1.4%
-0.3%
2.0%
1.7%
International GM Same Store Sales (%)
7.9%
-15.1%
-1.0%
-4.9%
0.0%
International Food Same Store Sales (%)
7.1%
0.7%
-0.1%
3.1%
2.0%
Total Gross Margin
28.9%
28.7%
28.5%
27.6%
0.0%
Total SG&A as a % of Total Revenue
20.1%
19.7%
20.5%
19.0%
0.0%
Total EBITDA Margin
8.8%
9.0%
8.7%
8.6%
8.9%
-17 bps
79 bps
20 bps
0 bps
Total SG&A Variance
-42 bps
116 bps
-143 bps
0 bps
24 bps
-7 bps
-8 bps
25 bps
Total EBITDA Variance
-123 bps
1.5x
1.4x
1.3x
1.3x
1.6x
3.3%
3.1%
2.6%
3.6%
4.3%
Free Cash Flow (after WC/Capex)
$43
$65
$76
$26
$34
28.4%
29.1%
24.3%
19.8%
21.7%
Return on Equity
Source: Company reports, Barclays Capital

Note: Growth rates/variances comparing 2011/2010 use GAAP figures, while 2010 raw figures are presented in IFRS
25 January 2012
98
COMPANY SNAPSHOT
North West Company

Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (reported) ($)
Diluted shares (m)
2011A
1,448
126
90
84
70
1.43
49
1.42
2012E
1,483
128
91
85
59
1.23
49
1.05
2013E
1,516
134
98
92
64
1.32
49
1.16
2014E
1,562
141
104
98
69
1.41
49
1.27
CAGR
2.5%
4.0%
4.9%
5.2%
-0.5%
-0.3%
-0.2%
-3.6%

EBITDA margin
EBIT margin
Pre-tax margin
Net margin
Payout as % net income
Payout as % CFO
Payout as % EBITDA
8.7
6.2
5.8
4.8
85.5
61.3
53.4
8.6
6.2
5.8
4.0
85.7
64.0
39.9
8.9
6.4
6.0
4.2
87.3
56.5
41.7
9.1
6.7
6.3
4.4
89.9
60.7
43.6
Average
8.8
6.4
6.0
4.4
87.1
60.6
44.7

Total assets
Total liabilities
Net debt/(funds)
Operating cash flow
Capital expenditure
Free cash flow
260
31
617
193
330
161
286
(0)
113
37
76
274
39
659
203
358
164
301
(16)
96
54
26
305
656
203
367
209
289
(2)
101
65
34
CAGR
318
7.0%
NA
677
3.2%
203
1.8%
380
4.8%
219 10.7%
296
1.1%
(5)
NA
106
-2.2%
50 10.4%
51 -12.2%

P/E (x)
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
14.0
9.0
7.8
0.7
3.4
7.1
40.2
1.5
16.3
8.9
2.6
0.7
3.2
5.3
40.3
1.6
15.1
8.8
3.5
0.6
3.3
5.8
41.3
1.5
Average
14.1
14.9
8.4
8.8
5.3
4.8
0.6
0.6
3.3
3.3
6.4
6.1
40.7
40.6
1.4
1.5

Same store food growth (%)
Same store merch growth (%)
Capex/sales (%)
2.9
1.8
12.2
2.6
3.5
0.3
13.4
3.6
3.0
1.6
13.3
4.3
3.0
2.2
13.3
3.2
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
2-EQUAL WEIGHT
2-NEUTRAL
$19.95
$20.00
NWC
Investment case
North West Company has superior defensive
characteristics than other food retailers that deserve
a premium multiple. The company is focused on
better in-stock and improving the general
merchandise business, which will take time. Our
target is based on an 8.5x EV/EBITDA multple.
Upside case
$22.00
Our upside case reflects a quick turnaround in the
GM business with better inventory leading to higher
sales and stronger margins off of fewer markdowns.
In this scenario, we estimate potential 2013E EBITDA
to be $138mln and would apply a 9x EV/EBITDA
multiple.
Downside case
$18.00
Our downside case reflects further deterioration of
the GM business with lower sales and margins due
to markdowns. In this scenario, we estimate
potential 2013E EBITDA to be $130mln and would
apply an 8x EV/EBITDA multiple.
24
$18
(-9.77%)
(-8.76%)
19
Downside
Case
14
$20
(1.3%)
(0.2%)
$22
(10.2%)
(11.5%)
Upside
Case
Price
Target
9
1/27/2011
1/20/2012
Source: FactSet
3.1
1.5
13.1
3.4
Same Store Food Sales vs. General Merch.

4.0%
Same Store Food
Same Store Merch
3.0%
2.0%
1.0%
0.0%
2011A
25 January 2012
2012E
2013E
2014E
Note: FY end Jan.
99
Figure 98: SNAPSHOT: North American Drugstore Industry Canada vs. US
NORTH AMERICAN DRUG RETAIL INDUSTRY

North American Drug Retail Market Share
Canada
United States
Pharmacy Sales ($CDN M)
Market Share
Pharmacy Sales ($USD M)
Market Share
$16,251
70.5%
$106,582
40.0%
Katz Group
$5,380
23.3%
Walgreens
$43,823
16.5%
Shoppers Drug Mart

Jean Coutu
$4,847
$2,381
21.0%
10.3%
CVS
Rite Aid
$38,994
$17,086
14.6%
6.4%
Other
Drug Store Chains
Other
$3,644
15.8%
Grocery/Mass
$2,858
12.4%
$6,679
2.5%
$52,497
19.7%
Wal-Mart
$892
3.9%
Wal-Mart
$15,616
5.9%
Loblaw
HBC Pharmacies
$354
$288
1.5%
1.2%
Kroger
Safeway
$7,886
$3,695
3.0%
1.4%
Costco
Sobeys (ex Lawton)
$223
$82
1.0%
0.4%
Target
Sam's Club
$3,033
$1,781
1.1%
0.7%
Metro
$46
0.2%
Costco
$1,449
0.5%
Other
$974
4.2%
Other
$19,037
7.1%
$3,942
17.1%
$107,316
40.3%
Independents/Mail Order
Total
$23,051
NACDS, CACDS,
CACDS, Chain
Chain Drug
DrugReview,
Review,StatsCan,
StatsCan,Company
Co. Reports,
Barclays
Capital
est.
Source: NACDS,
Reports,
Barclays
Est.
$266,395
Based
on fiscal
Note:Note:
Based
on fiscal
year year
20102010
Shoppers
Jean Coutu
Walgreens
CVS
12 Months Ending
Jan-11
Feb-11
Aug-10
Dec-10
National Rx Market share est.
21.0%
10.3%
16.5%
14.6%
Store Count
1,238
389
7,562
7,182
12.5
2.8
84.5
75.5
Script Volume (mlns)
106
68
695
636
10,097
7,198
11,174
10,512

Revenue per store ($M)
$8.4
$9.7
$8.9
$8.0
Front end sales per store ($M)
$4.4
$3.6
$3.1
$2.6
Rx sales per store ($ Millions)
$4.0
$6.1
$5.8
$5.4
86
174
92
89
Average script value
$46.86
$35.21
$63.25
$61.31
Avg. scripts/store (k's)
$10,376
$2,613
$67,420
$57,345
Revenue Growth (3Yr CAGR)
7.0%
15.5%
7.8%
8.3%
Total SSS Growth (%)
2.1%
1.6%
1.7%
2.2%
Front-End SSS (%)
2.5%
0.3%
0.5%
0.5%
Rx SSS (%)
1.7%
1.9%
2.3%
2.9%
Front End Sales as % of Total
52.0%
37.0%
34.8%
32.0%
Generic RX as a % Total RX
55.5%
54.0%
73.0%
Gross Margin (%)
38.6%
19.9%
28.4%
29.7%
EBITDA Margin (%)
11.5%
11.1%
6.7%
9.9%
8.7%
9.8%
5.1%
8.0%
2.1%*
4.0%
1.7%
1.5%
Net Debt to EBITDA
1.0x
0.7x
0.5x
1.1x*
$405
$170
$3,146
$2,480*
5.4%*
4.7%
7.3%
9.1%
ROE (%)
FCF Yield (%)
14.2%
32.4%
14.8%
9.5%*
ROIC (%)
11.9%
23.8%
14.3%
7.5%*
Source: StatsCan, NACDS, CACDS, Company reports, Barclays Capital estimates *Includes PBM business
25 January 2012
100
CANADIAN DRUGSTORE SECTOR OVERVIEW
Canadas Prescription drug market A brief overview

Canada is known internationally for its virtually universal healthcare system, which,
although not as universal as some Canadians might like it to be, is a very generous, allencompassing program funded and controlled by the federal and provincial governments.
The problem is that government cannot afford the promise, as the already rapidly
escalating cost of healthcare meets with an aging baby boomer population which threatens
to significantly increase the cost of healthcare over the coming decade. Something has to
give: First it was service levels (extended wait times) and late, or no, adoption of new
technology and then it was prescription drug reform a kind word for reduced
reimbursements from government to the providers.
So far, Drug Reform = decreased
Rx sales
Rx sales growth of 5%-6% over the past three years has shifted into 1% decline in 2011
due to drug reform. We estimate total sales of drugstore type merchandise in Canada were
$41bn in 2010, up approximately 5% versus 2009 with prescription drug sales representing
56%, or $23bn, up 6.6% in 2010. Prescription drug sales have historically grown at an
above-average rate (5%-10%) relative to most retail categories. Drug Reform by the
provincial governments, which pay for more than 40% of all prescription drugs, to ease the
growth curve (called drug reform) has resulted in Rx sales declining 1.1% so far in 2011.
Figure 99: Canadian Drugstore Retail Prescription Sales
2000 - 05
CAGR
2005
213
223
223
221
221
217
10.8%
17.9%
4.6%
-0.3%
-0.8%
0.0%
-1.9%
161
175
205
237
262
288
-9.6%
8.9%
17.1%
15.3%
10.7%
9.9%
374
399
428
458
483
505
4.0%
6.4%
7.4%
6.9%
5.6%
4.5%
$64.84
$66.10
$67.62
$69.23
$71.91
$72.12
7.0%
1.9%
2.3%
2.4%
3.9%
0.3%
$24.56
$24.95
$25.99
$26.38
$26.59
$26.77
Patented RX (M)
% growth
Generic RX (M)
% growth
-2.3%
RX Scripts (M)
% growth
3.9%
Patented RX ($)
% growth
5.7%
Generic RX ($)
% growth
3.8%
Avg. $ / script
% growth
5.8%
Patented RX ($B)
% growth
12.8%
Generic RX ($B)
% growth
-9.7%
Prescription drug sales ($B)

% growth
9.9%
2006
2007
2008
2009
2010
3.4%
1.6%
4.2%
1.5%
0.8%
0.7%
$42.90
$44.46
$45.74
$44.97
$44.84
$45.73
1.3%
3.7%
2.9%
-1.7%
-0.3%
2.0%
$13.8
$14.8
$15.0
$15.3
$15.9
$15.6
4.7%
6.6%
2.0%
1.6%
3.9%
-1.6%
$2.2
$3.0
$4.5
$5.3
$5.8
$7.5
-47.5%
33.4%
52.5%
17.3%
8.9%
29.1%
$16.1
$17.7
$19.6
$20.6
$21.7
$23.1
5.4%
10.3%
10.5%
5.2%
5.2%
6.6%
2005 - 10
CAGR
0.3%
12.4%
6.2%
2.2%
1.7%
1.3%
2.5%
27.4%
7.5%
Source: PMPRB, IMS Health, StatsCan, Barclays Capital estimates
25 January 2012
101
Drug reform has been a bitter pill to swallow

Phased-in drug reform will continue to curtail sales growth in 2012 and 2013, but the
pain is easing. The first round of changes occurred in 2005/06, with the Ontario
government demanding and ultimately legislating that it get its fair share of the sizeable
rebates (estimated at 40%-80%) called education support funds that generic drug
manufacturers paid to pharmacists to encourage generic substitution. The rebates made
the lower priced generic as, or often more, profitable to the pharmacist on a per script basis
than the higher-priced patented drug.
Phased-in drug reform allows pharmacists to adapt, but its a slow and painful transition.
In 2010, Ontario and Quebec finalized and began the implementation of phased-in changes
to the reimbursement model of generic drugs, which dramatically lowered the selling price
and profitability of generic drugs to pharmacists. The following table provides a summary
of the announced plans for Ontario, Quebec, Alberta and British Columbia (BC).
Figure 100: Provincial Drug Reform Summary: Phase-in
2009
2010
2011
2012
2013
2014
Generic reimbursement rate
50%
25%
25%
25%
25%
25%
Private sector rate
50%
50%
35%
25%
25%
25%
Professional allowances
65%
50%
35%
25%
0%
0%
Dispensing fees
$7.00
$8.00
$8.20
$8.40
$8.62
$8.83
Professional service fees
$50M
Ontario
Private label generics
$150M
Banned - Supreme Court ruling overturned lower court
Quebec
50%
Wholesale markup on generics
37.5%
37.5%
30%
25%
5.0%
6.0%
6.3%
6.5%
25%
Dispensing fees
$7.89
$7.89
20%
20%
16.5%
15%
40%
35%
35%
35%
$10.00
$10.50
$10.50
$10.50
increases expected - but none announced
no restrictions
British Columbia - Under Review

65%
50%
Allowable markup
7%
8%
$8.60
$8.98
Dispensing fees
no restrictions
no restrictions
Note: BC is considering reducing generic reimbursement rate to 25% immediately

Alberta
Dispensing fee
75%
51%
51%
51%
51%
51%
$10.93
$10.93
$10.93
$10.93
$10.93
$10.93
$3.00
$2.00
$1.00
$0.33
Transitional allowance
no restrictions
no restrictions
Source: Provincial government filings
25 January 2012
102
The good news is the earnings drain of drug reform for Shoppers Drug Mart is estimated
to be much less in 2012 and almost insignificant by 2013.
Figure 101: Shoppers Drug Mart and Jean Coutu Average Rx Price Drain
0%
-1%
-2%
-3%
-4%
-5%
-6%
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
Shoppers Drug Mart
4Q12
1Q13
2Q13
3Q13
4Q13
Jean Coutu
Figure 102: Canadian Drug Reform Estimated Impact on EPS by Year
Estimated drug reform impact on EPS

2010
2011
2012
2013
2014
Total
Jean Coutu EPS impact
-$0.01
-$0.02
-$0.02
-$0.01
$0.00
-$0.06
Shoppers EPS impact
-$0.21
-$0.23
-$0.05
$0.00
$0.00
-$0.48
Source: Barclays Capital estimates
Still uncertainty on the table

Unfortunately, several factors are expected to maintain a certain amount of earnings risk
for Shoppers Drug Mart, albeit less than before.
1. The BC government is expected to follow Ontarios lead; we estimate the EPS risk to
Shoppers at $0.05. Recently, the BC government announced that the plan it had previously
announced was not generating the expected savings so it is re-opening discussions with
various industry segments, which we suspect will result in BC implementing a similar plan
to Ontarios. We estimate that if BC implements these changes, it would represent an
incremental $0.05 of EPS risk to Shoppers Drug Mart once fully implemented. This does not
include the banning of private label generic drugs.
2. The federal governments plan to reduce healthcare funding could become another
catalyst that forces the smaller provinces to follow Ontarios drug reform lead. Most of
the provinces are already scrambling to find ways of reducing their deficits which have
ballooned under the pressures of the extended economic slowdown. The federal
governments surprise announcement that it intends to change the healthcare funding
formula, when the current agreement expires in 2013/14, appears to make things worse for
most provinces. What the final funding formula is going to be remains uncertain as the
provinces are in the midst of reviewing the federal governments announced changes and
trying to see if they can influence some modifications. In the meantime this adds more
uncertainty to the drug reform outlook.
25 January 2012
103
3. Ontario will begin negotiations with the doctors this year; the end result could have
some implications for pharmacy. According to the Canadian Institute for Health
Information (CIHI), healthcare expenditures on doctors represents 14% of total healthcare
spending versus 16% for prescription drugs. One area that the provincial governments and
the pharmacists seem to agree on is that pharmacy can play a significant role in reducing
the cost of healthcare; highly educated/trained retail pharmacists are ultimately one of the
governments lowest-cost contact points for patient care in a number of areas. The
challenge is how to get there, as most of the savings involve transferring responsibilities
from the doctors to pharmacists at a lower reimbursement rate. Implementing this type of
transition obviously takes revenue away from the doctors and often introduces an
incremental transition expense for the government as the pharmacists would require some
upfront training/qualification process. The doctors, sometimes for ethical reasons, but also
for financial reasons, are not open to giving up any services they currently provide unless
the government can find ways to replace those revenues. Given how aggressive the Ontario
health ministry was with drug reform, it will be interesting to see how tough it is with the
doctors. We might get some indication of how aggressively the government is prepared to
pursue this transition of services as negotiations with the doctors unfold.
Figure 103: Canadian Healthcare Spending
Public Health
6%
Capital
5%
Administration
3%
Hospitals
29%
Other Health
Spending
6%
Other Institutions
10%
Other
Professionals
11%
Drugs
16%
Physicians
14%
Source: CIHI
By 2013, the level of focus and

uncertainty around drug reform
will likely increase, resulting in a
potential overhang on valuations
in the sector
25 January 2012
Longer term the risk of more reform will remain despite the logic; the wall of worry
could start as early as 2013, creating a valuation overhang on the sector. We are hopeful
that once all of the provinces have taken as big a bite out of pharmacy profits as Ontario
has, they wont come back for more. Unfortunately, pharmacists are an easy target; they
have a tough time winning the PR battle, and squeezing them more doesnt carry the same
risk as going after the generic manufacturers (they can close plants, which doesnt win
votes). Regardless of whether we are right or not, by the time 2013 rolls around, the level of
focus and uncertainty around the issue will likely increase, resulting in a potential overhang
on valuations in the sector.
104
Increased focus on improving Rx counter productivity

Canadas average patented
prescription drug price is almost
60% lower than the average U.S.
patented drug price
Government drug reimbursement reform is expected to increase the major pharmacies

sense of urgency to capture improved Rx counter productivity through consolidation,
expanded services and technology. Government price controls and a more saturated/less
densely populated market make Canadas pharmacy counter 35% less productive than the
United States. Patented drugs in Canada are subject to price controls under the Patented
Medicines Prices Review Board (PMPRB), which according to IMS Health results in Canadas
average patented prescription drug price being almost 60% less than the average U.S.
patented drug price (source: IMS Health $72.12 vs. $166.68 in 2010). This combined with
lower script volume per store in Canada makes the Canadian Rx counters much less
productive than they are in the United States. Excluding Quebecs average script volume
per store, which is significantly higher than the rest of the country (71/store vs 48/store)
due largely to Quebecs 30-day script rule on first time prescriptions and more extensive
universal coverage, Canadas average script volume per store is 20% lower than the United
States.
Figure 104: Canada vs. US Pharmacy Productivity Comparison
Rx Scripts
per store (000s)
Rx Sales
per store ($M)
Canada
Canada ex Que
US
CN:US Index (ex Que)
56.4
47.1
60.2
0.78
$2.6
$2.8
$4.4
0.63
Shoppers
Jean Coutu
85.8
173.8
$4.0
$6.1
Walgreens
CVS
91.9
88.6
$5.8
$5.4
Average Script Prices

Average Branded Generic
$42
$56
$72
0.77
$72
$88
$167
0.53
$27
$33
$44
0.75
Sources: IMS Health/Brogan, CACDS, NACDS, Company Reports, Barclays Capital estimates
Rx Script acquisition appears to be the only immediate term lever the major competitors
can rely on. Shoppers and Jean Coutu already have significantly more productive and
profitable front-end businesses than the U.S. pharmacies due largely to their success in
high-end prestige cosmetics and related health/wellness offerings such as derma care.
Their focus over the next few years is expected to be the pursuit of expanded service
revenues and improved Rx counter productivity (more scripts/hour, filled at a lower cost):
1. Expanded services: meaningful gains require significant changes in the public and
private sectors that will take time. Making changes to healthcare provision is a delicate
subject regardless of whether its in the public or private sector. We doubt that we will see
any major progress beyond currently approved professional services before the current
provincial drug reform agreements near the end of their term in 2014. Over the long term
we expect government affordability constraints to force changes in public healthcare
delivery that will ultimately create a meaningful revenue/profit stream for pharmacies who
offer a lower cost, high quality patient contact point.
2. Technology and process changes can improve script throughput and reduce handling
costs, but to get an acceptable payback the major pharmacies need more volume. Rx
script fulfilment in Canada is significantly more labour intensive than it is in the United
States and Europe. There are many process changes and technologies that Canadian
pharmacies could employ to reduce handling costs and increase script fill rates but many of
these require government policy changes that support more productive approaches (e.g.,
increased technician handling, centralized filling of chronic disease script renewals). Lower
Rx sales productivity makes it difficult for the industry to cost justify adoption of some of
25 January 2012
105
the productivity technologies employed in the United States and Europe. Industry
consolidation appears the most likely way for pharmacies to achieve acceptable payback
levels.
Figure 105: Drugstore Revenue Metrics Canada vs. US
2004
2010
CN:US
6 Year CAGR
US
Canada
US
Canada
Chain Drug Stores
20.8
3.0
22.6
Food / Mass Rx counters
16.6
1.5
17.6
Independents
20.8
3.3
Total RX counters (k"s)

Population per store
Independents share
Top 3 retailers' share of RX
58.3
5,322
7.9
4,224
RX sales
$217
$15
$266
$23
3.5%
7.3%
FE sales
$60
$14
$61
$18
0.4%
3.9%
Drugstore sales ($B)
$276
$29
$327
$41
2.9%
5.7%
Rx sales as % of DSTM
52%
361
81%
56%
Prescriptions (mlns)
78%
3,274
3,676
505
1.9%
5.7%
Generic penetration
48%
43%
71%
57%
24
14
Branded Price/script
$92
$62
$167
$72
0.4
10.5%
2.5%
Generic Price/script
$28
$44
$27
0.6
7.7%
2.3%
Avg. RX Price / script
$66
$23
$42
$72
$42
0.6
1.5%
0.2%
US
CN
3.9
1.3%
4.4%
1.8
1.0%
2.2%
20.8
3.3
0.0%
0.0%
61.0
5,058
34%
8.9
3,867
37%
0.8%
-0.8%
2.2%
-1.5%
35%
59%
INDEX
1.7
RX Scripts / capita
11.1
11.3
4.6%
$472
$442
$914
14.8
$677
$523
$1,199
1.2%
$735
$202
$938
11.9
$863
$197
$1,060
1.2
Rx sales / capita
Front-end sales / capita
DSTM sales / capita
0.8
2.7%
6.2%
1.1
2.1%
4.6%
Rx scripts / store (000s)
56.2
45.9
60.2
56.4
0.9
1.2%
3.5%
Rx sales / store ($M)
$3.7
$1.9
$4.4
$2.6
0.6
2.7%
5.0%
Front-end sales / store ($M)
$1.0
$1.8
$1.0
$2.0
2.0
-0.4%
1.7%
DSTM sales / store ($M)
$4.7
$3.7
$5.4
$4.6
0.9
2.1%
3.5%
Source: NACDS 2011 Chain Pharmacy Industry profile, CACDS 2010 Industry report, Barclays Capital estimates
3. Industry consolidation is needed to improve Rx counter productivity; so far we have

not seen much activity. Shoppers Drug Mart, Jean Coutu and Katz Group are all eager to
lead industry consolidation. The hope is that as the independents digest the reality of the
second phase of reimbursement cuts (April 2011), they will become more motivated to sell.
Our concern is that true independents wont sell at least not this year. We have seen
something similar occur in the Canadian home improvement sector and in the U.S.
convenience store industry; tough times did not shake out as much consolidation activity as
we would have expected. Shoppers Drug Mart has indicated that it is starting to see more
acquisition files, but a company of Shoppers size needs scale acquisitions doing
transactions with one-store operations is a lot of work for what its worth.
25 January 2012
106
Figure 106: Smaller Canadian Drugstore Chains and Independents

Atlantic
Quebec
Ontario
West
Canada
Drug Store Chains

London Drugs
Lovell Drugs
Main Drug mart
Medical Pharmacies Group
People's Drug Mart
Paragon Pharmacies
Prince Theodore
Super Thrifty
11
45
34
21
-
74
48
22
17
74
11
45
34
48
22
21
17
Total Health
Value Drug Mart
37
-
56
37
56
148
217
365
293
298
73
6
112
196
235
366
53
947
148
11
862
1,021
200
955
1,155
421
252
366
1,982
3,319
Total Stores
Independent
Familiprix
Pharmasave
Proxim
Uniprix
Unidentified Independents
Total Stores
Source: Company reports, CACDS, IMS Health, Barclays Capital estimates.
We estimate that independents represent at least 37% of the total Canadian pharmacy
store count, which includes Uniprix. IMS Health estimates the independent store count at
1,691, or 19% of total pharmacies in Canada. Some industry sources have suggested the
number is between 40% and 50%. Defining an independent in Canada is not clear cut, as
many independents are members of buying groups, or loosely defined cooperatives, or
minimally contractual affiliated programs. In our view, the key measure is determining the
independents financial/legal ability to leave their current membership agreement if and
when they choose to. In general, this adds many pharmacies to the definition of
independents (e.g., many of Uniprix and Katz Groups pharmacy members) as in many
cases these pharmacies are not corporate, or true franchise agreement relationships.
With required notice either through the year, or at year end after receiving their share of
group rebates, these members can leave and take their deposited capital with them (plus or
minus the groups return).
Of equal importance, with respect to consolidation is that in many of these organizations
(e.g., Uniprix) each member has a vote regarding any major policy, or strategy changes.
The aforementioned flight risk and the fragmented voting structure of these organizations
has proven to be a major hurdle to acquirers interest and ability to pursue a merger with
these organizations as has been seen with McKessons failed attempt to acquire Uniprix
(2009) and the opposition to Jean Coutus toe-hold acquisition of three Pharmasave stores
in 2003 (subsequently sold back to Pharmasave in 2006).
25 January 2012
107
Figure 107: Canadian Pharmacy Store Count by region and segment

Atlantic
Quebec
Ontario
West
Canada
CHAIN:
Shoppers Drug Mart
110
174
612
345
1,241
Katz Group
Jean Coutu
132
20
359
1,129
10
474
-
1,735
389
68
-
179
-
103
161
179
68
264
330
41%
712
40%
1,854
53%
980
34%
3,876
43%
71
-
40
-
224
78
159
-
494
78
140
-
47
5
-
47
194
94
234
199
94
McMahon Dist. (Metro)

Lawton's (Sobeys)
Other
TOTAL CHAIN
% of Total Stores
FOOD RETAIL:
Loblaw
Metro
Sobeys
Canada Safeway
Overwaitea Food Group
Other
34
35
211
26%
40
2%
355
10%
528
18%
1,134
13%
Wal-Mart
Costco
The Bay / Zellers
40
5
25
53
10
12
120
25
117
111
31
71
324
71
225
TOTAL MASS RETAIL

% of Total Stores
70
9%
75
4%
262
8%
213
7%
620
7%
TOTAL INDEPENDENT
% of Total Stores
196
24%
947
53%
1,021
29%
1,155
40%
3,319
37%
TOTAL PHARMACIES
807
1,774
3,492
2,876
8,949
TOTAL FOOD RETAIL

% of Total Stores
MASS RETAIL
Source: Company reports, CACDS, IMS Health, Barclays Capital estimates.
Generics are expected to continue to grow in importance as there are several major
patents set to expire over the next few years and benefit payers want cheaper generics.
One of the motivations for the provincial governments to get reform in place in 2010 was
the pending patent expiry of Lipitor, which was one of the largest generic conversions in
years.
Figure 108: Patent Expiration Schedule for Major Branded Drugs in Canada
Canadian Patent Expiries ($B) - 2011 thru 2014
$4.5
$3.5
$3.3
$2.5
$1.5
$1.5
-$0.5
$0.6
$0.3
$0.5
2011
2012
2013
2014
2011
2012
2013
2014
Lipitor
Cozaar
Crestor
Aricept
Norvasc
Micardis
Oxycotin
Celebrex
Spiriva
Arthrotec
Plavix
Gleevec
Diovan
Hyzaar
Atacand
Wellbutrin
Lupron
Singulair
Arimidex
Caduet
Cosopt
Femara
Prograf
Source: ODB expiry listings, Barclays Capital estimates
Per capita script count has

increased at an average annual
CAGR of 5% over the past five
years
25 January 2012
Baby Boomers are expected to lift annual script growth by as much as 2%. Adults age
60+ order more than 3x the per capita script volume of the 40- to 59-year-old cohort. With
the mean age of the baby boomer population nearing 60, we expect this age group shift to
begin driving a meaningful increase in average annual script volume. We estimate that the
108
shift of the aging baby boomer population into the 60+ cohort could drive script count
growth up by as much as 2% over the next five years, just based on expected population
trends and the heavier usage of the 60+ age group. We note that per capita script count has
increased at an average annual CAGR of 5% over the past five years and 4.7% over 10
years.
Figure 109: Rx Growth due to Demographic Shifts
RX per Capita
Age 0-39
Age 40-59
Age 60+
4.21
13.51
41.82
2011 Population
(M)
17.3
10.2
7.0
Total (M)
CAGR Growth (%)
2016 Population
(M)
18.0
10.2
8.3
Total RX (M)
72.9
137.7
293.3
34.5
503.9
36.5
0.3%
Total RX (M)
75.8
138.1
345.6
559.5
2.1%
Source: CACDS, StatsCan, Barclays Capital estimates
Despite drug reform, the Canadian drugstore sector continues to achieve above-average
growth versus many other retail sectors (e.g., food, specialty retail and home
improvement) as evidenced by square footage growth and the continued outperformance
of front-end comp-store sales.
Figure 110: Drugstore vs. Food Retail square footage growth
2007
Food retail
Drug Retail
2008
2009
2010 2011e 2012e 2013e
1%
1%
2%
1%
1%
2%
10%
10%
10%
6%
5%
5%
2%
4%
Source: Company reports and Barclays Capital estimates
Figure 111: Canadian Retail Comp -Store-Sales weighted averages

Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11
Food Retail - CSS
4.7% 3.4% 1.2% 0.4% 0.1% -0.1% -0.2% -0.8% -0.1% 0.2% 1.3%
Drug Retail - FE CSS
2.3% 4.8% 3.4% 4.6% 2.0% 1.6% 1.4% 3.2% 5.1% 2.3% 1.8%
Specialty retail - CSS
0.9% -0.3% 0.3% 1.1% 3.9% 3.0% 1.0% 1.2% -1.1% -0.1% 0.6%
Home Improvement - CSS
-6.6% -5.6% -2.3% 6.4% 8.5% 0.6% -4.0% -6.3% -9.6% -5.3% -5.1%
Food & Drug CSS - wtd avg.
4.5% 3.6% 1.5% 0.8% 0.3% 0.1% 0.0% -0.4% 0.4% 0.4% 1.3%
Discretionary CSS - wtd avg.
-0.8% -1.5% -0.3% 2.4% 4.9% 2.4% -0.2% -0.5% -3.1% -1.3% -0.7%
TOTAL Group CSS
2.1% 1.4% 0.7% 1.5% 2.3% 1.1% -0.1% -0.5% -1.1% -0.3% 0.4%
Leaders in their respective markets Shoppers Drug Mart & Jean Coutu
Shoppers Drug Mart (SC-TO) and Jean Coutu Group (PJC.a-TO) are Canadas only publicly
traded drugstore retailers. Shoppers Drug Mart is Canadas only national drugstore chain
and the largest drug store retailer by total sales (estimated Rx market share of ~21%), the
largest player by store count is Katz Group. Jean Coutu is the market leader in Quebec
(national Rx share of 10%, Quebec Rx share estimated at 38%), on a total sales basis,
followed by Uniprix, a large cooperative independent also based in Quebec.
25 January 2012
109
Shoppers Drug Mart operates an Associate dealer model in which the company generates
earnings through a share of store profits and service fees charged to the Associate dealer,
whereas Jean Coutu is a pure franchise model earning a royalty (3%-4%) plus fees for
shared services they provide to the franchise members.
Jean Coutu is a franchisor and distributor of prescription drugs and front-end
merchandise to its network of Jean Coutu franchisees. The company also generates rental
income where it either owns the site, or holds the lease. The franchisees are responsible for
store fixtures, inventory and day-to-day operation of the store for which they get to keep
the profits after paying Jean Coutu for product, shipment, rent where applicable, royalties
and services. In Quebec, the revenue generated by the sale of a prescription drug must be
received by a pharmacist; this includes payments such as generic rebates.
Jean Coutu is also a vertically integrated generic drug supplier to its franchise network.
In addition to this franchise/wholesale business, Jean Coutu also has a generic
manufacturing/distribution company called Pro Doc which it acquired at the end of 2007,
immediately following drug reform in 2006. Pro Doc facilitates the approval, packaging and
sale of generic molecules predominantly on behalf of third-party generic manufacturers.
Since being acquired by Jean Coutu, the majority of Pro Docs customers are Jean Coutu
franchisees. The move to vertical integration of generic drug supply was well timed as it
provided a significant buffer to the drain of drug reform over the past two years.
Figure 112: Shoppers Drug Mart vs. Jean Coutu a Financial Comparison
Store count
Atlantic
Quebec
Ontario
West
Canada
Shoppers
110
174
612
342
1,238
Jean Coutu
20
359
10
389
Jean Coutu
Shoppers
System sales ($M)
$3,778.5
$10,376.0
Reported revenue ($M)
$2,613.0
$10,376.0
Franchise EBITDA ($M)
$237.5
Pro Doc / Generic EBITDA ($M)
$58.1
Total EBITDA ($M)
$288.5
$1,184.0
EBITDA margin %
11.0%
11.4%
Franchise margin (%)
9.1%
Pro Doc / Generic margin (%)
35.4%
AVG per store metrics

% front end
36.8%
52.0%
Generic penetration %
54.0%
55.5%
Avg. RX scripts / store (ooo's)

Average script value / store
174
86
$35.34
$46.86
Front end sales /store ($M)
$3.6
$4.4
RX sales / store ($M)
$6.1
$4.0
System sales /store ($M)
$9.7
$8.4
Average store size - sq. ft.
7,303
10,097
$1,330
$830
System sales / square foot

Note: Shoppers is based on Fiscal 2011 (Jan) and Jean Coutu Fiscal 2011 (Feb) data
25 January 2012
110
Shoppers Drug Marts Associate dealer model provides more corporate control than a
typical franchise model. Shoppers licenses the operation of each store to a pharmacist
owner receiving fees for services (e.g., operational support, purchasing/distribution,
information technology, marketing, accounting) and a share of store profits up to an
agreed to capped level in exchange for Shoppers providing working capital loans and loan
guarantees. Fixtures, leasehold improvements and equipment are purchased by the
company and leased to Associates over periods ranging from two to 15 years. In addition
to the fees for services, Shoppers receives a substantial share of Associate store profits in
return for their financial backing of the Associates operations. The share of store profits is
reflective of Shoppers investment in, and commitment to, the operations of the Associates
stores. In 3Q11 Shoppers disclosed that it has increased the Associate dealers share of
store profits in response to complaints following the negative impact of drug reform.
Shoppers felt proportionately more pain from drug reform than Jean Coutu. Partly due to
their different business models and their different market jurisdictions, Jean Coutu had less
of a negative impact on its earnings from drug reform than Shoppers Drug Mart. We are
still waiting for an announcement about a possible dispensing fee increase in Quebec,
which could reduce PJCs EPS risk by as much as $0.01-$0.02 depending on the size of the
increase.
Jean Coutus exposure to drug reform in Quebec was proportionately less than Shoppers
due to its franchise structure (lower prices reduced royalty payments and wholesale sales,
no impact from the reduction/elimination of rebates that hit the franchisees) and due to Pro
Doc (PJC received profits from increased generic sales and the benefit of reduced
professional allowances). Shoppers business model outside of Quebec was fully impacted
by the reduced profitability of generic drugs, including lower professional allowances. It has
been able to mitigate some of this exposure through the launch of its Sanis private label, but
the Ontario private label ban has significantly impeded the financial benefit.
Figure 113: Canadian Drug Reform Estimated Impact on EPS by Year
Estimated drug reform impact on EPS

2010
2011
2012
2013
2014
Total
Jean Coutu EPS impact
-$0.01
-$0.04
-$0.01
Shoppers EPS impact
-$0.21
-$0.23
-$0.05
-$0.01
$0.00
-$0.07
$0.00
$0.00
-$0.48
Source: Barclays Capital estimates
Shoppers Drug Mart launched the Sanis private label generic program to offset some of
drug reforms profit drain. In 2010, Shoppers Drug Mart launched a private label generic
called Sanis Health, essentially its version of Pro Doc, to provide its associate network with
access to lower-cost generics to mitigate some of the lost profitability from drug reform. As
part of drug reform, the Ontario government banned private-label generics, a move
specifically designed to stop one of Shoppers primary drug reform offsets. Within the
markets where Sanis is sold, Shoppers is on track to achieve a 50% penetration of generic
scripts in its network excluding Ontario (55% of store count) by the end of this year and is
targeting 70% penetration by the end of 2012.
Unfavourable Ontario Supreme court private label generic ruling at minimum extends
period of uncertainty and distantly introduces risk in other provinces. Immediately after
the Ontario government passed legislation to ban private label generics, Shoppers and Katz
Group moved to challenge the Ontario governments legal right to implement the ban. The
Ontario District court ruled in February 2011 that the Ontario government had overstepped
25 January 2012
111
its legislative/regulatory powers and disallowed the ban.

requested an appeal which was reviewed in June 2011.
The Ontario government
On December 23, 2011, the Ontario Court of Appeal overruled (supported by 2 of 3 judges)
the lower District courts findings, resulting in the reinstatement of the private label generic
ban in Ontario. Shoppers share price dropped $1.28, or 3% on the first trading day
following the decision but has since recuperated some of the loss (S&P/TSX -1.7%). This
decline is materially less than the implied impact of the $0.15 to $0.20 EPS we estimate
could be generated by Ontario private label a 5%-7% share price impact assuming a 14x
PE multiple.
We expect Shoppers and Katz Group to seek a Supreme Court of Canada appeal. Given
that the decision 1) was not unanimous; with a strongly worded dissenting argument
presented by Judge Epstein, and 2) hinges on a delicate subject: the governments legal right
to dictate public and private sector commercial trading terms, we expect Shoppers and
Katz to seek an appeal with the Supreme Court of Canada. They have 60 days to file for an
appeal following the Ontario appeal decision.
The appeals court decision appears to conclude that: 1) the Ontario Drug Benefit Act
(ODBA) and Drug Interchangeability and Dispensing Fee Act (DIDFA) are collectively a
specialized legislative scheme that provides the government with sufficient regulationmaking powers to ban private label generics as they circumvent the intent of the 2010
changes (elimination of special funding) and could over the longer term impede the
governments ability to achieve further cost reductions; 2) public healths importance and
the effective use of significant tax payers dollars provides the government with some
latitude in how it legislates health care expenditures; 3) responsibility for the management
of public funds rests with the government and not the courts.
This decision introduces a potential risk that other provincial governments may choose
to pursue a similar ban once we have a final decision, as the Ontario case will have
established a precedent. The EPS downside risk of a ban by the remaining provinces would
be approximately $0.15-$0.20, or an approximate share price risk of $2.10-$2.80, by our
analysis.
25 January 2012
112
Drugstore Recommendation & Valuation Summary

We prefer the Drugstore Retailers over the Food Retailers despite the impact of drug
reforms. While drug reform has constrained earnings growth, more so at Shoppers than at
Jean Coutu, we believe the worst of the pain is in the past. Both are defensive names with
limited downside risk at their current valuations, fuelled by the prescription drug growth of an
aging population. We expect Jean Coutu to deliver over 10% EPS growth this fiscal year, while
Shoppers is on track to delivering within its EPS guidance for F2011 (+3%) with growth
accelerating as 2012 (+7%) unfolds toward what we expect will be a sustainable level of 10%
earnings growth in 2013.
Despite our comfort with Jean Coutu and Shoppers near-term earnings outlook the risk of
further drug reform is expected to remain an overhang on valuations. This uncertainty is
expected to be more of an issue for Shoppers than Jean Coutu due largely to their different
business models. Some of the potential changes include:
Another round of reform in BC: British Columbia is currently revisiting its generic drug
reimbursement rate. There is a possibility that reimbursement rates could be lowered to
25% (from the current 35% level).
Revised federal formula lowering health care distributions to provinces: This could add
pressure on provinces to control health expenses.
Other provinces implementing new drug reforms.
Resolution of the legality of private label generic drugs sold by retailers: The banning on
private label generic drugs in Ontario can set a precedent for other provinces to follow
suit.
While we see Jean Coutu and Shoppers earnings growth reaccelerating as the earnings
drain from drug reform eases, in light of the risks weve highlighted, we are hard pressed to
see any material upside potential to current valuations. At current levels, Jean Coutu is the
most expensive drugstore stock in North America at a forward P/E of 14.3x. Shoppers Drug
Mart is only modestly lower at 13.7x. This represents on average a 7% premium on CVS and
19% premium on Walgreens.
Figure 114: Drugstore Retailer Recommendation Summary

Market
Company
Ticker

Actual
FY1
FY2
P/E
FY1
Dividend
Current
Price
Potential
FY2
DPS
Yield
Price
Target Ttl Return
DRUGSTORE RETAILERS
Jean Coutu
PJC-A.TO
2-EW
Feb-28
$3,003
$0.76
$0.88
$0.98
15.1x 13.5x
$0.24
1.8%
$13.27
$14.00
7.3%
Shoppers DM
SC.TO
2-EW
Dec-31
$8,974
$2.75
$2.83
$3.04
14.6x 13.6x
$1.00
2.4%
$41.45
$43.00
6.2%
Source: FactSet, Company Reports, Barclays capital estimates. Pricing is as of January 20, 2012
25 January 2012
113
Figure 115: Shoppers Drug Mart vs. Jean Coutu Historical Fwd. P/E
40x
35x
30x
25x
20x
15x
10x
5x
0x
2002
2003
2004
2005
2006
2007
Shoppers Drug Mart
2008
2009
2010
2011
Jean Coutu
Figure 116: Shoppers Drug Mart vs. Jean Coutu Historical Fwd. EV/EBITDA
30x
25x
20x
15x
10x
5x
0x
2002
2003
2004
2005
2006
2007
Shoppers Drug Mart
2008
2009
2010
2011
Jean Coutu
25 January 2012
114
Figure 117: Canadian Drug Reform Summary by Province

Province
Date
Reform Type
Generic Drug
Nova Scotia
Quebec
Ontario
Alberta
British Columbia
July 2011
November 2010
May 2010
Public Plans Only
Public Plans Only
Public and Private Plans
Generic drug prices lowered
Generic drug price was lowered
Public plans were lowered to 25% of the
Existing generic drugs lowered
Generic drugs
to 45% of the branded drug
to 37.5% of the branded drug
branded drug price immediately
to 56% of the branded drug
introduced prior to Nov.
price July 1, 2011.
price Dec/10
price 4/1/10
08 lowered to 50% of
- Reduces to 40% 1/1/12
- Reduced to 30% 4/1/11
Private plans were lowered to 50% of the
- Reduces to 35% 7/1/12
- Reduces to Lowest price in
branded drug price immediately
October 2010
Public Plans Only
the branded drug price

New generic drugs reimbursed
10/1/10 (42% for drugs
Canada on 4/1/12
- Reduced to 35% 4/1/11
at 45% of the branded drug
introduced after Nov.
i.e. Ont. rate of 25%
- Reduces to 25% 4/1/12
price as of 4/1/10
08)
Reimbursement
Rate
April 2010
Public Plans Only
- Reduced to 40%
7/1/11
- Reduces to 35%
4/1/12*
The magnitude of the
Negotiations for a dispensing
increase in dispensing fees is fees increase are ongoing
Dispensing fees increased from $7 to $8 for
Transitional allowance of $3
Dispensing fees were
most pharmacies immediately
paid in addition to dispensing
increased to $9.10 on
currently being negotiated
between the government and
- Increased to $8.20 4/1/11
fees for all prescriptions
7/1/10
Dispensing Fees
by the government and
pharmacists a positive
- Increases to $8.40 4/1/12
(branded and generic) under
& Transitional
pharmacists
decision is expected in the near
$75
term
Allowance
- Reduced to $2 4/1/11
Rural pharmacies can qualify for a dispensing
- Reduces to $1 4/1/12
fee as much as $5 above the published level
- Eliminated 4/1/13
- Increased to $9.60
10/1/10
- Increased to $10
7/1/11
- Increases to $10.50
4/1/12
Professional
Allowances
The government gained the
Capped at 20% of generic drug
authority to limit
price
Eliminated immediately for public plans
professional allowances paid
- Reduced to 16.5% 4/20/11 Private plans reduced to 50% of sales
to pharmacies in the future
- Reduces to 15% 4/20/12
Not addressed
Not addressed
immediately
- Reduced to 35% 4/1/11
- Reduces to 25% 4/1/12
- Eliminated 4/1/13
Other
Maximum profit margin on
Ordinary commercial trading terms capped at
Minimum drug mark-up
pharmacy/wholesaler produced
10% of the generic drug price
increased to 8% on
generic drugs capped at 6%
10/1/10 (from 7%)
- Increased to 6.25% 4/1/11 Private label generics banned for pharmacies

- Increases to 6.50% 4/1/12
and wholesalers
* British Columbia is renegotiating their reimbursement for further reductions (estimated to end up at 25% like Ontario and Quebec)
Source: Company and Government Ministry Reports
25 January 2012
115
SHOPPERS DRUG MART

SC CN / SC.TO
Shoppers Drug Mart Corp.(SC.TO): Quarterly and Annual EPS (CAD)

2010
Stock Rating
2-EQUAL WEIGHT
Sector View
2-NEUTRAL
Price Target
CAD 43.00
Price (20-Jan-2012)
CAD 41.45
+4%
FY Dec
2011
2012
Actual
Old
New
Cons
Old
New
Q1
0.56A
N/A
0.54A
N/A
N/A
Q2
0.67A
N/A
0.68A
N/A
N/A
Q3
0.74A
N/A
0.79A
N/A
Q4
0.78A
N/A
0.82E
N/A
Year
2.75A
N/A
2.83E
2.83E
P/E
15.1
Change y/y
Cons
2011
N/A
N/A
-4%
N/A
N/A
N/A
1%
N/A
N/A
N/A
N/A
7%
N/A
N/A
N/A
N/A
5%
N/A
N/A
3.04E
3.01E
3%
7%
14.6
2012
13.6


Uncertainty around Drug Reform
is likely to weigh on the shares
We are initiating coverage of Shoppers Drug Mart (SC.TO) with a 2-Equal Weight/2-Neutral
rating and $43 price target, which offers a potential total return of 4% from recent levels.
Our price target is supported by a 14x target multiple applied to our 2012 EPS forecast of
$3.04. Within the Consumer group, we currently prefer the drugstore stocks over the food
retailers, with Shoppers preferred over Jean Coutu. Despite the earnings drain from drug
reform, Shoppers has delivered on its promise of renewed earnings growth in 2H11 and is
on track to meet its 2011 guidance. Although we estimate 2012 EPS growth of 7% y/y, the
rate of EPS growth should improve through 2012 as drug reform drain eases and ongoing
share buybacks increase EPS growth toward what we expect will be the new sustainable
EPS growth rate of 10%. With lower capex spending and increasing free cash flow, further
dividend increases are expected. In the immediate term, we expect the uncertainty of
further provincial drug reform (i.e., British Columbia) and an expected private label appeal to
the Supreme Court of Canada will act as overhangs on the valuation. A lack of
extraordinary positive catalysts also keeps us on the sidelines for now.
Figure 118: Shoppers Drug Mart P/E Valuation Range
f2012E
f2013E
BarCap est
BarCap est
Comments
EPS range
Y/Y % chg
$3.00
6.0%
$3.04
7.3%
$3.10
9.6%
$3.25
7.0%
$3.33
9.6%
$3.40
11.9%
P/E Multiples
10.0x
11.0x
12.0x
13.0x
14.0x
14.5x
15.0x
16.0x
18.0x
19.0x
21.0x
$30
$33
$36
$39
$42
$44
$45
$48
$54
$57
$63
$30
$33
$36
$39
$43
$44
$46
$49
$55
$58
$64
$31
$34
$37
$40
$43
$45
$47
$50
$56
$59
$65
$33
$36
$39
$42
$46
$47
$49
$52
$59
$62
$68
$33
$37
$40
$43
$47
$48
$50
$53
$60
$63
$70
$34
$37
$41
$44
$48
$49
$51
$54
$61
$65
$71
<= WAG fwd P/E

<= SC's trough P/E
<= CVS fwd P/E
<= BarCap multiple
<= SC's LT avg Fwd P/E

<= SC's 5 Year Max P/E
25 January 2012
116
The unfavourable private label

generic ruling in Ontario has
transformed an EPS upside
opportunity into a potential
downside risk
Shoppers commands the largest

market cap (free float) and has
the highest liquidity within our
coverage universe
Despite more tepid earnings growth, Shoppers is trading at 13.7x forward P/E, which is 5%
above CVS Caremark and 17% above Walgreens P/E multiple. Shoppers is only modestly
cheaper than Jean Coutu at 14.3x, which is currently the most expensive stock in the drug
store space. There are limited indications that with a new CEO just coming on board, we
should expect a sudden step-up in earnings growth in 2012. The unfavourable private label
generic ruling in Ontario has transformed an EPS upside opportunity into a potential
downside risk depending upon whether Shoppers appeals the decision, or not, to the
Supreme Court of Canada. If this process ends up with private label generics still banned in
Ontario other provinces may opt to implement a ban as well using Ontarios case precedent
as their justification. We estimate the share price downside risk at $2-$2.50 per share, or
5%-7%.
Based on the retail sectors average PEG ratio range of 1.1x-1.5x, Shoppers current
valuation suggests the market is anticipating EPS growth of approximately 10%.
Shoppers EPS growth potential has been significantly reduced by drug reform. Gone are the
heady days of 15% EPS growth quarter after quarter which supported a forward P/E
multiple of more than 20x. The earnings drain of known drug reform changes will ease
materially in 2012 versus 2011 and continue to decline over the following two years but we
are challenged to see EPS growth in 2012 of more than 10% versus our forecast of 6%.
Once Shoppers is able to establish a consistent trend of earnings growth in the 10% area
we believe the market will pay up for that certainty/consistency toward the 15x P/E level.
In our view, attainment of this P/E level will be partly a function of Shoppers superior
liquidity versus most other Canadian retail sector stocks. We note that Shoppers
commands the largest market cap (free float) and has the highest liquidity within our
coverage universe.
For now, however, Shoppers still faces several meaningful earnings drain hurdles from the
remaining cuts in generic reimbursement rates, professional allowances, or temporary
transition fees that are scheduled over the next two-plus years. This will make it difficult to
achieve any sequential earnings growth consistency until 2013. By that time we are
somewhat concerned that investors will start to worry anew about the next leg of drug
reform which could create a valuation overhang.
Figure 119: Shoppers Drug Marts forward P/E and EPS growth
30.0x
50%
25.0x
40%
30%
20.0x
20%
15.0x
10%
10.0x
0%
Forward P/E
2011
2010
2009
2008
2007
2006
2005
-20%
2004
-10%
0.0x
2003
5.0x
earnings growth
25 January 2012
117
Corporate Profile
Shoppers Drug Mart is Canadas largest public drug retailer with an estimated 21%
prescription sales market share. The company is Canadas only national drugstore retailer
operating under the Shoppers Drug Mart banner, with the exception of the Pharmaprix
banner in Quebec, and has 1,238 stores and 12.5 million retail square feet. Shoppers Drug
Mart derives a greater proportion of its sales from the front of the store (52%) compared to
North American peers. This is partly due to its industry-leading cosmetics business and
prestige BeautyBOUTIQUES, which offer high-end cosmetics similar to the assortments
found in department stores. The company currently has 303 stores with BeautyBOUTIQUES
with a goal of 350 stores. (See the drugstore sector overview for more details about
Shoppers and the Associate dealer business model.)
Shoppers new CEO, Domenic Pilla, brings extensive wholesale pharmacy experience and
a can do attitude to Shoppers. Shoppers Drug Marts previous CEO Jurgen Schreiber left
the company in February 2011 after five years at the helm to become CEO of Edcon
Holdings, a leading retailer in South Africa. Mr. Pilla, Shoppers new CEO as of November
2011, was most recently president of McKesson Canada the Canadian division of
McKesson Corporation, a leading pharmacy distributor/provider. Given the top two
challenges/opportunities Shoppers faces over the next 3-5 years (government/industry
consensus building and driving industry consolidation) Mr. Pillas experience and credentials
seem well aligned. It will take time for Mr. Pilla to formalize his plans for Shoppers Drug
Mart but the opportunity path seems fairly clear; getting the job done is the real challenge.

Shoppers delivered on its promise of returning to EPS growth by the second half of 2011
despite the second phase of Ontario drug reform kicking in April 1, 2011. In our view, the
company has done an admirable job offsetting what is estimated to have been a $0.23 EPS
drain in 2011 from drug reform across the country. Unfortunately, unless it wins the
Ontario private label appeal, which we estimate could add as much as $0.15-$0.20 to EPS
on an annualized basis, and starts to achieve meaningful acquisition benefits from industry
consolidation, we are concerned that establishing consistent +10% EPS growth in 2012, or
2013, will be difficult to achieve.
Shoppers has an extensive array
of earnings growth initiatives
In the immediate term we expect new CEO Domenic Pilla to stick with Shoppers current
growth and drug reform offset plans. We believe that some of his immediate to longerterm strategic priorities are: 1) ensuring that Shoppers is the biggest beneficiary of industry
consolidation, 2) establishing a more cooperative, proactive dialogue with the provincial
governments to increase the likelihood that the pharmacy industry benefits from the next
round of healthcare changes, 3) exploring private sector exclusivity arrangements that
leverage Shoppers national store network. In the meantime, Shoppers has an extensive
array of earnings growth initiatives, which we have outlined below, that has allowed the
company to re-establish earnings growth despite the onerous drain of drug reform.
1. Square footage growth of 4% to 5% remains a solid assist to sales growth. Shoppers
reduced its square footage growth plans immediately following the confirmation of drug
reform plans in Ontario providing square footage growth guidance for 2011 of 4.5% versus
8%-10% in previous years to conserve free cash flow for other needs. Shoppers is on track
to open 50-55 new stores this year and expects to open approximately the same number of
stores next year.
25 January 2012
118
Figure 120: Shoppers Drug Mart Store Population Density

Shoppers Drug Mart
ATL
QUE
ONT
WEST
CANADA
Store count
110
174
612
345
1241
000's of people / store (k's)

People / sq. ft
22.4
2.2
45.4
4.5
21.6
2.1
30.5
3.0
27.5
2.7
Population
2464
7906
13228
10529
34126
Square footage (mlns)

Average store size
1108
10.1
1753
10.1
6164
10.1
3475
10.1
12500
10.1
Source: Statistics Canada, Company reports, Barclays Capital estimates.
2. Small store renovation program provides faster payback on capex. Shoppers continues
to roll out its renovation program for smaller stores (7-8k sq. ft.) adding a greater selection
of convenience food and beauty products to enhance sales productivity and margins. Sales
in original prototype stores increased on average 17-22%. Shoppers is on track to complete
40 of these renovations this year and expects to complete a total of 150 over the next 2-3
years. Each conversion requires an investment of approximately $300k/store, and should
generate a faster payback on capex than what the company achieves on bigger projects.
3. Beauty Boutique expansion continues toward 350 locations. Shoppers industryleading prestige cosmetics offering still has lots of runway from its current 303 locations.
Shoppers continues to gain share in the category, up another 40bps in 3Q11. The Murale
stores, although not a growth focus, have served one of their primary purposes, which, in
our view, was to convince more of the higher-end prestige brands to become part of the
beauty boutique network.
4. Cost reduction efforts Project Infinity. Over the past two years Shoppers has
completed productivity and efficiency initiatives under the Project Infinity program that we
estimate have reduced operating costs by as much as $100mn. Project Infinity involved a
complete review of procurement, supply chain and in-store operations for the front-end and
Rx portions of the business, which generated sustainable reductions that are now largely
reflected in the companys cost run rate. These savings were a meaningful contributor to
offsetting the negative profit impact of drug reform. While we expect that Shoppers new
CEO will continue to press the organization for cost reductions Project Infinitys
contributions are now in place.
5. Shoppers Optimum program is one of the largest loyalty programs in Canada.
Launched in 2000, Shoppers Optimum loyalty program now has more than 10 million
active members. The Optimum program is an important part of the companys overall
value proposition and a key driver of sales growth. Optimum cardholders frequent the
stores more often and have an average basket size that is over 60% greater than noncardholders. Typically, a member earns 10 Optimum points for each dollar spent in-store.
Members can redeem points for dollar value rewards toward store purchases according to a
rewards grid (i.e., $10 for 8,000 points; up to $170 for 95,000 points). Shoppers also
implements promotional campaigns that offer bonus points (i.e., 20x bonus points). To
further leverage the success of the program, Shoppers introduced the Optimum MasterCard
in 2009 which enables cardholders to earn points on all purchases made with the
MasterCard (not just in Shoppers Drug Mart stores). On January 17, 2012, Shoppers and
Royal Bank of Canada announced a co-branded RBC Shoppers Optimum banking account
and debit card. Similar to the Optimum MasterCard, the new bank account allows
members to earn Optimum points at Shoppers and other retailers on purchases made with
the new debit card.
25 January 2012
119
Figure 121: Shoppers operates one of the largest loyalty programs in Canada
11
10.5
9.9
Active Members (mln)
10
9.3
9
8.2
8
7.5
7.7
7
6
5
2005
2006
2007
2008
2009
2010
6. Front-end private label penetration gains continue to offer margin upside. Shoppers
continues to make significant progress increasing the penetration of its more profitable
private label products in front-end categories. Since 2000 Shoppers has almost doubled its
private label penetration from 10% to 19.3% (3Q11), with the Q3 rate up 26bps versus
3Q10 last year. Management expects private label penetration to reach 25% over the next
three to five years. We estimate that each 50bp increase in front-end private label
penetration can increase Shoppers consolidated gross margin by 10bps.
7. Sanis private label generic drug sales nearing 50% penetration level. Shoppers
launched its private label generic program in 2010 under the Sanis label. Outside of
Ontario, Sanis has achieved a penetration rate of 46% of generic drugs dispensed with a
goal to reach 70% by the end of next year. The unfavourable Ontario appeals court ruling
seems to end Shoppers ability to expand the current program into Ontario. It appears that
Shoppers will have to consider becoming a generic manufacturer to qualify for formulary
listing in Ontario. This seems like a possibility but not a preferred route unless the other
provinces also move to ban, or outlaw, private label generics.
8. Consolidation remains a major opportunity for improved growth. Shoppers new CEO
sees consolidation as a must and expects the number of opportunities to increase between
now and the next phase of drug reform, which for Ontario is April 2012. He sees
consolidation as an important driver to future growth and will be stepping up the
organizations efforts in this area. He has said the organization can do a better job of making
the platform more receptive to independents that join the organization.
A major step toward demonstrating that the organization can be more receptive to
independent entrepreneurs appears to be some concessions by Shoppers regarding
shared earnings with its current Associate dealers. After some strained relations and an
attempted class action lawsuit by a few dealers, Shoppers appears to have responded by
increasing the Associates earnings as noted in the 3Q11 press release as an increased
expense in the quarter. As Associates are front-line ambassadors in Shoppers efforts to
attract new independents, we see this as a prudent and necessary move.
9. Shoppers has begun to actively buy back shares to augment EPS growth, repurchasing
2.7mn shares in 3Q11 out of an approved buyback program of 8.7mn shares. With a cut
back in new store growth capex, Shoppers has been able to increase the dividend and
maintain a clean balance sheet by limiting funds use to available free cash flow. In 2012
25 January 2012
120
Shoppers has indicated that total capex spending will remain in the $350mn area with a
considerably larger portion committed to acquisition activity. With a net debt/EBITDA ratio
of only 1.0x, the company has considerable leverage capacity if it chooses to use it. If
Shoppers utilizes all of the 8.7mn share buyback capacity, we estimate it would increase
annualized earnings by 0.5%. We are assuming a buyback in 2011 of 5mn shares and
8.7mn in 2012 and 2013 contributing 3% to EPS growth per year.
Figure 122: Shoppers Drug Mart Free Cash Flow Summary ($ mn)
Fiscal Year (Dec)
2006
2007
Operating Cash Flow
$569
$676
Change in W/C
-$27
-$138
$542
$539
Capex
-$293
Free Cash Flow
$249
Dividends
Acquisitions
Net Change in Debt
Remaining cash flow
2008
2009
2010
2011E
2012E
2013E
$772
$835
$894
$910
$963
$1,028
-$325
-$178
-$82
-$66
-$56
-$64
$447
$657
$812
$844
$907
$964
-$396
-$516
-$443
-$415
-$343
-$260
-$250
$143
-$69
$214
$397
$501
$647
$714
-$99
-$130
-$175
-$187
-$194
-$211
-$220
-$232
-$41
$14
$7
$5
$1
-$191
-$361
-$414
-$94
-$122
-$238
-$98
$1
-$18
-$100
-$100
-$23
$41
$143
$220
-$133
-$96
$0
$150
-$8
-$54
-$331
$154
$72
-$15
-$34
$118
Free Cash Flow per share
-$0.04
-$0.25
-$1.52
$0.71
$0.33
-$0.07
-$0.16
$0.59
Free Cash Flow Yield
-0.1%
-0.5%
-3.0%
1.6%
0.9%
-0.2%
-0.4%
1.4%
16.9%
16.1%
14.2%
14.1%
14.4%
15.1%
ROE
16.5%
16.9%
Figure 123: Shoppers Drug Mart Financial Performance Summary
GAAP
f2009A
IFRS
f2010A
IFRS
f2011E
IFRS
f2012E
IFRS
f2013E
$9,986
$10,193
$10,403
$10,688
$11,130
6.0%
2.1%
2.1%
2.7%
4.1%
9.9%
0.0%
4.5%
4.0%
3.9%
Front End Same Store Sales Growth (%)
4.0%
2.5%
2.6%
1.2%
3.0%
Prescription Same Store Sales Growth (%)
5.7%
1.7%
0.4%
1.1%
2.9%
3.0%
3.7%
3.5%
3.5%
38.2%
38.6%
38.8%
39.0%
Prescription Same Store Count Growth (%)

Gross Margin
37.5%
26.1%
26.6%
27.0%
27.0%
27.0%
EBITDA Margin
11.5%
11.6%
11.6%
11.8%
12.0%
43 bps
106 bps
45 bps
18 bps
20 bps
SG&A Variance
36 bps
101 bps
45 bps
1 bps
-3 bps
EBITDA Variance
8 bps
16 bps
0 bps
17 bps
23 bps
1.3x
1.0x
0.9x
0.9x
0.8x
4.4%
0.0%
3.3%
2.4%
2.2%
$152
$418
$490
$547
$614
Return on Equity
16.1%
14.6%
14.1%
14.4%
15.1%
12.4%
12.1%
12.1%
12.5%
12.8%

Note: Growth comparisons between 2011/2010 are presented in GAAP, raw figures/margins are presented in IFRS
25 January 2012
121
Risks
25 January 2012
The unfavourable appeal ruling in Ontario could become precedent for other provinces
to move to banning private label generics. We expect Shoppers to make an appeals
request to the Supreme Court of Canada which it must submit within 60 days of the
Ontario appeals court ruling. If it does not proceed or loses the appeal, other provinces
may consider banning private label generics. We estimate the downside could be as
much as $2.80/share, or 3% (14x EPS of $0.20).
More government policy changes that reduce pharmacy profitability. An aging baby
boomer population is expected to significantly increase the rate of health care cost
inflation over the next ten years which is likely to dramatically outpace the governments
tax revenue growth which is the primary funding source. This disconnect is expected to
result in continued significant reform of the Canadian Health care delivery system.
While we see the opportunity for some positive outcomes (i.e., expanded professional
services by pharmacists) it would be naive to assume that government wont look at the
prescription drug channel again as a source of cost reduction.
Further economic weakness that leads to intensified price competition. About 50% of
Shoppers Drug Marts sales are done in the front end of the store which involves more
discretionary purchases. Given our expectations that consumers will remain tight fisted
through 2012 there is some risk that Shoppers front end sales growth could be slowed
and margins put at risk due to increased promotion intensity.
A favourable Supreme Court ruling could materially increase Shoppers earnings outlook
and its valuation.
122
COMPANY SNAPSHOT
Shoppers Drug Mart

Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (reported) ($)
Diluted shares (m)
2010A
10,193
1,184
907
847
598
2.75
218
0.90
2011E
10,403
1,208
911
847
613
2.83
217
1.00
2012E
10,688
1,259
932
872
637
3.04
210
1.05
2013E
11,130
1,337
978
917
669
3.33
201
1.16
CAGR
3.0%
4.1%
2.5%
2.7%
3.8%
6.6%
-2.6%
8.7%
11.6
8.9
8.3
5.9
12.1
8.5
14.6
11.6
8.8
8.1
5.9
12.1
8.5
14.1
11.8
8.7
8.2
6.0
12.5
8.7
14.4
12.0
8.8
8.2
6.0
12.8
9.1
15.1
Average
11.8
8.8
8.2
5.9
12.4
8.7
14.5

1,690
272
64
Total assets
7,044
1,280
Total liabilities
1,528
Net debt/(funds)
1,216
4,093
(82)
Operating cash flow
832
Capital expenditure
415
Free cash flow
405
1,777
274
132
7,193
936
1,624
1,054
4,361
(66)
851
343
807
1,810
274
98
7,282
1,186
1,654
1,088
4,417
(56)
907
260
547

EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROIC
ROA
ROE
CAGR
1,801
2.1%
274
0.2%
66
0.9%
7,349
1.4%
1,186
-2.5%
1,696
3.5%
1,120
-2.7%
4,440
2.8%
(64)
NA
964
5.0%
250 -15.5%
614 14.8%
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
2-EQUAL WEIGHT
2-NEUTRAL
$41.45
$43.00
SC
Investment case
Shoppers Drug Mart is Canada's only national
drugstore chain with an estimated 21% share of Rx
sales. Shoppers has done a good job at offseting the
EPS drain from drug reforms; however, it will be hardpressed to get back to +10% EPS growth in 2012 or
2013. Our price target is supported by a 14.5x P/E
multiple on our 2012E EPS of $3.04.
Upside case
$48.00
Our Upside case reflects a favourable decision in
Shoppers' private label case with the Ontario court of
appeal, which we see annualized EPS upside of up to
$0.20. Applying a 15x P/E multiple to a potential
2012E EPS of $3.19 would generate an Upside case
of $48.
Downside case
$39.00
Having received an initial favourable ruling,
Shoppers' premium valuation could be at risk if it
loses the Ontario court of appeal review of its private
label case. Applying a 13x P/E multiple on our 2012E
EPS of $3.04 derives a $39 Downside case.
P/E (x)
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
15.1
8.6
4.5
0.9
2.2
2.2
23.8
1.1
14.7
8.3
9.0
0.9
2.1
2.4
17.7
0.8
13.6
7.8
6.3
0.8
2.0
2.5
21.2
0.9
12.4
7.1
7.4
0.7
1.9
2.8
21.1
0.9
Average
14.0
7.9
6.8
0.8
2.0
2.5
20.9
0.9
$48
$43
(15.8%)
(11.1%)
$39
(-0.39%)
(3.7%)
(-9.65%)
(-5.91%)
58
48
38
Downside
Case
28
Upside
Case
Price
Target
18
1/27/2011
1/20/2012
Source: FactSet

Front-end same store sales (%
RX same store sales (%)
Rx as % of sales
Capex as % of sales
Same Store Sales

2.5
1.7
47.8
4.1
2.6
0.4
46.8
3.3
1.2
1.1
46.3
2.4
3.0
2.9
46.3
2.2
2.3
1.5
46.8
3.0
Front End
4.0%
Rx
3.0%
2.0%
1.0%
0.0%
2010A
25 January 2012
2011E
2012E
2013E
Note: FY end Dec.
123
25 January 2012
124
25 January 2012
125
JEAN COUTU GROUP.

PJC/A CN / PJC-A.TO
Jean Coutu Group(PJC-A.TO): Quarterly and Annual EPS (CAD)

2011
Stock Rating
2-EQUAL WEIGHT
Sector View
2-NEUTRAL
Price Target
CAD 14.00
Price (20-Jan-2012)
CAD 13.27
+6%
FY Feb
2012
2013
Change y/y
Actual
Old
New
Cons
Old
New
Cons
2012
2013
Q1
0.19A
N/A
0.22A
N/A
N/A
N/A
N/A
16%
N/A
Q2
0.18A
N/A
0.20A
N/A
N/A
N/A
N/A
11%
N/A
Q3
0.21A
N/A
0.23A
N/A
N/A
N/A
N/A
10%
N/A
Q4
0.20A
N/A
0.23E
N/A
N/A
N/A
N/A
15%
N/A
Year
0.78A
N/A
0.88E
0.87E
N/A
0.98E
0.94E
13%
11%
P/E
17.0
15.1
13.5


Jean Coutu stock is trading at
fair value, in our view
We are initiating coverage of Jean Coutu (PJC-A.TO) with a 2-Equal Weight/2-Neutral

rating and $14 price target, which offers a potential total return of 6% from recent levels.
Our $14 price target reflects a target P/E multiple of 14.5x on our fiscal 2013 (February) EPS
of $0.98. Jean Coutus share price appreciated 38% in 2011 versus -11% for the TSX index
as investors were attracted to its relatively modest exposure to drug reform (franchise
model and Pro Doc); strong free cash flow, which is being used to buy back stock; and
continued commitment to strong new store growth (+4% to 5%), which has helped offset
the drain of drug reform through above-market volume growth (+7% in F3Q12).
Unfortunately, as a result of this sector-leading price appreciation, we view the shares as
being fairly valued.
Figure 124: Jean Coutu P/E Valuation Range
f2013
BarCap Est.
EPS range
growth vs PY
P/E Multiples
9.0x
10.0x
11.0x
12.0x
13.0x
14.0x
14.5x
15.0x
16.0x
17.0x
18.0x
19.0x
f2014
BarCap Est.
$0.90 $0.98 $1.10

-7.9% -0.2% 12.6%
$8
$9
$10
$11
$12
$13
$13
$14
$14
$15
$16
$17
$9
$10
$11
$12
$13
$14
$14
$15
$16
$17
$18
$19
$10
$11
$12
$13
$14
$15
$16
$17
$18
$19
$20
$21
$1.00
2.6%
$9
$10
$11
$12
$13
$14
$15
$15
$16
$17
$18
$19
Comments
$1.09 $1.20
11.6% 23.1%
$10
$11
$12
$13
$14
$15
$16
$16
$17
$19
$20
$21
$11
$12
$13
$14
$16
$17
$17
$18
$19
$20
$22
$23
<= Jean Coutu trough P/E multiple
<= Barclays Capital Target Multiple

<= Jean Coutu all-time avg Fwd P/E
<= Shoppers all-time avg Fwd P/E
At 14.3x forward P/E, Jean Coutu currently commands the highest valuation in the North
American drugstore sector, although we note that PJC is trading versus its historical
average of 15.8x. We believe this discount is warranted as we see some potential short- to
medium-term headwinds that could limit further valuation upside. In the near term, we
25 January 2012
126
expect a weak flu season to negatively impact OTC and pharmacy sales, which also reduces
traffic in other areas of the front store. Further, in the absence of any major drug patent
expiries in 2012 and 2013, we believe Pro Docs contribution to Jean Coutus margin growth
will become more muted as the savings from mandated lower professional allowances is
unlikely to be enough to offset the sales and earnings drain of lower generic drug prices.
Figure 125: Jean Coutu Historical Forward P/E
35x
31.9x
30x
25.5x
23.3x
25x
20.8x
20x
15x
14.7x
13.7x
10x
10.7x
8.0x
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
5x
Note Normalized Average excludes stub year estimates from 2007-2008

Source: FactSet, Barclays Capital estimates.
On an EV/EBITDA basis, PJC also commands the highest multiple at 9.8x FY2 EBITDA.
Excluding the value of Rite Aid, we estimate that PJC Canada is currently trading at an
EV/EBITDA multiple of 8.6x, which is still at a premium to Shoppers and CVS at 7.9x and
7.3x, respectively. Our $14 price target would imply a 9.0x EV/EBITDA multiple for PJC
Canada on our F2013 EBITDA forecast of $324mn.
Figure 126: North American Drug Stores Comparable Valuations EV/EBITDA
Price
EV
Ticker
20/01/2012
($M)
PY
FY1
FY2
PY
FY1
FY2
PY-FY1
FY1-FY2
PY-FY2
SC
$41.45
$10,013
$1,184
$1,212
$1,269
8.5x
8.3x
7.9x
2%
5%
4%
Jean Coutu
PJC.A
$13.27
$3,124
$291
$307
$318
10.7x
10.2x
9.8x
5%
4%
5%
Walgreens
WAG
$33.48
$30,660
$5,131
$4,972
$5,258
6.0x
6.2x
5.8x
-3%
6%
1%
CVS
CVS
$42.77
$64,522
$7,634
$7,945
$8,701
8.5x
8.1x
7.4x
4%
10%
7%
Rite Aid
RAD
$1.38
$7,403
$644
$903
$913
11.5x
8.2x
8.1x
40%
1%
19%
Shoppers
Fiscal EBITDA ($M)
EV/EBITDA
EBITDA Growth
Average
$23,144
9.0x
8.2x
7.8x
10%
5%
7%
Average (ex. RAD)

Source: FactSet.
$27,080
8.4x
8.2x
7.7x
2%
6%
4%
Corporate Profile
The Jean Coutu Group is Quebecs leading drugstore retailer and the fourth-largest player in
Canada. The company operates 394 stores predominantly in Quebec. Jean Coutu is a
franchisor and distributor of prescription drugs and front-end merchandise to its network of
Jean Coutu franchisees. It also generates rental income where the company either owns the
site, or holds the lease. The franchisees are responsible for store fixtures, inventory and
day-to-day operation of the store for which they get to keep the profits after paying Jean
Coutu for product, shipment, rent where applicable, royalties and services. In Quebec, the
25 January 2012
127
revenue generated by the sale of a prescription drug must be received by a pharmacist; this
includes payments such as generic rebates.
Rite Aid stake provides potential windfall upside if it ever materializes; for now PJC has
become a seller. For the first time since selling the Eckerd stores to Rite Aid in 2007 Jean
Coutu reduced its stake in Rite Aid by selling 17.6mn shares for total consideration of
$22mn. As of the end of F2Q12, Jean Coutu held a 26.1% equity interest in Rite Aid, which
is down from 28.3% at the beginning of the year. Jean Coutu has written off its investment
in Rite Aid.
Jean Coutu has two classes of shares outstanding: 1) Class A Subordinated Voting
Shares which are entitled to one vote each, and 2) Class B shares which are each entitled
to ten votes. Mr. Jean Coutu, founder, maintains 100% interest of the Class B shares,
which represents over 90% of the companys total voting rights.
Growth Strategy & Outlook: keeping it simple

Since exiting the U.S. drugstore sector through the sale of its Eckerd stores to Rite Aid in
June 2007 for $2.36bn in cash and 250mn RAD shares, Jean Coutu has embraced the
simpler life of growing its business in Canada. The earnings growth strategy has been built
on a few basic strategies: 1) increased square footage growth, 2) Pro Doc generic drug
vertical integration, 3) selective share buybacks, and 4) dividend increases. This simple
formula has contributed to a share price gain of 216% since the lows in November 2008,
with most of this gain occurring in 2011(+38% versus a TSX decline of 11% ).
Smaller average store size continues to be a growth opportunity. Jean Coutus average
store size as of year-end F2010 was approximately 7.3k sq ft vs. Shoppers Drug Mart at
10.1k sq ft. Although the pace of square footage growth has slowed following the recent
drug reforms in Quebec, PJC has continued to pursue square footage growth (4%-4.5% per
year versus an initial 8%-9%). This in part is achieved through upgrading and expanding its
materially smaller stores compared to its competitors. The sale of the Brooks Eckerd stores
to Rite Aid has also resulted in a much improved balance sheet for PJC, which put the
company in a good position to invest in its store network.
Acquisition of Pro Doc enabled PJC to have a greater participation in growing generics
penetration. In addition to its franchise/wholesale business, Jean Coutu also has a generic
manufacturing/distribution company called Pro Doc which it acquired at the end of 2007,
immediately following the drug reform in 2006. Pro Doc facilitates the approval, packaging
and sale of generic molecules predominantly on behalf of third-party generic
manufacturers. Since being acquired by Jean Coutu, the majority of Pro Docs customers
are Jean Coutu franchisees. As a generic drug manufacturer/supplier, Pro Doc has helped
PJC partially mitigate the negative impacts from the Quebec drug reforms. More
specifically, the mandated reductions in professional allowances results in some cost
savings for Pro Doc.
Pro Docs growth prospects look more limited post F2012. The Pro Doc acquisition was a
home run for Jean Coutu. Pro Doc has been a major contributor to top-line and margin
growth over the past two years. With Pro Docs sequential revenues having peaked a year
ago (F3Q11) it appears that the year-over-year PJC franchise network penetration gains and
molecule expansion do not have enough upside to offset the generic price drain. This may
limit earnings growth to the contribution of professional allowance cuts, which in Quebec
will have been fully deployed by spring 2013.
25 January 2012
128
Figure 127: Quebec drug reform phase-in schedule

2009
2010
2011
2012
2013
2014
50%
37.5%
37.5%
5.0%
6.0%
30%
25%
25%
6.3%
6.5%
16.5%
15%
Quebec
wholesale markup on generics
Dispensing fees
$7.89
$7.89
Professional Allowances
20%
20%
private label generics
no restrictions
Source: Quebec government filings
When fully deployed, we expect the mandated professional allowance cuts to result in
$32mn in savings for Pro Doc. However, this will largely be offset by the loss in gross profit
due to lower generic selling prices.
Figure 128: Estimated drug reform impact on Pro Doc ($M)
F2011E F2012E F2013E F2014E
Cumulative
OIBA Impact
Lost Gross Profit due to lower generic drug selling price
Reduced professional allowances
Total
-$3.7
$2.1
-$1.7
-$14.9
$10.2
-$4.7
-$13.6
$13.9
$0.2
-$7.8
$6.0
-$1.8
-$40.0
$32.1
-$7.9
Net Income Impact

Lost Gross Profit due to lower generic drug selling price
Reduced professional allowances
Total
-$2.6
$1.4
-$1.2
-$10.7
$7.3
-$3.4
-$9.8
$10.0
$0.2
-$5.6
$4.3
-$1.3
-$28.7
$23.1
-$5.6
-$0.01
-$0.02
$0.00
-$0.01
-$0.03
EPS Impact - Net

Specific details regarding Pro Docs penetration rate are limited; however, the most recent
data point provided by management (in 2Q11) indicated that Pro Doc offered over 300
molecules or roughly 80% of generics available in the market. Management has also
indicated that Pro Doc will not carry every molecule in the market. As such, we do not see
material growth remaining in Pro Docs offering (beyond new drugs coming off patent). As
shown in Figure 129, Pro Docs revenue growth has slowed over the past four quarters.
While the price reductions were largely driven by drug reforms, we would have expected
this to be partly mitigated by volume growth (total script growth in 3Q12 was up 7%, which
would imply even stronger growth for generic drugs).
25 January 2012
129
Figure 129: Pro Doc Gross Sales ($ mn)

$45
$40
$37.4 $35.9
$33.9
$35
$26.8
$30
$25
$20
70%
$42.0
$28.9
$30.9
$37.1
60%
$33.6
50%
40%
$22.7
30%
20%
$19.2
$15
10%
$10
0%
-10%
$5
-20%
$0
Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12
Pro Doc Sales
Y/Y Growth
Sharing the pain of drug reforms. In response to the 2006 drug reform and subsequent
recession, PJC has materially lowered its royalty rate. Management has indicated that the
company has temporarily lowered royalty rates on new or expanded stores as a form of
support to the franchisee given that they had to invest in the leasehold improvement,
increased inventory and are paying more on rent (in the case of an expanded store).
Figure 130: PJC royalty rates have fallen dramatically
4.5%
Royalty Rate
4.0%
3.9%
3.5%
3.5%
3.6%
3.6%
3.4%
3.5%
3.2%
3.0%
3.0%
2.5%
2.0%
f2005
f2006
f2007
f2008
f2009
f2010
f2011
Q2 YTD
Reducing its holding of RAD

shares has increased free cash
flow
which can be used to buyback shares
25 January 2012
Increasing returns to shareholders through share buybacks. PJC continues to generate

strong free cash flow. In addition, the company has recently reduced its holdings of Rite Aid
(26.1%, down from 28.3%) which generated additional liquidity. In 2Q12, PJC sold 17.6mn
RAD shares for total consideration of $22mn.
PJCs solid financial position and strong free cash flow generation has enabled the firm to
actively repurchase shares, which has generated incremental EPS growth. PJCs current
NCIB permits the company to repurchase up to 10.4mn Class A shares (10% of
outstanding), expiring May 3, 2012. Since initiation of the program, PJC has bought back
8.7mn shares. Management has indicated that it intends to fully execute on the NCIB. We
note that the company has stepped up its buyback activity as it had only repurchased
130
6.8mn of the 11.1mn shares permitted under its previous NCIB which expired on May 3,
2011.
Figure 131: Jean Coutu Free Cash Flow Summary ($ mn)
Fiscal Year (Feb)
2009
2010
2011
2012E
2013E
2014E
Operating Cash Flow
$175
$215
$221
$288
$241
$256
Change in W/C
-$31
-$8
-$8
-$7
-$9
-$9
$144
$207
$213
$281
$232
$248
Capex
-$49
-$47
-$44
-$45
-$45
-$45
Free Cash Flow
$95
$160
$169
$236
$187
$203
Dividends
-$39
-$43
-$51
-$61
-$63
-$66
-$91
$3
-$61
-$124
-$141
-$152
$0
-$7
-$5
-$5
-$20
-$20
Net Change in Debt
$103
-$75
-$15
-$56
-$61
-$63
Remaining cash flow
$68
$38
$37
-$10
-$98
-$98
$0.28
$0.16
$0.16
-$0.04
-$0.46
-$0.48
Acquisitions

3.5%
1.7%
1.7%
-0.4%
-3.4%
-3.6%
ROE (ex-RAD)
12.4%
33.9%
32.8%
32.1%
32.8%
35.1%
Risks
25 January 2012
Due to Quebecs Lowest Price in Canada statute on drug prices, further government
policy changes affecting pharmacy profitability from any province in Canada will
negatively impact the majority of Jean Coutus pharmacies.
Further economic weakness would lead to intensified price promotion.
An expected increase in Quebecs Rx dispensing fees could be supportive of the share

price.
131
Figure 132: Jean Coutu Financial Performance Summary

GAAP
f2009
GAAP
2010A
IFRS
2011A
IFRS
2012E
IFRS
2013E
Front End Same Store Sales Growth (%)
Prescription Same Store Sales Growth (%)
$2,377
7.5%
3.8%
1.2%
5.4%
$2,556
7.5%
6.3%
4.5%
2.8%
5.7%
$2,613
2.2%
7.3%
1.6%
0.3%
1.9%
$2,671
2.2%
5.0%
1.8%
2.0%
1.6%
$2,749
2.9%
4.5%
2.5%
1.9%
2.9%
Gross Margin
EBITDA Margin
18.2%
8.4%
9.8%
19.0%
8.5%
10.5%
19.9%
8.8%
11.1%
20.3%
8.8%
11.5%
20.7%
8.9%
11.8%

SG&A Variance
EBITDA Variance
-16 bps
19 bps
-35 bps
74 bps
2 bps
72 bps
97 bps
34 bps
63 bps
32 bps
-4 bps
36 bps
45 bps
14 bps
31 bps

Return on Equity (ex RAD)
Return on Invested Capital (ex-RAD)
1.2x
2.1%
$95
12.4%
10.0%
0.8x
1.8%
$160
33.9%
23.5%
0.7x
1.5%
$160
31.3%
23.2%
0.7x
1.7%
$172
32.1%
24.2%
0.7x
1.6%
$189
32.8%
24.1%

Note: Growth comparisons between 2011/2010 are presented in GAAP, raw figures/margins are presented in IFRS
25 January 2012
132
COMPANY SNAPSHOT
Jean Coutu Group

Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (reported) ($)
Diluted shares (m)
2011A
2,613
289
261
259
181
0.77
234
0.23
2012E
2,675
307
277
275
219
0.88
224
0.25
2013E
2,753
324
292
290
209
0.98
214
0.28
2014E
2,891
345
310
308
221
1.09
203
0.31
CAGR
3.4%
6.1%
5.9%
5.9%
7.0%
12.1%
-4.5%
11.4%
11.0
10.0
9.9
6.9
17.4
31.3
11.5
10.3
10.3
8.2
20.6
35.7
11.8
10.6
10.5
7.6
18.9
32.8
11.9
10.7
10.6
7.7
19.5
35.1
Average
11.6
10.4
10.3
7.6
19.1
33.7

362
Total assets
1,060
201
Total liabilities
461
Net debt/(funds)
201
598
(8)
Operating cash flow
214
Capital expenditure
44
Free cash flow
118
386
1,094
199
456
199
639
(5)
283
45
182
419
1,122
232
484
232
638
(7)
234
45
129
449
1,156
264
511
264
645
(9)
247
45
139
CAGR
7.4%
2.9%
9.5%
3.5%
9.5%
2.5%
NA
5.0%
0.8%
5.5%
15.1
10.4
6.1
1.1
4.7
1.9
23.8
0.7
13.6
9.5
4.5
1.0
4.5
2.1
26.6
0.7
12.2
8.6
5.1
0.9
4.2
2.3
29.1
0.8
Average
14.5
10.0
4.9
1.1
4.6
2.0
26.2
0.7

EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROA
ROE

P/E (x)
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
17.2
11.5
3.8
1.2
5.2
1.7
25.2
0.7
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
2-EQUAL WEIGHT
2-NEUTRAL
$13.27
$14.00
PJC.A
Investment case
PJC has relatively modest exposure to drug reform;
strong FCF, which is being used to buy back stock;
and commitment to new store growth, which has
helped offset the drain of drug reform through
strong script growth. However, as a result of sector
leading price appreciation, we view PJC as fully
valued at 14.5x P/E.
Upside case
$15.00
Our Upside case reflects increased sales and
profitability at Pro Doc driven by higher loyalty rate
by franchisees. In this scenario, we estimate
potential 2013E EPS of $1.03. Applying a 15x P/E
would generate an Upside share price of $15.
Downside case
$12.00
Increasing economic weakness could lead to
intensified price promotion. In this scenario, we
expect lower wholesale sales of front-end
merchandise and lower royalty rates to support
franchisees. Our downside case is based on 12x
potential 2013E EPS of $0.89.
19
$12
(-9.57%)
(-8.46%)
14
9
Downside
Case
$14
(6.7%)
(5.5%)
$15
(13.0%)
(14.4%)
Upside
Case
Price
Target

Front-end SSS (%)
Rx SSS (%)
RX as a % of sales
Capex as % of sales
1/27/2011
0.3
1.9
63.0
1.7
2.0
1.6
63.1
1.7
1.9
2.9
63.4
1.6
2.6
3.9
63.6
1.6
1.7
2.5
63.3
1.6
1/20/2012
Source: FactSet
Same Store Sales

Front-End
5.0%
Rx
4.0%
3.0%
2.0%
1.0%
0.0%
2011A
25 January 2012
2012E
2013E
2014E
Note: FY end Feb.
133
DISCRETIONARY RETAILERS
25 January 2012
134
CANADIAN TIRE CORP.

CTC/A CN / CTC-A.TO
Canadian Tire Corp., Ltd.(CTC-A.TO): Quarterly and Annual EPS (CAD)

2010
Stock Rating
1-OVERWEIGHT
Sector View
2-NEUTRAL
Price Target
CAD 74.00
Price (20-Jan-2012)
CAD 63.70
+16%
FY Dec
2011
2012
Change y/y
Actual
Old
New
Cons
Old
New
Cons
Q1
0.63A
N/A
0.71A
N/A
N/A
N/A
N/A
13%
N/A
Q2
1.50A
N/A
1.33A
N/A
N/A
N/A
N/A
-11%
N/A
Q3
1.35A
N/A
1.42A
N/A
N/A
N/A
N/A
5%
N/A
Q4
1.41A
N/A
1.78E
N/A
N/A
N/A
N/A
26%
N/A
Year
4.89A
N/A
5.24E
5.47E
N/A
6.14E
6.17E
7%
17%
P/E
13.0
12.2
2011
2012
10.4

FactSet
Recommendation and Valuation

We believe the risk/reward at
10x P/E is attractively weighted
We are initiating coverage of Canadian Tire (CTC) with a 1-Overweight/2-Neutral rating

and $74 price target, offering a total potential return of 18% from recent levels. Despite
our cautious macro outlook and bias toward defensives, we believe Canadian Tires
attractive valuation offers investors an attractive risk/reward play on the eventual turn in
consumer discretionary spending. Canadian Tire is the least expensive stock in our
coverage trading at 10x forward P/E, which is at 23% discount to its long-term average of
13x. We are applying a conservative target multiple of 12x on our F2013 EPS estimate to
reflect the earnings uncertainty of the recent consumer spending pullback which is
expected to constrain sales growth. We have reflected the potential drain of unseasonably
warm/dry winter weather on CTCs seasonal sales/margins at all three retail banners in our
below consensus 4Q11 forecast and expect consensus to drop as we get closer to the
quarterly release. While we acknowledge the immediate-term downside risk of a Q4
earnings miss and the patience required while waiting for an improved consumer spending
outlook (2H12) we believe the risk/reward at 10x P/E is attractively weighted.
Figure 133: Canadian Tire Forward P/E Valuation
YE Dec. 31
2012
BarCap est
$6.06 $6.14 $6.21

EPS range
Growth vs PY 15.6% 17.1% 18.4%
P/E Multiples:
8.0x
$48
$49
$50
9.0x
$55
$55
$56
10.0x
$61
$61
$62
11.0x
$67
$68
$68
$73
$75
12.0x
$74
13.0x
$79
$80
$81
14.0x
$85
$86
$87
15.0x
$91
$92
$93
16.0x
$97
$98
$99
17.0x
$103 $104 $106
2013
BarCap est
$6.73
9.6%
$54
$61
$67
$74
$81
$88
$94
$101
$108
$114
Comments
$6.81 $6.88
10.9% 12.1%
$54
$61
$68
$75
$82
$89
$95
$102
$109
$116
$55
$62
$69
$76
$83
$89
$96
$103
$110
$117
<= Trough multiple

<= Current multiple
<= BarCap target multiple
<= Long-term Avg P/E
<= Peak multiple
25 January 2012
135
Figure 134: Canadian Tire (CTC-A.TO) Forward P/E Multiple Trend

18x
17x
Max 16.7x
16x
15x
14x
Avg 12.7x
13x
12x
11x
10x
9x
8x
2005
Min 8.3x
2006
2007
2008
2009
2010
2011
2012
Canadian Tires share price has typically moved in lockstep with the U.S. department
store stocks. As shown in Figures 135 and 136, Canadian Tires share price and valuation
have exhibited similar trading patterns over an extended period. Since 2005, Canadian
Tires forward P/E traded at an 8% average discount to a select group U.S. department
stores (Macys, JC Penney and Nordstroms). Currently, Canadian Tire trades at a 32%
discount relative to the group. Should Canadian Tires valuation discount revert back to its
long-term mean versus the U.S. department stores, this would imply a forward P/E multiple
of 14x which is more reflective of a recovery multiple. We believe a 13x-14 x P/E multiple
for Canadian Tire is achievable once investors are convinced that a resurgence in consumer
discretionary spending is imminent. We believe Canadian Tires shares will move quickly
once a sense of recovery takes hold so its important to establish a position well in advance.
Shares could move quickly once

a sense of recovery takes hold
Figure 135: CTC vs. US Dept. Stores Price Change since 2000
250%
Figure 136: CTC vs. US Dept. Stores Forward P/E since 2005
25x
200%
20x
150%
100%
15x
50%
10x
0%
5x
-50%
-100%
2000
2002
2004
Canadian Tire
2006
2008
2010
2012
2006
Department Stores
Source: Factset (US Dept. Stores consists of Macys, JC Penney and Nordstroms)
25 January 2012
0x
2005
2007
2008
Canadian Tire
2009
2010
2011
2012
Department Stores
Source: FactSet.
136
Figure 137: Specialty Retailers Comparison Valuation

Price
Market
Fiscal EPS
Ticker 20/01/12 Cap ($M)
FY0
FY1
PE
FY2
FY0
FY1
EPS Growth
FY2
FY0-FY1 FY1-FY2 FY0-FY2
Home Improvement Retailers

RONA
Home Depot
Lowe's
RON
$9.55
$1,215
$ 1.03 $ 0.74 $ 0.93
9.3x
12.9x 10.3x
-28.0%
24.9%
-10.1%
HD
$44.51
$68,615
$ 2.01 $ 2.39
$ 2.74
22.1x
18.6x
16.2x
18.8%
14.7%
36.3%
LOW
$26.53
$33,230
$ 1.42 $ 1.61
$ 1.78
18.7x
16.4x
14.9x
13.6%
10.5%
25.5%
14.8x 15.5x 13.0x
-7.4%
21.0%
10.0%
11.5x 11.6x 10.4x
-1.6%
12.5%
10.7%
17.4%
Home Improvement Retailer Average

General Merchandise
Canadian Tire
CTC/A
$63.70
$4,970
$ 5.56 $ 5.47 $ 6.15
Wal-Mart
WMT
$61.01
$208,941
$ 4.18 $ 4.49
$ 4.91
14.6x
13.6x
12.4x
7.4%
9.3%
Target
TGT
$50.17
$33,694
$ 4.00 $ 4.24
$ 4.30
12.5x
11.8x
11.7x
5.9%
1.4%
7.4%
Sears Holdings
SHLD
$49.00
$5,237
$ 1.19 $ (5.10) $ (4.86)
41.2x
na
na
-528.2%
-4.6%
-508.5%
Kohl's
KSS
$47.37
$12,005
$ 3.66 $ 4.24
$ 4.95
12.9x
11.2x
9.6x
15.9%
16.6%
35.2%
Nordstroms
JWN
$50.02
$10,475
$ 2.75 $ 3.13
$ 3.58
18.2x
16.0x
14.0x
13.7%
14.5%
30.3%
Dillards
DDS
$46.21
$2,136
$ 2.67 $ 3.91
$ 4.65
17.3x
11.8x
9.9x
46.3%
19.1%
74.3%
Macy's
$35.38
$14,853
$ 1.98 $ 2.79
$ 3.23
17.9x
12.7x
11.0x
41.0%
15.7%
63.2%
JC Penney
JCP
$35.09
$7,493
$ 1.59 $ 1.25
$ 1.66
22.1x
28.1x
21.2x
-21.5%
32.9%
4.3%
18.0x 14.3x 12.3x
-42.5%
13.5%
-25.3%
General Merchandise Average

Source: FactSet, Barclays Capital estimates. EPS estimates are consensus from FactSet.
Company Profile
Canadian Tire Corp. (CTC) is a unique multi-line retailer that operates a total of over 1,700
store locations across Canada under four major business units: Canadian Tire (a Dealer
structure), Marks, CT Petroleum and Forzani Sports (Corporate and franchised), which it
acquired in August 2011. CTC also operates a Financial Services business as a Schedule
One bank and a credit card issuer.
Figure 138: Canadian Tire Store Network
East
Quebec
Ontario
West
Total
Sq. Ft. (M)
Canadian Tire
54
98
200
134
486
19.5
Forzani
30
177
147
174
528
6.5
Mark's
41
48
147
149
385
3.3
CT Gas
33
59
161
38
291
59
25
87
0.3
PartSource
25 January 2012
Canadian Tire is Canadas No. 1 retailer of auto parts through its 486 Canadian Tire retail
stores and 87 Part Source (specialty stores for serous DIYers) locations. Canadian Tire
also services Canadians auto needs through a network of 5,500 service bays across
Canada (predominantly located in CTR stores) and a network of 291 gas stations across
Canada.
Canadian Tires recent acquisition of sporting goods market share leader Forzani Group
(roughly 20% market share) has made Canadian Tire the dominant leader in the
category with an estimated combined share of 32%
Marks is Canadas largest specialty retail apparel banner with an estimated market
share of 4%-5% of total apparel sales. CTC acquired Marks in 2002.
137
Founding family member controls 61% of the votes, but only 4% economic interest.
Canadian Tire has a dual class share structure that primarily restricts voting to the 3.4mn
common voting shares that are predominantly controlled by Martha G. Billes, daughter of
the founder (61.4% voting control, but only 3.5% total economic interest). Class A shares
are restricted to voting on the election of three of the 16 directors.
Figure 139: Canadian Tire Company Snapshot
Canadian Tire Corp.
Total
Retail Segment
Financial Services
F2012E
CTR
Mark's
Forzani
Petroleum
Retail Sales
$12,800
$7,828
$1,055
$1,653
$2,264
% of total
100%
61%
8%
13%
18%
Operating Revenue*
$11,441
$5,869
$1,011
$1,446
$2,066
$993
% of total
100.0%
51.3%
8.8%
12.6%
18.1%
8.7%
EBITDA
$1,155
$842
$313
% of total
100%
73%
27%
General retailer; Industrial apparel, Specialty sporting

MasterCard; highGasoline; c-stores;
automotive
Men's & Women's goods; footwear;
interest savings
car washes
parts/services
casual wear
apparel
accounts; GICs
Products/Categories
*net of eliminations and adjustments
A brief background
Over 80% of Canadian
consumers have shopped the
store in a 12-month period and
50%-60% every month
Canadian Tires core retail business is Canadian Tire Retail (CTR) which is one of
Canadas best-known and often-shopped retailers. Canadian Tires appeal and resilience in
the face of growing competition is its status as a trusted brand, its unique product offering,
its modern store network and global sourcing capabilities. Canadian Tire retail operates 486
stores across Canada under a dealer structure (see details later in this report). Canadian
Tires store network reach is more extensive than most of its Big Box competitors such as
Wal-Mart Canada (330 stores), Zellers (273 stores), Home Depot (179 stores), and Rona
(80 Big box stores). Typically, over 80% of Canadian consumers have shopped the store in
a 12-month period and 50% to 60% shop there every month. The average consumer lives
12 minutes away from a Canadian Tire. Canadian Tires retail banner carries a unique
merchandise mix with auto parts representing approximately 26% of CTRs approximately
$7bn of retail sales, Home products (Living & Fixing), about 38%; and Leisure (Playing;
includes sporting goods), roughly 36%. Canadian Tire is the dominant auto-parts retailer in
Canada, and more recently following the acquisition of Forzani Group, Canadas leading
sporting goods retailer.
Just when you thought it couldnt get any tougher, Wal-mart and Target turn up the heat.
Over the past 20 years Canadian Tires core retail banner has been under siege as a flurry of
best in class U.S. retailers entered and aggressively expanded its footprint in Canada
offering customers compelling, often industry-leading consumer propositions in many of
Canadian Tires established core categories (e.g., housewares and hardware/tools). From
1994 to 2010 these retailers have opened over 500 stores.
As if the economy wasnt making things challenging enough for Canadian Tire, in January,
through two separate transactions, the ownership of 188 Zellers locations was transferred
to Wal-Mart (39) and Target (149) marking the latters entry into Canada. This change of
25 January 2012
138
ownership of almost 15mn sq. ft. of retail space is expected to have significant implications
for many of Canadas leading retailers as it places underperforming square footage in the
hands of two best-in-class retailers which are expected to generate substantially higher
sales productivity in several categories that represents a material threat to many established
retailers in Canada.
Figure 140: Estimated sales productivity lift of redeployed Zellers locations
Store count
TGT
WMT
Remaining
Zellers
Canada
Canada
Zellers
TOTAL
vs Zellers
Increase
273
135
39
85
259
-5%
Avg store size - sf
78
83
83
68
78
1%
Sales / selling sf.
$189
$440
$545
$189
$385
104%
$4,000
$4,930
$1,764
$1,092
$7,786
95%
Sales estimate
Not a lot of overlap with Target..
For Wal-Mart the 39-store acquisition represents almost a doubling of its Supercenter
banner rollout pace from 40 per year to 73 in 2012. As for Target, fortunately for Canadian
Tire, Targets core category strengths do not have a significant overlap with Canadian Tires
key categories. Small appliances, kitchenware, storage and ready-to-assemble furniture
appear to be the most at risk categories.
...for now, but Targets focus and
Wal-Marts (and maybe one day, Targets) focus on food sales growth is the real risk to
Canadian Tire through a change of shopping habits. Over time, Canadian Tires biggest
risk is a shift of shopping habits and customer traffic due to Wal-Marts growing food sales.
As Wal-Mart establishes the Supercenter banner across Canada they benefit from securing
the significantly greater shopping frequency of weekly food shopping. Over time these
more regular trips to Wal-Mart can erode a customers need, or interest, in going to
Canadian Tire for commonly available merchandise. This scenario could gradually erode
Canadian Tires ranking on consumers short list of retail destinations for household needs.
consumer shopping habits could

change
With the landscape changing, Canadian Tire needs to bolster its uniqueness and
category dominance in sectors that can remain differentiated versus Wal-Mart and
Targets core offerings. It is also why we believe Canadian Tire will continue to explore its
own entry into food sales. While initially Target will not be placing a major emphasis on
food sales, as the Zellers stores are materially smaller than Targets U.S. conventional stores,
we do expect them to, eventually. Once Targets initial sales ramp-up slows 2-3 years after
it first opens it will get a better handle on what its optimal merchandise mix is and what
space allocation is required. Once it has that figured out we expect it to begin looking for
incremental sales growth opportunities at that time we expect food to take on a greater
priority.
For now, to say that Canadian Tire survived the onslaught of the past 20 years would be
an understatement as in many respects it has remained top of mind and relevant as a retail
destination. Unfortunately, one of the casualties of the successful defence of its home turf
has been a deterioration of the companys profitability and return on equity in its core retail
operations. This has occurred despite the successful and very accretive acquisition of
Marks Work Wearhouse in 2002. As the Figure below demonstrates, the earnings growth
at Marks and Financial Services has more than doubled the core Retail performance.
25 January 2012
139
Figure 141: Canadian Tire segmented EBITDA growth

2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A
Adj. EBITDA* ($millions)
CT Retail
$403.5 $472.1 $517.8 $523.8 $509.1
Marks
$41.0 $54.8 $83.5 $112.8 $118.4
Petroleum
Financial Services
$10.5
$10.5
$21.8
$10.4
$39.9
$123.5 $149.4 $171.4 $212.3 $200.5
$524.7 $533.4 $565.2

$115.9 $91.7 $89.4
$44.3
$42.9
7-yr
CAGR
4.9%
11.8%
$41.7
21.8%
$221.6 $218.7 $269.4
11.8%
*Cdn. GAAP basis (pre-IFRS and new company segmentation presentation)

Growth Strategy & Outlook: improve retail performance & returns

In November 2008 Canadian Tire announced the appointment of Stephen Wetmore as CEO
replacing Tom Gauld, a long-standing Canadian Tire employee, who had previously run the
companys Financial Services business. Mr. Wetmore had previously been CEO of Bell
Alliant, a large Canadian telecommunications company. Prior to his appointment as CEO of
Canadian Tire he had been a Canadian Tire board member for six years.
In short order, Mr. Wetmore confirmed that his strategic priority was to strengthen the
Canadian Tire retail business and to improve the profitability/returns of the companys retail
operations. Canadian Tires management team provided details of this strategy to investors
when they presented their new five-year strategic plan in April 2010.
The top priority is to strengthen the Canadian Tire retail business and generate higher
returns on the total retail business. The companys primary objective is to strengthen the
core retail business and improve productivity. CTCs financial aspirations are shown below.
Unfortunately, the extended economic slowdown has already hampered Canadian Tires
achievement of these aspirational targets, but the company has made respectable progress
on a number of its objectives and strategies.
Figure 142: Canadian Tires Financial Aspirations
Financial Measure
CTR retail sales annual growth
Adj. EPS annual growth
Retail ROIC
Financial Services return on receivables
Total return to shareholders
Aspirations
3% - 5%
8% - 10%
10%+
4.5% - 5.0%
10% - 12%
The strategys key priorities are as follows:
25 January 2012
1.
Increase the companys focus on the core retail business to ensure its long-term
relevance and success.
2.
Improve the customer experience to bolster the brand and attract more customers.
3.
Increased focus on Automotive the company is aggressively working to improve the

quality and breadth of its automotive relationship with customers across a broad
spectrum of initiatives. Key programs include the roll-out of a new, more robust autoparts IT software platform, an expanded tire offering and a commercial on-line website
program.
140
4.
The Financial services operations will place an increased focus on developing products
and services that support the strengthening of Canadian Tire retail such as in-store
financing, customer loyalty, the introduction of insurance products such as extended
product warranties and potentially auto insurance.
5.
Executionexecutionexecution Canadian Tire needs to execute better and faster.
6.
Aggressively pursue productivity and efficiency programs that improve profitability and
financial performance.
Improve the customer experience & investment returns

Since the unveiling of the new strategic plan Canadian Tire has made real progress on a
number of these objectives/strategies.
1.
A September 2010 reorganization along more functional lines resulted in headcount

reductions and other synergies that were estimated to generate cost savings of $0.11
at EPS in F2011.
2.
Critical Automotive software upgrade is being rolled out with completion targeted for
1Q12. This new IT platform is a key enabler of many other initiatives that Canadian
Tire would like to pursue in its auto parts and service business.
3.
Canadian Tire retail expects to retrofit 170 stores to the improved Smart store
concept by the end of F2011 with another 100 planned for 2012 which would bring
over 55% of the store network on prototype.
4.
The Forzani acquisition significantly enhances Canadian Tires market position in this
sector and inevitably the profitability of the category. We also believe that this
increased market dominance may create a permanent deterrent to the potential entry
of a U.S. retailer.
5.
Expanded/enhanced CTRs retail tire offering and launched an on-line tire order
website.
6.
Initiated the development of a new loyalty program with Dunnhumby Canada, one of
the worlds best retail loyalty program consulting companies, which is expected to be
tested in early 2012.
While financial services achieved a faster-than-expected recovery of elevated net write-off

rates which significantly improved CTCs earnings growth and profitability, the sluggish
economy has been more of a headwind than tailwind in many of the companys more
discretionary retail categories.
Smart stores are designed to improve productivity and the shopping experience. The
Canadian Tire store concept continues to evolve with the Smart store representing the
latest iteration of the Canadian Tire Retail box. First launched in November 2008, the Smart
store was designed to build off the previous Concept 20/20 design with more focus on
improving productivity. The concept, so far, has proven successful, with positive feedback
from customers and Canadian Tire dealers. In addition to driving incremental sales, a Smart
store retrofit is capital-light (costing less than $300k per store) which is positive from an
ROIC perspective. As improving ROIC remains a top priority for the company, management
has set an aggressive growth target of retrofitting 170 stores by the end of 2011 and
completing approximately 100 capital-light projects in 2012.
25 January 2012
141
Small Market stores also require less capital. Launched in summer 2008, the Small Market
store was developed to meet the needs of underserved rural markets. Ranging from 14,000
to 19,000 sq. ft., the small market stores represent another capital-light concept offering
strong returns with minimal capital outlay. Where feasible, a small market store may include
a Marks outlet and/or Petroleum gas bar. As of 3Q11, there were 13 small market stores.
Canadian Tire is the industry
leader in DIY parts, auto
accessories and installed tires
Automotive: refocusing on growing this cornerstone business.

Canadian Tires
automotive business is one of its most profitable categories, partly due to the companys
dominance of the retail DIY segment in Canada. The retail automotive aftermarket in
Canada is estimated to be a $22bn market consisting of a DIY segment of approximately
$6bn and do-it-for-me (DIFM) sales of $16bn. Canadian Tires automotive parts sales are
estimated be in the range of $1.8-$2 billion, which excludes the dealers auto bay service
sales, making Canadian Tire the industry leader in DIY parts, auto accessories and installed
tires. After a surprisingly slow Fall 2010, the retail auto sector in Canada has experienced
robust sales aided by: 1) tight-fisted consumers who have shifted from DIFM to DIY, 2)
more cars on the road are driving volume growth, and 3) longer average miles driven per
car require more maintenance.
Figure 143: Automotive parts sales trends have improved in 2011
Canadian Auto Parts/Accessories/Tire Store Sales Growth (NSA)
20%
15%
10%
5%
0%
-5%
3Q-11
2Q-11
1Q-11
4Q-10
3Q-10
2Q-10
1Q-10
4Q-09
3Q-09
2Q-09
1Q-09
4Q-08
3Q-08
2Q-08
1Q-08
4Q-07
3Q-07
2Q-07
1Q-07
4Q-06
3Q-06
2Q-06
1Q-06
4Q-05
3Q-05
2Q-05
1Q-05
-10%
Source: StatsCan, Retail trade data.
The company is committed to securing Canadian Tires position as Canadas authority in

Automotive. One of the first steps toward this goal has been the Automotive Infrastructure
initiative that was launched in 2008, which was intended to improve the automotive
customer experience at Canadian Tire and PartSource stores. This initiative involves three
components:
1. Significantly expand the auto parts assortment and replace aging IT with a commercially
available, decision rule and predictive modelling based solution;
2. Upgrading CTRs legacy green screens with Windows-based automotive management
software and data management software to establish a more interactive customer
experience;
3. Create a network of PartSource hub stores across Canada to enhance supply of auto
parts at the local market level.
25 January 2012
142
The final roll-out of the Automotive Infrastructure project is expected to be completed by

1Q12. In addition to the Auto Infrastructure initiative, Canadian Tire has recently launched
an online tire website and opened four Automotive concept stores.
The company has not provided an update of the financial benefits from the Automotive
Infrastructure investment. However, we note managements initial expectations when the
project was announced which projected the program to generate $120-$130mn in
incremental auto parts sales by 2010 and increasing to over $200mn by 2014. The
associated pre-tax earnings contribution was estimated to be $15-$20mn by 2010, growing
to an estimated $45-$50mn by 2014. While it seems that the economy and system rollout
timing has probably delayed the achievement of the targeted sales gain if this program does
generate the intended sales lift it could increase CTCs EPS by $0.36 to $0.40 to EPS by
2014.
Forzani Sports provides Canadian Tire with increased category dominance, which means
significant synergies and improved retail profitability. Canadian Tire completed the
acquisition of Forzani in August 2011. CTC paid $26.50 per FGL share (a 45% premium to
FGLs prior 10-day VWAP) for an aggregate purchase price of $771mn (excluding FGL net
debt/shares already owned). The acquisition was financed with $500mn in cash and the
balance in short-term financing. While CTR already participates in the sporting goods
category with an estimated share of 12%, the Forzani acquisition significantly increases
Canadian Tires market share and sector dominance with a very complementary product
mix. We expect both CTR and Forzanis retail operations to benefit from this merger.
Forzanis profitability will benefit from Canadian Tires superior transportation, marketing
and real estate clout. Both organizations offer some potentially powerful imported product
sourcing expertise Canadian Tire through its direct import operations and Forzani through
its ownership stake in the European based Intersport organization.
Figure 144: Canadian Tire Category Importance
Category Importance
Market
Footwear
Clothing
Equipment
Total
share
22%
Forzani
31%
40%
29%
100%
Canadian Tire
4%
2%
94%
100%
12%
Combined CTC
21%
27%
52%
100%
34%
Source: .Barclays Capital estimates, Company Reports, Sports Vision
Including synergies, we estimate

that the Forzani acquisition
could add $0.48 to EPS
Preliminary synergy target set at $25mn in 2012, increasing to a run rate of $35mn in
2014 we expect the final number to be materially higher. Management expects to
capture synergies in areas like supply chain, marketing and global sourcing. Annualized
synergies are expected to be approximately $25mn in 2012, increasing to a run-rate of
approximately $35mn in 2014. We believe this number could prove to be substantially
higher as Forzani management was already well down the path of planning banner
rationalization and related centralized services overhead reductions prior to the CTC
takeover. At a valuation of 7.3x EV/LTM EBITDA, we believe CTC paid a hefty premium for
Forzani; however, the deal is expected to be accretive to earnings. Including synergies, we
estimate that the acquisition could add $0.48 to EPS (~8% accretion) with a strong
possibility that the synergies will come in above the companys preliminary estimate.
Of equal, or greater, importance we believe that CTCs new combined purchasing power
scale could be a major deterrent to new entrants as it will be difficult for them to achieve
25 January 2012
143
comparable expense rates in areas such as domestic sourced product costs, rent,
transportation and marketing expenses.
Figure 145: Forzani acquisition is earnings accretive to CTC
F2012E
$ millions
Forzani
Revenues
$1,446.3
Synergies
EBITDA
adj.
Total
$1,446.3
$25.0
$25.0
$87.2
$112.2
Net Income
$39.1
EPS
$0.48
Enhancing customer loyalty. Canadian Tire money is already one of Canadas best known
and most successful loyalty programs. Unfortunately, the paper currency does not allow
Canadian Tire to capture valuable customer information from the over one million points of
customer transaction data and feedback it receives each day.
In early 2012, Canadian Tire will
begin piloting a new loyalty
program
In early 2012, Canadian Tire will begin piloting a new loyalty program that is expected to
provide deeper customer insight. Canadian Tire has retained Dunnhumby Canada (Metros
JV partner), a leader in customer insights and analytics to develop the program.
Management has not provided specific details of the new program but we expect it to
involve an evolution of Canadian Tire money through electronic collection of points.
Financial Services remains a key strategic business unit and has been a major contributor
to CTCs earnings rebound. Management views Canadian Tire Financial Services (CTFS) as
a key strategic business segment that supports the core retail unit. CTFS is expected to
grow through cross-promotional activity with Canadian Tire Retail including broadening of
in-store financing offers, instant in-store credit, and integration with the pending launch of
a new loyalty program. While the Canadian Tire MasterCard remains the core product,
CTFS is pursuing new product and service offerings such as home services (i.e., garage door
opener installations), auto and home insurance, and product warranties.
Figure 146: Canadian Tire Financial Services Summary
2007A
2008A
2009A
$760.3
$823.3
$917.7
$953.7
$711.7
24.78%
24.39%
25.14%
23.60%
23.56%
EBITDA ($M)
$200.5
$221.6
$218.7
$274.7
$217.5
EBITDA margin
26.4%
26.9%
23.8%
28.8%
30.6%
1,816
1,819
1,768
1,716
1,728
0.2%
0.2%
-2.8%
-2.9%
0.7%
$1,899.0
$2,031.0
$2,179.0
$2,334.0
$2,341.0
9.4%
7.0%
7.3%
7.1%
0.3%
5.76%
6.34%
7.58%
7.51%
7.33%
$3,650.4
$3,913.0
$4,071.5
$4,041.2
$4,061.1
5.10%
4.93%
3.57%
4.96%
5.10%
Revenue ($M)
Revenue (as % of GAR)
Avg. active credit card accounts (000's)

Y/Y Growth
Avg. account balance
Y/Y Growth
Net credit card write-off rate
Gross avg. receivables (GAR) $M
Return on receivables
2010A YTD 2011
25 January 2012
144
Dealer contract set to expire in 2014. In conjunction with the launch of the Automotive
Infrastructure initiative in 2008, the company announced a new dealer agreement that
expires in 2014. The new agreement included financial adjustments on cost sharing of
marketing expenses, shared savings from store-based energy initiatives and participation by
Canadian Tire in the growth of dealer profits. At the time of the announcement,
management estimated that the new agreement would generate $15-$20mn of
incremental pre-tax earnings ($0.13 to $0.17 at EPS), growing to an estimated $80-$100mn
by 2014 ($0.68 to $0.85 at EPS). Unfortunately, we believe these benefits have not been as
significant as originally expected as a result of the recession.
We have mixed views about this round of negotiations. It really hinges on the quality of the
dealer relations as the negotiations begin and what each party is willing to give up. We are
encouraged by the fact that previous management was able to negotiate the 2008 deal with
some financial benefits to the company, especially when the existing deal was not anywhere
near its expiry. We are concerned that perhaps the recession eroded most, or all, of the
upside for either party, creating the potential for a less cooperative stance in this round of
discussions.
Increasing returns to shareholders. In conjunction with its 3Q11 earnings release,
Canadian Tire announced a 9% increase in its quarterly dividend to $0.30 per share
following a 31% increase in November 2010. We note that in 2010, Canadian Tire also
increased its dividend payout ratio to a range of 20%-25% from 15%-20%.
Risks
25 January 2012
Canadian economic slowdown would lower sales and financial performance.
Wal-Mart's current build-out and the 2013 entry of Target will increase the competitive
intensity of the market, potentially leading to lower sales and margins as promotions
increase to drive traffic.
The recent acquisition of Forzani poses integration risks.
145
Figure 147: Canadian Tire Financial Summary

Canadian Tire - Financial Statement Summary
IFRS
2010
$9,213
6.0%
0.8%
1.9%
IFRS
2011E
$10,352
12.4%
0.8%
2.1%
IFRS
2012E
$11,371
9.8%
1.5%
2.0%
IFRS
2013E
$11,612
2.1%
2.0%
3.0%
Total Sq. Ft. Growth (%)

CTR Sq. Ft. Growth (%)
MWW Sq. Ft. Growth (%)
0.9%
1.6%
-0.5%
1.2%
1.5%
0.8%
1.5%
2.0%
1.3%
1.4%
1.9%
1.3%
Gross Margin
EBITDA Margin
30.3%
19.3%
11.0%
29.6%
19.6%
10.0%
30.8%
20.7%
10.2%
30.9%
20.9%
9.9%
-69 bp
32 bp
-100 bp
120 bp
101 bp
19 bp
5 bp
28 bp
-24 bp
4.5x
2.4%
$775
9.0%
5.7%
3.2x
2.8%
$344
8.1%
5.2%
2.6x
2.6%
$703
7.7%
4.5%
CTR Same Store Sales (%)
MWW Same Store Sales (%)

SG&A Variance
EBITDA Variance
Free Cash Flow ($M, After Dividends/Capex/WC, LTM)
Return on Equity
4.2x
2.6%
$656
10.4%
6.9%
25 January 2012
146
COMPANY SNAPSHOT
Canadian Tire Corp. Ltd.

Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (adjusted) ($)
Diluted shares (m)
2010A
9,213
1,011
736
583
400
4.89
82
0.91
2011E
10,352
1,032
748
601
429
5.24
82
1.13
2012E
11,371
1,155
853
708
502
6.14
82
1.25
2013E
11,612
1,152
834
785
557
6.81
82
1.30
CAGR
8.0%
4.5%
4.2%
10.4%
11.7%
11.7%
0.1%
12.8%
11.0
8.0
6.3
4.3
6.9
4.0
10.4
10.0
7.2
5.8
4.1
5.7
3.7
9.0
10.2
7.5
6.2
4.4
5.2
4.0
8.1
9.9
7.2
6.8
4.8
4.5
4.3
7.7
Average
10.3
7.5
6.3
4.4
5.6
4.0
8.8

3,232
361
569
Total assets
11,049
3,525
Other long-term liabilities
137
Total liabilities
7,044
Net debt/(funds)
2,956
4,005
171
Operating cash flow
792
Capital expenditure
(238)
Free cash flow
962
3,353
1,092
340
12,244
2,471
190
6,945
2,131
5,299
(134)
1,249
(247)
1,114
3,353
1,092
689
12,641
2,471
190
5,563
1,782
7,078
(85)
850
(320)
766
CAGR
3,353
1.2%
1,092 44.6%
1,380 34.4%
13,070
5.8%
2,471 -11.2%
190 11.5%
5,596
-7.4%
1,091 -28.3%
7,474 23.1%
234 11.1%
875
3.4%
(300)
NA
1,109
4.8%
10.4
6.1
14.7
0.5
0.7
2.0
25.9
Average
9.4
11.2
5.5
6.7
21.3
19.0
0.4
0.5
0.7
0.9
2.0
1.8
24.8
32.3

EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROIC
ROA
ROE

P/E (x)
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
13.0
8.1
18.5
0.6
1.3
1.4
46.8
12.1
7.1
21.4
0.5
1.0
1.8
31.8
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
1-OVERWEIGHT
2-NEUTRAL
$63.70
$74.00
CTC.A
Investment case
At 10x f2012 P/E, Canadian Tire is attractively valued
compared to its long run average of 13x P/E. We
believe CTC's valuation will benefit from a modest
economic recovery in H2/12, as historically, cyclical
stocks experience multiple expansion roughly 6
months in advance of an economic rebound. Our
price target is supported by a 12x P/E.
Upside case
$82.00
Stronger-than-expected economic rebound could
support more robust CSS and increased gross
margins due to lower price promotions. Under this
scenario, we estimate potential 2012E EPS of $6.85.
Applying our 12x P/E multiple would generate an
Upside scenario of $82.
Downside case
$68.00
Weaker consumer expenditure could constrain retail
CSS and pressure margins due to increased
promotional pricing. In addition, credit card writeoffs could rise as consumer debt increases. Our
Downside scenario is predicted on 12x P/E on a
potential 2012E EPS of $5.67.
$68
(2.1%)
(6.7%)
86
$74
(11.1%)
(16.1%)
66
Downside
Case
46
Price
Target
$82
(28.7%)
(23.1%)
Upside
Case
26
1/27/2011
1/20/2012
Source: FactSet

CTR Same store sales (%)
MWW Same store sales (%)
FGL Same store sales (%)
CTR Same Store Sales vs. Sq. Ft. Growth

0.8
1.9
5.5
0.8
2.1
-6.2
1.5
2.0
5.4
2.0
3.0
3.1
1.3
2.3
2.0
Same Store Sales
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2010A
25 January 2012
2011E
2012E
2013E
Note: FY end Dec.
147
Figure 148: SNAPSHOT: North American Dollar Store Industry Canada vs. US
Canadian Dollar Store Competitor Profiles
As of Jan-11
Dollarama
Established
1992
Total Store Count
652
Ownership Structure
Corporate
Store Size Range
2,500 - 10,000
Price Point
$1 - $2
Source: Company documents, BarCap estimates
12 Months Ending
Store Count
Dollar Store with

More
Great Canadian
Dollar Store
Dollar Giant
Everything for a
Dollar
Buck or Two
1998
130
Franchise
8,000 - 15,000
$1 - $3
1993
112
Franchise
2,000 - 10,000
$1 - $3
2001
88
Corporate
8,000 - 15,000
$1.25
1985
61
Franchise
1,600 - 8,000
Up to $1
1990
58
Franchise
3,500 - 5,000
Up to $2.00
Dollarama
Jan-11
Dollar Tree
Jan-11
99 Cents Only
Mar-11
Family Dollar
Aug-10
Dollar General
Jan-11
652
4,101 (85 in CAD)
285
6,785
9,372
$1 - $2
9,862
$1 or less
8,559
$0.99
16,702
$10 or less
7,104
$10 or less
6,989
Retail Square Footage (Millions)

Sales per Store ($ Millions)
6.43
$2.2
35.1
$1.4
4.8
$5.0
48.2
$1.2
65.5
$1.4
Average sales per sq. ft.
$221
$168
$299
$163
$199
Price point range

Yes
Yes
Yes
Yes
Yes
POS
Offshore Sourcing
Dedicated DC
Yr 1 of rollout
54%
Yes
43%
Yes
na
Yes
9%
Yes
13%
Private label
Consumables mix
54%
37%
Yes
48%
Yes
65%
22%
64%
22%
71%
$1,420
$5,882
$1,424
$7,867
$13,035
13.5%
11.5%
5.9%
4.8%
11.1%

Gross Margin (%)
7.6%
36.1%
6.3%
35.9%
0.8%
40.8%
4.8%
35.7%
4.9%
32.0%
EBITDA Margin (%)

16.5%
14.5%
13.9%
11.2%
10.2%
8.3%
9.5%
7.3%
11.9%
9.8%
Net Margin (%)
8.7%
7.0%
5.2%
4.6%
5.0%
Inventory Turns
3.3x
4.3x
4.6x
5.0x
5.4x
Net Debt to EBITDA
3.0%
1.3x
3.0%
-0.3x
4.3%
-1.4x
2.7%
-0.1x
3.2%
1.8x
Free Cash Flow ex Capex ($ Millions)

FCF Yield (%)
$66
3.6%
$340
6.3%
$19
1.5%
$379
7.5%
$353
3.9%
ROE (%)
18.1%
28.7%
11.6%
25.0%
17.4%
ROIC (%)
11.2%
33.4%
15.5%
26.6%
9.5%
25 January 2012
148
DOLLARAMA
Dollarama Inc.(DOL.TO): Quarterly and Annual EPS (CAD)
DOL CN / DOL.TO
2011
Stock Rating
1-OVERWEIGHT
FY Dec
Sector View
2-NEUTRAL
Price Target
CAD 49.00
Price (20-Jan-2012)
CAD 44.00
2012
2013
Change y/y
Actual
Old
New
Cons
Old
New
Cons
2012
2013
Q1
0.30A
N/A
0.40A
N/A
N/A
N/A
N/A
33%
N/A
Q2
0.37A
N/A
0.50A
N/A
N/A
N/A
N/A
35%
N/A
Q3
0.42A
N/A
0.55A
N/A
N/A
N/A
N/A
31%
N/A
Q4
0.56A
N/A
0.67E
N/A
N/A
N/A
N/A
20%
N/A
Year
1.64A
N/A
2.12E
2.13E
N/A
2.50E
2.47E
29%
18%
P/E
26.8
20.8
17.6

+11%

For DOL.TO, an above-average
multiple is warranted, in our
view
We are initiating coverage of Dollarama (DOL.TO) with a 1-Overweight/2-Neutral rating

and $49 price target, offering a potential total return of 12% from recent levels. In the
context of a weak economic backdrop, we view Dollarama as one of our top defensive picks
with an ability to deliver the strongest EPS growth within our coverage. Although Dollarama
is not counter-cyclical, it offers solid defensive characteristics. Dollarama has compelling,
low cost/quick payback new store growth prospects (in an underdeveloped market), bestin-class store economics driven by its dominant market position, weaker direct competition,
and industry-leading offshore direct sourcing capabilities, and is backed by an experienced
management team. Dollaramas ability to generate strong free cash flow has enabled it to
significantly reduce debt, and more recently introduced a dividend. With a long runway of
store growth potential, strong FCF and a clean balance sheet, we see potential for dividend
increases and/or introduction of a share buyback program. Our $49 price target is based
on a 19.5x multiple applied to our fiscal 2013 (January) EPS estimate of $2.50. While a
19.5x target P/E multiple appears lofty relative to most stocks under our coverage, we
believe investors should be willing to award Dollarama with an above-average valuation for
16% EPS growth (excludes extra week), plus a dividend. Our target price implies an 18x P/E
on our F2014 EPS forecast of $2.78 which is in line with DOLs FY1 P/E multiple of 17.9x.
Figure 149: Dollarama Valuation P/E Multiple
Yr ending Jan
f2013
f2014
BarCap est
EPS range
BarCap est
extra week
$2.45
$2.55
$2.50
Y/Y % chg
15%
18%
20%
Comments
$2.70
$2.78
$2.85
DOL has an extra week in f2013
8%
11%
14%
adjusted f2013 EPS growth is 16%
P/E Multiple
$32
$33
$35
$37
13.0x
$32
$36
$34
$36
$38
$40
14.0x
$35
$39
$37
$38
$41
$43
15.0x
$37
$42
$39
$41
$43
$46
16.0x
$40
$44
$42
$42
$43
$46
$47
$48
17.0x
$44
$46
$49
$51
18.0x
$45
$50
$47
$48
$51
$54
19.0x
$47
$53
$48
$50
$53
$56
19.5x
$49
$54
20.0x
$49
$50
$51
$54
$56
$57
25 January 2012
<= DOL trough multiple
<= DOL & DLTR current multiple

<= BarCap valuation multiple
149
Since the Dollarama IPO in October 2009, the shares have traded at around a 9% premium
to Dollar Tree (Dollaramas closest comparable). At recent levels, Dollarama is trading in
line with Dollar Tree. Given Dollaramas greater dominance in its relative market and its
superior store economics versus Dollar Tree, we believe a premium is justified. Thus, the
relative comparison should provide additional support to our view of further valuation
upside for Dollarama. If, as we expect, Canadian consumers continue to meaningfully
reduce their spending through at least the first half of 2012 we expect this trend to become
a catalyst to a valuation lift. Given the slightly more positive retail spending trends in the
United States we could see a disconnect between Dollaramas valuation multiple and Dollar
Trees in 2012, resulting in a renewed premium for Dollarama.
Figure 150: Dollarama is trading at a discount to Dollar Tree
20x
50%
19x
40%
18x
30%
17x
20%
16x
10%
15x
0%
14x
Premium/Discount (right axis)
DOL
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
-20%
Mar-10
12x
Jan-10
-10%
Nov-09
13x
Dollar Tree
Source: FactSet.
Figure 151: Dollarama Comparable Valuation

Ticker
Price
Market
20/01/12
Cap ($M)
Dollar Stores / Discount / Off-Price Retailers

Dollarama
DOL
$44.00
Fiscal EPS
FY0
FY1
PE
EPS Growth
FY2
FY0
FY1
FY2
$ 2.47
26.8x
20.6x
17.8x
30.0%
15.7%
50.4%
$3,244
$ 1.64 $ 2.13
$84.46
$54.78
$40.96
$14.76
$40.21
$10,053
$6,451
$13,818
$547
$2,638
$
$
$
$
$
3.10
3.12
1.82
0.75
2.83
$
$
$
$
$
3.99 $ 4.73
3.62 $ 4.17
2.32 $ 2.70
0.86 $ 0.98
2.87 $ 3.37
27.2x
17.6x
22.5x
19.6x
14.2x
22.1x
21.2x
15.1x
17.7x
17.3x
14.0x
18.1x
17.8x
13.1x
15.2x
15.0x
11.9x
15.6x
28.6%
16.1%
27.3%
13.3%
1.4%
20.8%
18.6%
15.0%
16.3%
14.9%
17.1%
16.0%
52.5%
33.6%
48.1%
30.1%
18.8%
40.2%
General Merchandise Retailers

Canadian Tire
CTC/A
Wal-Mart
WMT
Costco
COST
Target
TGT
Average
$63.70
$61.01
$81.41
$50.17
$4,970
$208,941
$35,408
$33,694
$
$
$
$
5.55
4.18
3.30
4.00
$
$
$
$
5.47 $ 6.15
4.49 $ 4.91
3.85 $ 4.37
4.24 $ 4.30
11.5x
14.6x
24.7x
12.5x
15.8x
11.6x
13.6x
21.1x
11.8x
14.6x
10.4x
12.4x
18.6x
11.7x
13.3x
-1.5%
7.3%
16.6%
5.8%
7.1%
12.5%
9.3%
13.6%
1.4%
9.2%
10.8%
17.3%
32.4%
7.3%
17.0%
High Growth Canadian Retailers

Lululemon
LULU
Tim Hortons
THI
Average
$60.12
$48.80
$6,575
$7,728
$ 0.85 $ 1.24 $ 1.58

$ 2.04 $ 2.35 $ 2.72
na
23.9x
23.9x
48.6x
20.8x
34.7x
38.1x
18.0x
28.0x
45.9%
15.1%
30.5%
27.7%
15.7%
21.7%
86.4%
33.2%
59.8%
8.8x
11.0x
9.9x
12.9x
17.0x
14.9x
10.3x
12.8x
11.5x
-32.1%
-35.1%
-33.6%
24.9%
32.9%
28.9%
-15.2%
-13.7%
-14.4%
Dollar Tree
Family Dollar Store
Dollar General
Fred's Discount Store
Big Lots
Average
DLTR
FDO
DG
FRED
BIG
Other Canadian Retailers

RONA
RON
$9.55
$1,215
$ 1.09 $ 0.74 $ 0.93
Reitmans
RET/A
$14.27
$736
$ 1.29 $ 0.84 $ 1.12
Average
25 January 2012
150
Company Profile
Dollarama was founded in 1992 by current CEO, Larry Rossy. With more than 650 stores
across Canada, Dollarama is by far the dominant dollar store chain in the country (more
than 5x the next largest competitor). Dollarama stores average more than 9,800 gross
square feet (80-85% selling square footage) and offer a wide assortment of private label
and national brand products. The company carries more than 4,000 SKUs with a mix of
general merchandise (50%), consumables (37%) and seasonal products (13%). The
products are sold at fixed priced points of up to $2.00.
Following Dollaramas IPO, Bain Capital owned 44.3mn shares (61% of outstanding) and
the Rossy family owned 8.9mn shares (12% of outstanding). Through a series of secondary
offerings, Bain Capital has sold its entire position while the Rossy family maintains 6%
ownership.
Figure 152: Dollarama Insider Holdings History
IPO
Oct-09
17.1
Secondary
Nov-09
2.6
Secondary
Jan-10
11.7
Secondary
Apr-10
10.2
Secondary
Dec-10
11.2
% Outstanding
24%
4%
16%
14%
15%
Insider Ownership
Bain Capital (M)
% Ownership
Rossy Family (M)
% Ownership
Combined (M)
% Ownership
44.3
61%
8.9
12%
53.1
73%
42.2
58%
8.4
12%
50.6
70%
32.9
45%
6.0
8%
39.0
54%
22.0
30%
4.4
6%
26.4
36%
9.2
13%
4.4
6%
13.6
19%
Shares Offered (M)
Current
Nov-11
0.0
0%
4.4
6%
4.4
6%
Source: FactSet, Company Reports
Growth strategy & Outlook

Although we do not believe Dollaramas business is counter cyclical, we agree that it offers
investors attractive defensive characteristics in the current environment that make it a
compelling investment:
25 January 2012
Compelling, low-cost/quick payback, new store growth opportunity in an

underdeveloped retail segment. New store capital costs are minimal ($600k, including
$400k for capex and $200k for inventory, per store). A typical Dollarama store reaches
average annual sales of $2mn within the first two years and can achieve an average
payback period of two years. We estimate that new store growth can be comfortably
funded by internally generated funds with significant excess cash flows allowing the
company to pay down debt while still aggressively growing the store network.
High return on capital achieved through a very strong competitive position.

Dollarama has the best store economics in the North American dollar store space
achieved through several strong competitive advantages including dominant market
share and scale, market-leading offshore sourcing and merchandising competencies
and an experienced management team. The Canadian dollar store space lacks wellcapitalized competitors and convergent retailers which have entered the space havent
been able to make it work in their operating environment (e.g., Loblaw).
151
Move to multiple price points has been a success, driving above-average sales
growth and de-risking margins through greater pricing flexibility. Prior to introducing
price points above a dollar, Dollarama was limited in its ability to pass along COGS
inflation, forcing it to either absorb the COGS inflation through lower gross margins or
to discontinue the sale of those items. The introduction of price points above $1 has
been a notable success with those items now representing 49% of total sales. The mix
of items above $1 includes items that have been increased in price as COGS inflation
required, and new items/categories that Dollarama could not include in its mix at the $1
price with an acceptable margin.
Enhancing shareholder returns through the introduction of a dividend. Dollarama

announced its first quarterly dividend in F1Q12 at $0.09/share, offering investors a 1%
annualized yield. Dollaramas low-cost/quick payback new store openings allow it to
generate strong free cash flows which far outstrip its capex needs for new store growth
and technology deployment. As a result, it has ample excess free cash flow to reduce
debt, increase its dividend and/or possibly buy back stock when that is deemed to be an
appropriate use of funds.
Figure 153: Dollarama Free Cash Flow ($M)

Fiscal Year (Jan)
2009
2010
2011
2012E
2013E
2014E
Operating Cash Flow
$129
$84
$119
$181
$204
$253
Change in W/C
-$12
$38
-$10
-$37
$6
-$5
$117
$122
$109
$144
$209
$248
Capex
-$41
-$34
-$43
-$42
-$45
-$45
Free Cash Flow
$76
$89
$66
$102
$164
$203
Dividends
$0
$0
$0
-$13
-$29
-$33
$0
$272
$2
$0
$0
$0
Acquisitions
$0
$0
$0
$0
$0
$0
Net Change in Debt
-$27
-$328
-$46
-$91
-$94
-$161
Remaining cash flow
$49
$33
$22
-$2
$41
$9
$1.05
$1.22
$0.91
$1.35
$2.18
$2.69
na
5.9%
3.5%
4.0%
4.9%
6.1%
63.6%
28.7%
18.1%
19.9%
19.5%
17.1%

ROE
Source: Barclays Capital estimates, Company Reports and FactSet.
Dollar Trees entry into the underdeveloped Canadian dollar store sector is not a nearterm threat to Dollarama.
25 January 2012
Dollaramas accelerated new store growth strategy is sustainable for at least 5-7
more years even if Dollar Tree matches its new store opening pace, in our view. In
light of the acquisition of Dollar Giant by Dollar Tree and its announced intention to
grow the Dollar Giant network to 900-1,000 stores, Dollarama has stepped up its annual
new store growth target to 50 stores per year, up from 30-40 stores per year in its
pursuit of attaining its goal of 900 stores in Canada. Given that Dollarama has opened
60+ stores per year in the past, we do not expect the 50-store target to cause any
significant logistical issues. Further, we believe Dollaramas accelerated storedevelopment strategy is sustainable in the context of the underdeveloped dollar store
segment in Canada despite Dollar Trees new store growth plan.
152
Canada can support at least 500 more dollar stores before risking significant new
store growth productivity drain. Our store saturation analysis shows that the Canadian
dollar store industry can support another 500 stores before reaching a saturation level
that could potentially constrain sales productivity and gross margin in a material way.
The U.S. dollar store industry is more concentrated than Canadas, with the top two
players (DLTR and FDO) having cumulative pop/store of 28k versus the top two
Canadian players with any meaningful store growth (DOL and Dollar Giant) at
44k/share. One would have to include all of the smaller Canadian players to get to a
similar saturation level as the top two U.S. players.
Figure 154: Small Format Retailing Saturation Analysis Canada vs. US

US small format value retailing
Store
count
Cumulative
stores
Cumulative
Pop/store
US discount retailing - Conv & SC

Store
Cumulative
count
stores
Cumulative
Pop/store
Dollar Tree
Family Dollar
99 cents only
4,152
6,943
285
11,095
11,380
75
28
27
Wal-Mart
Target
Kmart
Meijer
3,837
1,762
1,307
197
5,599
6,906
7,103
81
56
45
44
Dollar General
9,641
21,021
15
Kohls
1,127
8,230
38
Freds
Big Lots
674
1,415
21,695
23,110
14
14
Fred Meyer SC
Shopko
131
147
8,361
8,508
37
37
Canadian small format value retailing

Store
Cumulative
Cumulative
CDN discount retailing - Conv & SC

Store
Cumulative
Cumulative
stores
Dollarama
Dollar Giant
Everything for a $1
count
680
95
67
775
842
Pop/store
51
44
41
count
372
135
487
stores
507
994
Pop/store
93
68
35
Buck or Two
Your Dollar Store
Great Cdn $1 store
56
124
115
898
1,022
1,137
38
34
30
Real Cdn SS
163
1,157
30
Zellers*
85
1,242
28
Giant Tiger
The Bargain Shop
Fields (HBC)
205
238
196
1,342
1,580
1,776
26
22
19
*Pro-forma after Zellers store acquisitions/divestitures
WalMart*
Target*
Canadian Tire
Figure 155: Canadian Dollar Store Saturation Forecast

Estimated
calendar year
2011
680
28
2012E
730
50
2013E
780
50
2014E
830
50
2015E
880
50
2016E
930
50
2017E
980
50
2018E
1,030
50
Dollar Giant / Dollar Tree

new store openings
95
7
145
50
195
50
245
50
295
50
345
50
395
50
445
50
Top 2 Dollar Store players

new store openings
cumulative new stores
775
35
875
100
135
975
100
235
1,075
100
335
1,175
100
435
1,275
100
535
1,375
100
635
1,475
100
735
Dollarama store count

new store openings
Top 2 Players Pop / store (ooo's)
44
39
36
33
30
28
26
25
Other Dollar store competitors

new store openings
362
367
5
372
5
377
5
382
5
387
5
392
5
397
5
Total Dollar Store format competition
Saturation level
1,137
1,242
1,347
1,452
1,557
1,662
1,767
1,872
2,394
Total Dollar store Pop / store (ooo's)
30
28
26
24
23
21
20
19
15
Other small format value retailers

(Giant Tiger, The Bargain Shop, Fields)
639
639
0
639
0
639
0
639
0
639
0
639
0
639
0
Total small format value retail stores
1,776
1,881
1,986
2,091
2,196
2,301
2,406
2,511
19
18
18
17
16
15
15
14
15
34.5
34.5
34.8
35.1
35.4
35.6
35.9
36.2
35.9
Canadian population
2,394
Source: StatsCan, FactSet, Barclays Capital estimates.
25 January 2012
153
Management believes that Dollarama can profitably open stores across Canada, even in
areas where it has the highest store density (Quebec).
However, we expect a
disproportionately higher number of new stores to be opened in the West given its much
lower store density development.
Figure 156: Dollarama Population per Store by Province
West
Ontario
Quebec
106
261
221
64
652
10.6
99,878
13.3
50,955
7.9
35,929
2.4
36,814
34.3
52,597
Stores
Population (M)
Population per Store
Atlantic
Canada
Source: StatsCan, Company Reports, Barclays Capital estimates
Multiple price-point strategy is helping to drive higher average transaction size. In

February 2009, Dollarama began offering products at fixed price points above a dollar
($1.25, $1.50 and $2.00). In addition to broadening its product offering, the multiple price
point strategy has resulted in a higher average ticket. The sales penetration of products
over $1 has increased in every quarter since its introduction. As of 3Q12, products sold
above $1.00 represented 49% of sales.
The company is willing to experiment with products at higher price points (potentially up to
$4.00) provided that they are new items or in new categories. We believe customers will be
receptive to higher price points at Dollarama so long as the company continues to provide
more compelling value relative to other discount stores or general merchandisers (i.e., WalMart and Canadian Tire).
The roll-out of debit card payment systems has also contributed to a higher average
ticket (debit card sales are 2x greater than the average transaction size for cash sales).
Debit card transactions represent approximately 37% of Dollaramas sales.
Declining traffic is of some concern but is consistent with what many other retailers have
experienced in 2011. Dollaramas transaction volume shifted from solid positive trends
into negative territory starting in 4Q11 with snowstorm disruption presented as the initial
catalyst. Based on the breadth of retailers that have experienced traffic/transaction count
weakness in 2011 (Food retailers, Wal-Mart Canada, Tim Hortons) we do not see
Dollaramas trend as being specific to them, or the dollar store space. We do expect
Dollarama to experience a deceleration in CSS growth in F2012 as the y/y lift of penetration
gains of items above $1 eases (F2013 and F2014 CSS forecast at 3%). Fortunately,
Dollarama continues to have significant square footage growth opportunities (+7% to 8%)
and a number of productivity and efficiency initiatives that can support continued sector
leading earnings growth.
Figure 157: Growing penetration of product sales over $1.00
Fiscal Quarter
Q1-10A
Q2-10A
Q3-10A
Q4-10A
Q1-11A
Q2-11A
Q3-11A
Q4-11A
Q1-12A
Q2-12A
Average Ticket
3.5%
5.6%
6.2%
5.8%
6.6%
6.2%
6.3%
6.1%
6.3%
5.3%
Q3-12A
5.2%
Transaction Volume
4.0%
1.4%
1.1%
3.3%
1.9%
1.4%
1.6%
-0.7%
-2.8%
-0.5%
-0.1%
CSS
7.5%
7.0%
7.3%
9.3%
8.6%
7.8%
8.0%
5.4%
3.3%
4.8%
5.1%
$1.00+ Penetration
12.0%
23.7%
27.0%
30.0%
34.0%
39.2%
40.0%
42.0%
44.0%
48.0%
49.0%
880bps
900bps
- Y/Y bps change
1,200bps 2,370bps 2,700bps 3,000bps 2,200bps 1,550bps 1,300bps 1,200bps 1,000bps
Productivity and efficiency enhancements are expected to result in further cost savings.
Dollaramas gross margin has improved by over 400bps since 2005. However, management
25 January 2012
154
has suggested that they do not expect any material upside to the current run-rate of
approximately 37%. Over the long run, management strives to maintain a gross margin
rate of around 36% where they believe they can achieve a healthy balance between
maximizing value for shareholders and offering a compelling value proposition to
customers. While managements target suggests that gross margins may come under
pressure in the future, we see opportunities for offsets through SG&A cost containment.
We expect Dollarama to benefit from a number of infrastructure initiatives that should allow
the company to lower its operating expense rate. These include the following:
Over the past two years the

company has diversified its
supplier network
Scanning technology: Dollarama completed the roll-out of point-of-sale scanners in

F2011. As of F3Q12, scanning penetration reached 96% of products sold. While
scanning technology increases pricing accuracy, which reduces shrink, the greater
benefit will come from labour cost savings associated with physical inventory counting.
The company is undergoing the validation phase which involves comparing the physical
inventory count data to the scanner data. Management expects the scanner data to be
used as the primary source of information for store replenishment by July 2012 which
should lead to better in-stock position and reduced labour in stores. The labour cost of
physical inventory counting is estimated at $15-$17mn per year. With about half of
that cost expected to be eliminated, we estimate an EPS uplift of $0.06-$0.08.
Labour scheduling software: the company is testing Kronos biometric terminals in

stores and expects to launch the first phase shortly. The system is expected to help
better manage scheduling and in-store attendance. Management expects phase one to
have a positive impact on store productivity starting in F2013. Phase two will be rolled
out by the end of F2013, which will provide field management with a state-of-the-art
labour screening tool that is expected to further enhance in-store productivity and
improve customer service training. The company should realize benefits from the phase
two roll-out in F2014.
DC and warehouse systems upgrade: The first phase of Dollaramas DC automation

initiative was completed in F1Q12 which has already resulted in labour efficiencies. The
company plans to launch phase-two of its DC automation initiative, which is expected
to generate further efficiencies in F2013. During F2Q12, the company began
implementation of a new shipping and warehouse management system. The system will
allow the company to optimize its warehousing capacity and result in various
productivity gains beginning in F2013.
Dollaramas purchasing scale and long-standing relationship with suppliers contributes

to its competitive cost advantage. Dollarama initiated its overseas direct sourcing program
in 1993. The company now sources 54% of its purchases directly from a low-cost supplier
network. While the majority of overseas products are sourced from China, over the past two
years the company has diversified its supplier network to include manufacturers from India,
Indonesia, Thailand, Turkey and Italy. Dollaramas supplier base is well diversified with no
single supplier representing more than 6% of its total purchases. Dollarama also has its own
development team that works closely with its suppliers to design its products, packaging,
and labelling for its private-label brand.
Risks
25 January 2012
Import sourcing and/or transportation costs may rise, leading to lower margins.
Increased competition, resulting in more aggressive pricing; lower availability of prime

real estate locations.
155
Sales and earnings growth slows below aggressive market expectations.
Counter-cyclical risk more of a multiple constraint than an earnings risk.
Figure 158: Dollarama Financial Performance Summary

2009A
2010A
2011A
2012E
2013E
2014E
Average Ticket Growth (%)
Volume Growth (%)
$1,089
12.0%
10.2%
4.4%
3.9%
0.5%
$1,254
15.1%
7.3%
7.9%
5.4%
2.3%
$1,420
13.3%
8.9%
7.6%
6.3%
1.2%
$1,594
12.3%
8.7%
5.0%
5.5%
-0.5%
$1,800
12.9%
9.1%
3.5%
3.0%
0.5%
$1,945
8.0%
8.3%
4.0%
3.0%
1.0%
Gross Margin
EBITDA Margin
33.5%
19.4%
14.1%
35.3%
20.0%
15.3%
36.1%
19.6%
16.5%
37.0%
19.5%
17.5%
36.8%
19.2%
17.6%
36.7%
18.8%
17.8%

SG&A Variance
EBITDA Variance
-31 bps
64 bps
-95 bps
184 bps
61 bps
123 bps
78 bps
-39 bps
117 bps
83 bps
-19 bps
102 bps
-15 bps
-21 bps
6 bps
-15 bps
-42 bps
27 bps
6.60x
3.7%
$76
2.6%
1.97x
2.7%
$89
7.3%
1.32x
3.0%
$66
11.2%
0.79x
2.6%
$102
14.3%
0.27x
2.5%
$164
16.1%
-0.24x
2.3%
$203
17.7%

25 January 2012
156
COMPANY SNAPSHOT
Dollarama
Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (reported) ($)
Diluted shares (m)
2011A
1,420
234
205
179
124
1.64
75
-
2012E
1,594
279
246
229
160
2.12
76
0.18
2013E
1,800
316
277
266
188
2.50
75
0.40
2014E
1,945
347
303
296
209
2.78
75
0.45
CAGR
11.1%
14.0%
13.8%
18.4%
19.1%
19.2%
-0.1%
NA
16.5
14.5
12.6
8.7
11.2
21.2
18.1
17.5
15.4
14.4
10.1
14.3
25.1
20.0
17.6
15.4
14.8
10.4
16.1
26.8
20.0
17.8
15.6
15.2
10.7
17.7
29.0
19.2
Average
17.3
15.2
14.2
10.0
14.8
25.5
19.3

152
Goodwill
728
53
Total assets
1,311
348
Total liabilities
573
Net debt/(funds)
309
738
(10)
Operating cash flow
119
Capital expenditure
43
Net cash flow
66
162
728
51
1,366
258
514
221
853
(37)
181
42
102

EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROIC
ROA
ROE
168
728
92
1,429
164
441
86
988
6
204
45
164
CAGR
169
3.6%
728
0.0%
101 24.0%
1,447
3.4%
3 -78.8%
284 -20.9%
(84)
NA
1,163 16.4%
(5)
NA
253 28.6%
45
1.5%
203 45.2%
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
1-OVERWEIGHT
2-NEUTRAL
$44.00
$49.00
DOL
Investment case
Dollarama is the dominant dollar-store chain in
Canada with significant growth prospects,
compelling store economics and increased pricing
flexibility with the successful introduction of items
above $1. Our price target is based on a forward P/E
multiple of 19.5x our F2013 EPS estimate of $2.50.
Upside case
$52.00
Our Upside scenario reflects more robust EBITDA
margin expansion driven by improved product mix,
lower shrink and greater savings from store
productivity initiatives. In this scenario, our 2013E
EPS increases to $2.63. Applying a 19.5x P/E
multiple generates an Upside case of $52.
Downside case
$38.00
Our Downside case reflects further weakening in
store traffic, constraining CSS. In this scenario, we
estimate a Downside 2013 EPS of $2.36. Applying a
16x P/E (representing a contraction from the current
17.5x forward P/E) generates a Downside case of
$38.

P/E (x)
EV/EBITDA (x)
NCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
26.8
15.5
2.0
2.3
4.5
0.0
32.0
1.5
20.7
12.7
3.1
2.1
3.9
0.4
23.2
0.9
17.6
10.7
5.0
1.8
3.3
0.9
14.2
0.5
15.8
9.3
6.1
1.7
2.8
1.0
0.3
0.0
Average
20.2
12.1
4.0
2.0
3.6
0.6
17.4
0.7
63
53
53
$38
$38
(-13.6%)
(-13.6%)
43
43
33
33
Downside
Case
23
$47
$49
(6.8%)
(11.3%)
$50
$52
(18.1%)
(13.6%)
Price
Price
Target
Target
Upside
Upside
Case
Case
13
1/28/2011
1/20/2012
Source: FactSet

Capex/sales (%)

7.6
8.9
3.0
5.0
8.7
2.6
3.5
9.1
2.5
4.0
8.3
2.3
5.0
8.8
2.6
Same Store Sales
10%
Sq. Ft. Growth
8%
6%
4%
2%
0%
2011A
25 January 2012
2012E
2013E
2014E
Note: FY end jan.
157
Figure 159: SNAPSHOT North American Food Service Industry

C$ millions
Full Service
Limited-Service
Other
Total
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
$15,845 $16,332 $16,908 $17,084 $18,059 $18,788 $19,350 $20,006 $20,865 $20,675 $20,931
$13,671 $14,607 $15,041 $15,386 $16,026 $16,415 $17,917 $18,385 $19,517 $20,134 $21,220
$5,345 $5,400 $5,516 $5,534 $5,733 $5,986 $6,089
$6,246 $6,414 $6,288 $6,465
$34,862 $36,340 $37,465 $38,003 $39,818 $41,190 $43,356 $44,637 $46,795 $47,096 $48,616
2000
2001
# Locations
Full Service
29,248 28,923
Limited-Service
30,545 28,110
Other
14,219 14,148
Total
74,012 71,181
Source: CFRA; Statistics Canada
2002
29,534
28,441
13,906
71,881
2003
30,420
28,359
13,519
72,298
2004
31,683
31,602
13,119
76,404
2005
31,386
30,858
13,388
75,632
2006
30,387
31,811
13,366
75,564
2007
30,079
31,420
13,161
74,660
2008
31,156
32,249
13,249
76,654
2009
30,485
32,391
13,068
75,944
2010
29,796
33,541
12,688
76,025
CAGR
2.8%
4.5%
1.9%
3.4%
CAGR
0.2%
0.9%
-1.1%
0.3%
QSR Segment Breakdown in Canada (2010)

Top 5 QSR chains
Tim Hortons
McDonald's
Subway
A&W
Wendy's
Revenues ($M)
$5,621.1
$3,335.0
$1,392.4
$794.0
$645.0
Top 5 Casual-dining chains

Boston Pizza
Keg
Moxie's
East Side Mario's
Kelsey's
Revenues ($M)
$955.0
$476.3
$270.0
$217.9
$192.9
Top 5 Burger Chains

McDonald's
A&W
Wendy's
Burger King
Harvey's
Revenues ($M)
$3,335.0
$794.0
$645.0
$365.0
$213.2
Top 5 Pizza chains

Pizza Pizza
Pizza Hut
Domino's
Panago
Pizza Nova
Revenues ($M)
$414.0
$300.0
$223.0
$132.4
$89.5
Top 3 Coffee/Donut chains

Tim Hortons
Starbucks
Second Cup
Revenues ($M)
$5,621.1
$633.0
$190.2
Top 5 Ethnic chains

MTY Tiki Ming
Manchu Wok
Mandarin
Edo Japan
Teriyaki Experience
Revenues ($M)
$461.0
$119.3
$107.6
$65.0
$42.0
Source: Foodservice & Hospitality Magazine
Rank
Company
1 Tim Hortons
2 McDonald's
3 Subway
4 Cara (Swiss Cahlet, Harvey's, Kelseys, Montana's, Milestones)
5 Boston Pizza
6 Yum! Restaurants (KFC, Pizza Hut, Taco Bell)
7 A&W Food Services of Canada Inc.
8 Wendy's Restaurants of Canada Inc.
9 Starbucks Coffee Canada
10 Dairy Queen
11 Keg Restaurants Ltd.
12 MTY Tiki Ming Enterprises Inc.
13 Northland (Denny's, Moxie's)
14 Priszm (KFC, Pizza Hut, Taco Bell)
15 Pizza Pizza
16 Imvescor (Pizza Delight, Mikes, Scores, Baton Rouge)
17 Burger King
18 Prime Restaurants (East Side Mario's, Casey's, Bier Markt)
19 Yogen Fruz Canada Inc.
20 Quiznos
21 Domino's Pizza
22 SIR Corp. (Jack Astor's, Alice Fazooli's, Canyon Creek)
23 The Second Cup
24 Chairman's Brands (Coffee Time, Eggsmart, 241 Pizza)
25 Cora's
Source: Foodservice & Hospitality Magazine
25 January 2012
Units
3,750
1,436
2,557
680
392
1,091
730
367
1,063
638
103
1,727
145
429
444
254
296
154
888
458
340
46
349
493
120
18,950
Revenues ($M)
2010
2009
$5,621
$5,311
$3,335
$3,100
$1,392
$1,260
$1,261
$1,267
$955
$985
$900
$794
$757
$645
$658
$633
$595
$507
$490
$476
$463
$461
$393
$445
$399
$416
$442
$414
$418
$413
$418
$365
$364
$337
$340
$289
$268
$225
$225
$223
$199
$201
$197
$190
$190
$181
$190
$150
$125
$20,829
% chg
5.8%
7.6%
10.5%
-0.5%
-3.0%
na
4.9%
-2.0%
6.4%
3.3%
2.9%
17.3%
11.5%
-5.9%
-1.0%
-1.2%
0.3%
-0.9%
7.7%
0.0%
12.2%
2.1%
-0.1%
-4.7%
20.0%
Avg Sales
/Unit (000's)
$1,499.0
$2,322.4
$544.4
$1,854.3
$2,436.2
$824.9
$1,087.7
$1,757.5
$595.5
$794.2
$4,624.3
$266.9
$3,069.0
$969.2
$932.4
$1,626.8
$1,233.1
$2,186.4
$325.0
$491.3
$655.9
$4,367.4
$545.0
$367.3
$1,250.0
$1,099.1
$ Market
Share
27.0%
16.0%
6.7%
6.1%
4.6%
4.3%
3.8%
3.1%
3.0%
2.4%
2.3%
2.2%
2.1%
2.0%
2.0%
2.0%
1.8%
1.6%
1.4%
1.1%
1.1%
1.0%
0.9%
0.9%
0.7%
100.0%
158
TIM HORTONS
THI CN / THI.TO
Tim Hortons Inc.(THI.TO): Quarterly and Annual EPS (CAD)

2010
Stock Rating
1-OVERWEIGHT
Sector View
2-NEUTRAL
Price Target
CAD 54.00
Price (20-Jan-2012)
CAD 48.80
+11%
FY Dec
2011
2012
Change y/y
Actual
Old
New
Cons
Old
New
Q1
0.45A
N/A
0.48A
N/A
N/A
N/A
N/A
7%
N/A
Q2
0.53A
N/A
0.61A
N/A
N/A
N/A
N/A
15%
N/A
Q3
0.54A
N/A
0.65A
N/A
N/A
N/A
N/A
20%
N/A
Q4
0.52A
N/A
0.61E
N/A
N/A
N/A
N/A
17%
N/A
Year
2.04A
N/A
2.35E
2.35E
N/A
2.75E
2.72E
15%
17%
P/E
23.9
20.8
Cons
2011
2012
17.8


While Tims is classified as a
discretionary name, the
company has relatively strong
defensive characteristics
We are initiating coverage of Tim Hortons (THI.TO) with a 1-Overweight/2-Neutral rating

and $54 price target, offering a potential total return of 12% from recent levels. Our $54
price target is based on a 19.5x multiple applied to our 2012 EPS estimate of $2.75. Tim
Hortons stock price appreciated 18% in 2011 (S&P/TSX -11%) reflecting its relative safe
haven status. While Tims is a member of the S&P/TSX Consumer Discretionary Index, the
company has relatively strong defensive characteristics with approximately 55% of EBIT
generated by rent and royalty fees, providing a stable stream of income. The company has
also delivered industry-leading CSS growth through a combination of innovative new
products, a strong marketing program, continuous store network refresh, and, when
necessary, price increases. Finally, Tims has continuously supplemented EPS growth
through share buybacks and has boosted the dividend four times since becoming a public
company in 2006. While its U.S. growth strategy is taking longer than expected to
materialize, we believe Canada has sufficient new store growth potential to give the U.S.
operations time to ramp up Average Unit Volumes (AUV). Tims currently trades at 17.8x
forward P/E, which is modestly below its historical average of 18.8x. In light of our cautious
economic outlook, we believe investors flight to high quality defensive stocks could push
Tims valuation to above-average levels.
Figure 160: Tim Hortons P/E Valuation Range
EPS Range:
y/y % chg
P/E Multiples
15.0x
16.0x
17.0x
18.0x
19.0x
19.5x
20.0x
21.0x
22.0x
23.0x
24.0x
25.0x
F2012
BarCap est
$2.70
$2.80
$2.75
15.2% 17.3% 19.5%
$41
$43
$46
$49
$51
$53
$54
$57
$59
$62
$65
$68
$41
$44
$47
$50
$52
$54
$55
$58
$61
$63
$66
$69
$42
$45
$48
$50
$53
$55
$56
$59
$62
$64
$67
$70
F2013
BarCap est
$2.98
$3.08
$3.03
8.4% 10.2% 12.0%
$45
$48
$51
$54
$57
$58
$60
$63
$66
$69
$72
$75
$46
$49
$52
$55
$58
$59
$61
$64
$67
$70
$73
$76
$46
$49
$52
$56
$59
$60
$62
$65
$68
$71
$74
$77
Comments
<= Trough multiple
<= Long Term Avg = 18.8x

<= BarCap target valuation
<= QSR select Grp. Avg.

<= Peak valuation
25 January 2012
159
While Tims valuation appears rich versus the other companies in our coverage universe, we
believe it is justified by its strong earnings growth (second-highest in our group of stocks),
high liquidity, and large (free-float) market cap ($8bn market cap; second largest behind
Shoppers Drug Mart). As such, for investors familiar with the lack of liquidity in many of the
Retail / Consumer names we believe Tim Hortons warrants a premium valuation.
Tim Hortons appears attractively valued on a relative basis versus its Quick Service
Restaurant (QSR) peers. Historically, Tim Hortons has traded at an average discount of
22% compared to a select group of U.S. QSRs. Given the strong performance of a number
of companies in the QSR space, this discount has widened to 27%. Relative to McDonalds,
Tims is trading at a 7% discount versus its historical 10% premium as McDonalds shares
have experienced significant appreciation reflecting its market share gains versus the
broader restaurant category and a flight to quality names. Reverting back to its historical
mean versus McDonalds would imply a valuation multiple of 21x for Tim Hortons. We also
note that our 19.5x target multiple is below Tims long-term peak of 25x.
Figure 161: Quick Service Restaurants Historical Forward P/E Peak/Trough Cycle
Ticker Current
Tim Hortons
Max
1-Year
Min
Avg.
Max
3-Year
Min
Avg.
Max
5-Year
Min
Avg.
Max
All-Time
Min
Avg.
19.3x
16.9x
18.1x
19.3x
15.2x
16.9x
24.7x
15.1x
18.3x
25.3x
15.1x
18.8x
17.1x
THI
17.8x
Dunkin' Brands
DNKN
20.6x
McDonalds
MCD
17.7x
17.7x
14.2x
15.7x
17.7x
13.1x
15.0x
19.4x
13.1x
15.8x
32.7x
9.5x
YUM!
YUM
19.2x
19.2x
15.7x
17.5x
19.6x
11.5x
16.2x
21.6x
11.5x
17.0x
27.1x
7.3x
15.7x
Panera Bread
PNRA
27.4x
27.5x
20.2x
24.5x
28.1x
16.4x
21.9x
28.1x
14.6x
21.4x
48.6x
14.6x
27.4x
Sonic
SONC
12.2x
19.1x
10.5x
14.7x
19.6x
7.4x
14.1x
22.8x
6.3x
15.3x
26.7x
6.3x
17.6x
Chipotle
CMG
40.6x
42.7x
32.4x
38.1x
42.7x
18.6x
30.0x
56.0x
15.7x
32.4x
75.0x
15.7x
35.1x
Starbucks
SBUX
24.6x
24.6x
19.6x
22.0x
24.6x
10.9x
20.0x
35.8x
9.7x
20.5x
56.6x
9.7x
31.8x
Grp. Avg. ex THI
23.2x
25.1x
18.8x
22.1x
25.4x
13.0x
19.5x
30.6x
11.8x
20.4x
44.5x
10.5x
24.1x
THI vs Group avg
-24%
-23%
-10%
-18%
-24%
17%
-14%
-19%
28%
-11%
-43%
43%
-22%
1%
9%
19%
15%
9%
16%
13%
28%
15%
16%
-23%
59%
10%
THI vs MCD's
Source: FactSet.
Figure 162: Tim Hortons Comparable Valuation

Fiscal EPS
P/E
EPS Growth
Price
Market
Ticker
20/01/2012
Cap ($M)
FY0
FY1
FY2
FY0
FY1
THI - Consensus
THI
$48.80
$7,728
$2.04
$2.35
$2.72
23.9x
20.8x
18.0x
15%
16%
33%
THI - BarCap est.
THI
$48.80
$7,728
$2.04
$2.35
$2.75
23.9x
20.8x
17.7x
15%
17%
35%
McDonald's
MCD
$101.74
$104,102
$4.58
$5.22
$5.73
22.2x
19.5x
17.8x
14%
10%
25%
Yum!
YUM
$62.48
$28,772
$2.38
$2.86
$3.22
26.3x
21.8x
19.4x
20%
13%
35%
Chipotle
CMG
$356.39
$11,154
$5.64
$6.83
$8.66
63.2x
52.2x
41.2x
21%
27%
54%
Panera
PNRA
$151.83
$4,291
$3.62
$4.64
$5.48
41.9x
32.7x
27.7x
28%
18%
51%
Sonic
SONC
$6.84
$414
$0.31
$0.53
$0.61
22.1x
12.9x
11.1x
70%
16%
98%
Dunkin' Brands
DNKN
$26.53
$3,187
$0.22
$0.92
$1.21
NA
29.0x
22.0x
na
32%
na
Starbucks
SBUX
$48.15
$35,891
$1.62
$1.83
$2.22
29.7x
26.4x
21.7x
13%
22%
37%
34.2x
27.8x
23.0x
28%
20%
50%
Wendy's
WEN
$5.25
$2,043
-$0.01
$0.14
$0.22
NA
36.4x
24.1x
NA
51%
NA
AFC Enterprises
AFCE
$14.41
$351
$0.90
$0.96
$1.12
16.0x
15.0x
12.9x
6%
17%
24%
30.7x
26.7x
21.6x
24%
22%
45%
Average (ex THI)
Group Average
$19,793
FY2
Source: FactSet, Barclays Capital estimates. EPS estimates are consensus from FactSet except where noted.
25 January 2012
160
Company profile
Tim Hortons is Canadas leading QSR franchisor, with more than 3,800 system-wide
restaurants. Tim Hortons is the dominant player in Canada with 3,189 locations and a
commanding 42% share of all QSR traffic. The company serves eight out of every 10 cups
of coffee sold in Canada which, in part, speaks to its leadership in the morning daypart
(64% share of traffic in breakfast daypart).
Figure 163: THI commands a 42% share of all QSR traffic in Canada
Tim Hortons
41.8%
McDonald's
15.1%
Subway
4.4%
A&W
2.9%
Wendy's
2.3%
Starbucks
2.2%
DQ
2.1%
Burger King
1.8%
KFC
1.8%
Pizza Pizza
1.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
The company also has an emerging presence in the United States. Over the past five
years, Tim Hortons U.S. restaurant count has grown at a 16% CAGR to over 600 locations.
In 2010, the company launched a new international strategy to roll-out up to 120 multiformat restaurants in the Gulf Cooperation Council (GCC) over five years. Through a Master
Lease Agreement (MLA) the locations will be developed and operated by Apparel Group
with a commitment to open five stores by the end of 2011. While the size and nature of the
agreement is expected to be immaterial to Tim Hortons profits for some time, we believe
the real value of this venture will be the learning Tims accrues from the initiative regarding
brand development and operating outside of North America.
Tims has a number of significant
challenges to deal with
25 January 2012
Tims is currently operating under the leadership of Paul House, chairman and former CEO,
as the company looks to replace recently departed CEO Don Schroeder. While this is a more
than acceptable short-term solution, the longer it takes to find a new CEO, the more
uncertainty it creates for the stock. Tims has a number of significant challenges to deal
with, including: 1) a potential slowing growth profile in Canada as the store network inches
towards saturation, and 2) the longer-than-expected maturation cycle of the U.S. stores
although they are progressing, AUVs in the United States (aside from Buffalo) remain well
below Canada averages. However, we believe Tim Hortons can sustain enough new store
growth and menu innovation in Canada for at least five more years to support +10%
earnings growth and allow the U.S. stores to find ways to reduce the maturation cycle
enough to take over as the earnings growth driver when the time comes.
161
Figure 164: Canada remains the most significant driver of earnings

Store
C$mln
Canada
U.S.
System
Avg EBIT
Count
3,148
AUV
$2.070
Sales
$5,181.8
Sales
92%
EBIT*
$332.3
EBIT
97%
per Store
$0.106
602
$1.012
$452.3
8%
$9.9
3%
$0.017
*excluding Distribution Income, Equity Income, VIEs and Corporate charges

Figure 166: U.S.: Restaurant and AUV growth
Figure 165: Canada: Restaurant and AUV growth
2,711
$1,793
2006
2,823
2,917
3,015
3,148
563
602
520
$1,888
$1,955
$2,025
$2,070
398
336
2007
2008
# Restaurants
2009
AUV (C$ 000's)
2010
$944
$956
$930
$957
$978
2006
2007
2008
2009
2010
# Restaurants
AUV (US$ 000's)
Tim Hortons compelling franchise model delivers low-risk earnings growth. Like many
franchise operations Tim Hortons generates the majority of its earnings (50%-60% of EBIT)
from rent and royalty fees (as a percentage of system sales), providing investors with
limited earnings volatility/risk assuming system sales remain in growth. Further, the
companys vertically integrated business model provides a high degree of quality control as
well as an additional layer of revenue and income through the supply of goods and
equipment to its restaurants.
25 January 2012
162
Figure 167: Tim Hortons vs. Dunkin Donuts

Tim Hortons
Canada
% Franchised
Initial franchise fee
Agreement Term
Dunkin' Donuts
U.S.
99.5%
99.3%
Upfront fee plus cost of equipment sold to franchisees
10yrs, plus aggregrate renewal period of 10yrs
3.5% - 4.5%
Royalty payment
Real estate
79% corporate owned or leased
Rent (paid to corp.)
8.5% - 10%
Advertising fund
Disitribution/Supply chain
3.5%
4.0%
Vertically-integrated distribution platform; 5 DC's in Canada; 3rdparty distributors in U.S.
Food Manufacturing
Corporately controlled; supply agreement with Maidstone

Bakeries & other 3rd-party suppliers; 2 coffee roasting facilities
(in ON & NY); fondant and fills plant (ON)
AUV ('000s)
Avg. Standard store size
$2,070
$978
1,400 to 3,090 sq ft
U.S.
99.8%
$40,000 - $80,000
20yrs
5.4%
Majority leased by franchisees from 3rdparty landlords
n/a
5.0%
Franchisee-owned purchasing and
distribution cooperative (National Distributor
Commitment Program, NDCP)
Franchisee-owned/operated; 100+
Centralized Mfg. Locations (CMLs); on-site
baking in certain stores or sourced from
store with on-site production
$855
1,200 to 2,500 sq ft

The quick serve restaurant sector is the most defensive segment within the restaurant
industry due to its lower average transaction values and typical franchise structure. Not
surprisingly, as the recession took hold, consumers restaurant expenditures declined as
they shifted some of their food/entertainment dollars from eating out to eating in.
Tims did experience a brief period of slowed CSS but responded immediately with an
increased emphasis on value meals, which got it back on course. More recently, as part of
its 3Q11 release, Tims noted a decline in traffic in Canada for the first time since 2008 with
management expressing a sense that consumers are once again hunkering down.
Increasing returns to shareholders

Historically, Tims has generated
a consistent stream of strong
excess free cash flow
25 January 2012
Beyond these economic aberrations Tims results have been strong (industry leading in
some periods) and generally very consistent. As with many franchise operations Tims
growth capex needs are typically very limited. Combine that with the Canadian operations
critical mass advantages and strong sales growth and you get a consistent stream of strong
excess free cash flow that can be returned to shareholders to enhance its returns.
163
Figure 168: Tim Hortons Free Cash Flow ($ mn)

Fiscal Year (Dec)
2006
2007
2008
2009
Operating Cash Flow
$329
$347
$355
Change in W/C
-$70
$38
$15
$259
$385
Capex
-$180
$79
Free Cash Flow
2010
2011E
2012E
2013E
$436
$767
$432
$528
$571
-$32
-$241
-$43
-$15
-$12
$370
$404
$526
$389
$513
$559
-$176
-$174
-$158
-$133
-$190
-$180
-$191
$210
$195
$246
$393
$199
$333
$368
Dividends
-$27
-$53
-$66
-$73
-$90
-$175
-$245
-$267
$697
-$178
-$169
-$131
-$247
-$597
-$200
-$250
Acquisitions/Dispositions
$0
$0
$0
$0
$445
$38
$0
$0
Net Change in Debt

Remaining Free cash flow
-$793
-$44
-$1
-$22
-$4
-$44
-$3
$40
-$29
$472
-$4
-$538
$0
-$111
$0
-$149
$0.41
$1.11
$1.06
$1.36
$2.25
$1.27
$2.18
$2.49
1.3%
3.2%
3.3%
4.5%
6.3%
2.8%
4.5%
5.1%
28.2%
27.9%
27.3%
28.3%
32.7%
32.5%
ROE
24.5%
26.7%
Tim Hortons has had an impressive track record of returning this excess cash to
shareholders through share repurchases and dividend increases. Since the IPO in 2006,
Tim Hortons has raised its dividend four times (average 25% increase per year). The
company has also aggressively repurchased stock which has enhanced EPS growth by
approximately 3% per annum in each of the past four years.
An extraordinary appeal for investors in 2011 has been the security of the special
share repurchase program that Tims put in place following the sale of its joint venture
stake in the Maidstone bakery which is expected to contribute to a 7.7% EPS lift in fiscal
2011. Tims is using $445mn from the proceeds of that sale to buy back up to 10% of the
companys public float to offset the EPS drain of the lost equity income. As of 3Q11, the
company had approximately $64mn available for repurchase before the program
terminates in March 2012. We expect Tim Hortons will establish a new $200mn buyback
program when the current one expires, or possibly sooner, which in combination with the
current years program should lift EPS by 5% y/y in 2012.
Figure 169: Tim Hortons: Company-Generated Growth/Returns for Shareholders
2007
2008
2009
2010
CAGR
2011E
2012E
Net earnings growth
3.8%
12.0%
6.9%
10.2%
9.7%
7.3%
12.1%
Share count EPS impact
2.4%
3.0%
1.9%
4.0%
3.0%
7.7%
5.2%
Total EPS growth
6.2%
15.0%
8.8%
14.2%
12.6%
15.0%
17.3%
Dividend yield
0.8%
1.1%
1.3%
1.5%
1.2%
1.5%
1.6%
Company generated return
7.0%
16.1%
10.1%
15.7%
13.8%
16.5%
18.9%
9.8%
-32.4%
34.4%
17.3%
5.4%
ROE
26.7%
28.2%
27.9%
27.3%
28.3%
32.7%
0.3x
0.4x
0.4x
-0.3x
0.3x
0.2x
Net debt to EBITDA
Source: Company reports, Bloomberg, Barclays Capital estimates.
Tim Hortons growth strategies have remained fairly constant over the past several years
with the exception of some significant changes in the United States and the introduction of
an international strategy in 2011. Managements broadly stated growth strategies for the
2011-2013 period includes the following four key elements:
25 January 2012
164
1. Attack daypart opportunities with new product and marketing opportunities to drive
CSS;
2. Invest in building scale and the Tim Hortons brand in new and existing markets. The
new markets strategy is predominantly focused on its U.S. growth platform and more
recently on its second international venture (started with a JV in Ireland in 2006; recently
opened its first store in Dubai) which is viewed as a go-slow test of a master franchise
approach.
3. Identifying new avenues of growth this includes new products, new formats, new
markets;
4. Leverage the core business strengths and franchise system.
Tim Hortons has a solid track record of delivering industry leading CSS in both Canada
and the United States.
Figure 170: Tim Hortons CSS consistently ahead of QSR peers
20%
15%
10%
5%
0%
1Q-99
2Q-99
3Q-99
4Q-99
1Q-00
2Q-00
3Q-00
4Q-00
1Q-01
2Q-01
3Q-01
4Q-01
1Q-02
2Q-02
3Q-02
4Q-02
1Q-03
2Q-03
3Q-03
4Q-03
1Q-04
2Q-04
3Q-04
4Q-04
1Q-05
2Q-05
3Q-05
4Q-05
1Q-06
2Q-06
3Q-06
4Q-06
1Q-07
2Q-07
3Q-07
4Q-07
1Q-08
2Q-08
3Q-08
4Q-08
1Q-09
2Q-09
3Q-09
4Q-09
1Q-10
2Q-10
3Q-10
4Q-10
1Q-11
2Q-11
3Q-11
-5%
QSR US Comp Average
THI Canada CSS
THI US CSS
Source: Company reports, Barclays Capital U.S. Restaurants team.
Canadian growth runway still compelling which buys the US time

Canada has sufficient new store growth and menu potential to give the U.S. operations
time to ramp up AUVs. We believe that Tims can be successful in the United States if it is
patient and tactical. The real question is whether Tims can sustain enough growth in
Canada to support +10% earnings growth and allow the established U.S. stores to reach
necessary maturation and critical mass. We believe the answer is yes: Canada can buy the
US time.
Significant underdeveloped daypart penetration being pursued through new product
introductions. Tims strong CSS performance has, in part, been driven by the launch of
innovative products to more effectively compete and grow in the morning, snacking and
lunch dayparts. Since 2007, the company has introduced 20-25 products each year. In
Canada, Tim Hortons is by far the dominant QSR in the morning daypart with more than a
63% share. In order to capture a greater share of the late morning business, Tim Hortons
recently extended its breakfast hours from 11am to noon. Despite not competing in 50% of
the lunch daypart categories (i.e., burgers and pizza), Tim Hortons is a close second at less
than 3 percentage points behind McDonalds. Tim Hortons more recent menu
25 January 2012
165
developments include the introduction of espresso-based lattes at very competitive price

points (starting at $2). While specialty coffee represents a relatively small portion of the
overall coffee market, it is one of the faster growing segments and allows Tim Hortons to
build upon its leadership in the coffee category in Canada.
Figure 172: Respectable share of lunch even without burgers
Figure 171: THI is the leader in the morning daypart

Tim Hortons
63.7%
McDonald's
17.6%
A&W
McDonald's
21.1%
Tim Hortons
2.9%
18.5%
Subway
9.9%
Starbuck's
1.4%
A&W
Subway
1.3%
Wendy's
Country Style
1.0%
Burger King
0%
10% 20%
McDonalds is a longer-term
competitive threat
30%
40%
50% 60%
70%
5.2%
4.5%
3.7%
0%
5%
10%
15%
20%
25%
McDonalds premium coffee push poses a longer-term risk. McDonalds recently

announced plans to invest $1 billion to undertake its largest store rebranding initiative in its
history in Canada. This initiative includes further roll-out of its McCaf concept and new
coffee and beverage products such as lattes, cappuccinos, and deluxe hot chocolate. Over
half of McDonalds Canadas roughly 1,400 restaurant locations currently carry espressobased beverages. By the end of 2012, the majority of the remaining locations will include a
McCaf.
In support of its coffee push, McDonalds has given away 60 million cups of coffee through
six trial events in the past three years. According to management, McDonalds marketing
efforts drove coffee sales up 45% in 2010 with similar growth projected for 2011. As a
result, McDonalds breakfast daypart has experienced double-digit growth over the last
three years making it the fastest growing daypart for the company. We do not expect
McDonalds to pose any material risk to Tim Hortons over our forecast horizon. However,
given Tim Hortons dominant share in the morning daypart, it is the most exposed to
McDonalds coffee and caf build-out. As such, we view McDonalds as a longer-term
competitive threat.
Still lots of room to grow in

Canada before passing the
earnings growth baton to the US
25 January 2012
Despite Tims already extensive presence across Canada the company continues to see
significant location growth opportunities in its home market. Historically, the company
has built roughly 140 restaurants, replaced 20 and renovated on average about 100
restaurants per year. In the past five years, the company has opened, replaced and
renovated more than 1,300 locations in Canada. Management believes that there is
potential for 4,000+ Tim Hortons restaurants in Canada. Assuming an annual development
of 140 net new stores, Tim Hortons would have at least five more years of store growth
before reaching managements targeted saturation level.
166
Figure 173: Still room for growth in Canada

2010A
2011E
2012E
2013E
2014E
2015E
2016E
2017E
Atlantic
354
364
374
384
394
404
414
424
Quebec
Ontario
West
439
1,588
655
489
1,608
715
539
1,628
775
589
1,648
835
639
1,668
895
689
1,688
955
739
1,708
1,015
789
1,728
1,075
Total
3,036
3,176
3,316
3,456
3,596
3,736
3,876
4,016
140
140
140
140
140
140
Store Count
Net New Stores

THI Target
Pop/store (000's)
Atlantic
Quebec
Ontario
140
4,000
6.6
6.5
6.3
6.2
6.1
5.9
5.8
5.7
18.0
16.3
14.9
13.7
12.8
11.9
11.2
10.6
8.3
8.3
8.4
8.4
8.4
8.4
8.4
8.4
West
16.1
14.9
14.0
13.1
12.4
11.8
11.2
10.7
Total
11.2
10.9
10.5
10.2
9.9
9.7
9.4
9.2
Source: Company reports, Statistics Canada, Barclays Capital estimates
US Ops: making progress, but still a long way from a growth driver
The U.S. store maturation cycle is still too long and the AUV is still too far below Canadas
for the U.S. roll-out to become a meaningful earnings growth driver in the foreseeable
future. The concern remains that beyond Buffalo none of the other aggregated markets
have come close to the Canadian AUV levels although they are progressing. The Syracuse
stores have reached a similar absolute AUV level (not inflation adjusted) that Buffalo
reached in 1998 ($738/standard store; disclosed in IPO presentations). This directionally
suggests that it could take Syracuse 10+ more years to reach Buffalos current AUV level,
which is generally in line with the Canadian average. We remain hopeful, but cautious, that
the addition of Cold Stone, other new products, and the potential success of the
repositioned new store design may eventually contribute to a shrinking of the Tims new
store productivity maturation cycle.
Figure 174: Tim Hortons
Standard Restaurants
Buffalo DMA
Columbus / Detroit
Rochester DMA
Syracuse DMA
Canada
Years in Mkt
~ AUV's
15+ Years
12 - 15 yrs
$1.6 mln
$900 to 950k
5 - 7 yrs
3 - 5 yrs
$930k
$700k
~$2 mln
The recent U.S. repositioning and menu development needs to work if the US is ever
going to be a meaningful earnings growth driver. As part of its efforts at boosting
profitability in the United States, Tim Hortons has undergone two rounds of store closures
in the New England region (11 stores in 2008; 34 restaurants and 18 self-serve kiosks in
2010). The shuttering of these restaurants has in part contributed to an improvement in
the U.S. segment operating income as it has resulted in higher rents and royalties due to
lower relief that was provided to the underperforming restaurants.
Given its lower awareness in the United States versus in Canada, the company has adopted
a differentiated marketing approach to better establish itself as a true contender in the
25 January 2012
167
hyper-competitive U.S. QSR segment. Tims has also developed a new store concept that
more clearly defines it as a Caf and Bake Shop. In addition to new signage, the concept
has a more inviting environment that encourages customers to dine in and try new
products.
Tim Hortons has embarked on a number of strategic initiatives to make it look bigger
through partnerships and strategic alliances with Cold Stone Creamery, The New York State
Thruway, Tops Friendly Markets and the U.S. military. With over 1,400 locations, Cold
Stones brand awareness in the United States is much higher than Tim Hortons. Thus, Tims
is able to leverage Cold Stones brand power to draw in more customers. The Cold Stone
partnership also allows Tims to leverage its fixed asset by doing more business between the
hours of 3pm to 10pm, a segment where a traditional Tim Hortons-only store is not overly
busy. There are currently 215 co-branded locations.
Tims partnership strategy also allows the company to seed the brand and enter into new
geographies with minimal capital investment. However, store development in the United
States will primarily focus on existing markets, with roughly 30% of capex devoted to
growing in contiguous markets. When entering a new market, Tims more recent strategy
has been to launch with more stores at once, as it had done in Syracuse. In 2008, Tims
opened 17 restaurants within 120 days, providing more immediate scale versus building out
stores one by one.
We are encouraged by Tims U.S.
growth strategies
We are encouraged by Tims U.S. growth strategies as the company has returned to
generating positive operating income over the past two years. However, as weve noted
previously, the U.S. store maturation cycle is still too slow and AUVs still too low for the U.S.
operations to become a more meaningful earnings driver in the near term. As weve
highlighted above, the Canada segment standard-store AUV is double that in the United
States while estimated average EBIT per store in Canada is six times greater than the US.
Figure 175: Tims US operations financial performance trend
C$mln
Store Count
System Sales
EBIT
*53 weeks
2006
2007
2008
2009*
2010
336
$279.3
398
$321.9
520
$369.0
563
$461.6
602
$452.3
$1.7
-$4.8
-$5.2
$4.8
$9.9
Coffee price outlook

Volatility in coffee commodity prices can impact margins as Tim Hortons sells coffee to
franchisees on a penny-profit basis. While this is beneficial to margins in a declining price
environment, it can also place pressure on margins if the competitive environment does not
allow Tim Hortons to implement price increases. In order to achieve reasonable cost
certainty, Tims typically hedges its future coffee purchase 6-12 months forward. This
practice has been particularly effective in light of the highly unpredictable coffee prices in
the spot market over the past two years. The company has bought forward partly through
2012 (not the entire year yet). Based on managements current outlook, Tim Hortons does
not plan to take any price increases in 2012 unless cost pressures force it to.
25 January 2012
168
Figure 176: Brazilian Natural Arabica Spot Price

$300
140%
$270
120%
$250
$260
80%
60%
$150
40%
$100
20%
0%
$50
$0
2008
2009
Spot Price
2010
2011
Y/Y % Change
Source: ICO.
US cents per pound
100%
$200
2007
Figure 177: Coffee C Futures Curve
$250
$240
$230
$220
-20%
$210
-40%
$200
Jan-12-2012
Dec-13-2011
Jul-15-2011
Jan-14-2011
$190
Jan
Mar
May
Jul
Sep
Nov
Source: Bloomberg.
Risks
25 January 2012
Commodity risks volatile coffee pricing exposes Tim Hortons to margin risk.
FX risk U.S. dollar denominated coffee prices and growing presence in the United
States result in FX-related earnings risk.
Potential inroads in Canada by McDonalds in the coffee and breakfast daypart

segments which are Tims core business.
Tims greatest long-term earnings risk is if it fails to get the U.S. operations profitability
up to a sufficient level to sustain consolidated company earnings growth (including
share buybacks) at 10% per year. We estimate that Tim Hortons has at least five more
years of substantial new store growth in Canada before it reaches maturation and menu
development continues to drive at least 1%-2% CSS growth every year.
169
Figure 178: Tim Hortons Financial Performance Summary
Sales ($M)
Sales Growth (%)
2009A
2010A
2011E
2012E
2013E
$1,704
$1,785
$1,927
$2,059
$2,178
26.4%
4.8%
7.9%
6.9%
5.8%
Canada Same Store Sales (%)
2.9%
4.9%
3.5%
3.0%
3.0%
US Same Store Sales (%)
3.2%
3.9%
5.5%
5.0%
4.0%
Weighted Same Store Sales (%)

Total Revenue ($M)
2.9%
4.8%
3.7%
3.2%
3.1%
$2,439
$2,566
$2,761
$2,938
$3,129
19.3%
5.2%
7.6%
6.4%
6.5%
Canada Sq. Ft. Growth (%)
3.6%
4.0%
4.0%
4.1%
3.6%
US Sq. Ft. Growth (%)
7.8%
-1.8%
12.9%
11.4%
6.9%
Total Sq. Ft. Growth (%)
4.2%
3.1%
5.3%
5.2%
4.1%
Gross Margin on Sales (%)
14.0%
14.4%
11.6%
13.4%
13.7%
165 bps
33 bps
-280 bps
180 bps
30 bps
EBITDA Margin on Revenue (%)
25.9%
26.9%
24.7%
25.8%
25.8%
EBITDA Margin Variance (bps)
-154bps
99bps
-222bps
113 bp
4 bp
Gross Margin Variance (bps)
0.4x
-0.3x
0.3x
0.2x
0.1x
Capex as a % of Total Revenue (LTM)
6.5%
5.2%
6.9%
6.1%
6.1%
Free Cash Flow ($M, After Capex/WC)
$258
$393
$285
$362
$393
Return on Equity
27.9%
27.3%
28.3%
32.7%
32.5%
24.6%
32.8%
27.5%
29.4%
29.9%
*Sales refers to warehouse sales and to Corporate stores and store consolidated under FIN 46 Rules.
**Depreciation not reported in quarterly release - BarCap estimate
25 January 2012
170
COMPANY SNAPSHOT
Tim Hortons
Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (reported) ($)
Diluted shares (m)
2010A
2,566
690
571
548
356
2.04
174
0.52
2011E
2,761
681
566
544
381
2.35
163
0.68
2012E
2,938
758
633
608
428
2.75
155
0.76
2013E
3,129
809
674
650
457
3.03
151
0.84
CAGR
6.8%
5.4%
5.7%
5.8%
8.7%
14.1%
-4.7%
17.1%
26.9
22.2
21.3
13.9
32.8
14.3
27.3
24.7
20.5
19.7
13.8
27.5
17.5
28.3
25.8
21.5
20.7
14.6
29.4
18.6
32.7
25.8
21.5
20.8
14.6
29.9
19.0
32.5
Average
25.8
21.5
20.6
14.2
29.9
17.4
30.2

1,374
Intangible assets
5
574
Total assets
2,482
355
112
Total liabilities
919
Net debt/(funds)
(220)
1,437
94
Operating cash flow
526
Capital expenditure
133
Free cash flow
393
1,476
5
182
2,177
360
117
792
177
1,262
(43)
475
190
285
1,531
5
227
2,305
360
117
807
133
1,376
(15)
542
180
362
CAGR
1,587
4.9%
5
-3.9%
244 -24.8%
2,403
-1.1%
360
0.5%
117
1.4%
820
-3.7%
116
NA
1,461
0.6%
(12)
NA
584
3.6%
191 12.8%
393
0.0%
17.7
10.2
4.8
2.6
5.5
1.6
20.7
0.5
Average
16.1
19.6
9.2
10.8
5.3
4.6
2.3
2.8
5.0
5.7
1.7
1.4
19.8
20.6
0.4
0.5

EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROIC
ROA
ROE

P/E (x)
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
23.9
12.0
4.6
3.3
5.9
1.1
19.8
0.5
20.8
11.9
3.6
2.9
6.3
1.4
22.2
0.5
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
1-OVERWEIGHT
2-NEUTRAL
$48.80
$54.00
THI
Investment case
THI is a leading QSR with a dominant position in
Canada. Its franchise model and industry-leading
CSS has helped deliver a stable stream of income
despite a slowing economy, making THI a strong
defensive investment. Our 19.5x target multiple
reflects its relative safe haven status, strong EPS
growth, and Canadian scarcity premium.
Upside case
$58.00
Our Upside case reflects new restaurant growth at
the high end of guidance range in Canada and U.S.
and more robust CSS driven by new product
innovations. In this scenario, our 2012 EPS forecast
would increase to $2.89 driving an Upside case of
$58 using our 20x target multiple.
Downside case
$45.00
Our Downside scenario reflects continued weakness
in traffic volume in Canada, constraining CSS. We
believe a lower target multiple is warranted under a
slower growth scenario. Applying a 17x P/E on a
reduced 2012 EPS forecast of $2.67 generates our
Downside case of $45.
70
60
$45
(-7.78%)
(-7.67%)
50
40
Downside
Case
30
$54
(10.7%)
(10.6%)
Price
Target
$58
(18.8%)
(18.9%)
Upside
Case
20
1/27/2011
1/20/2012
Source: FactSet
Same Store Sales

Can same store sales (%)
US same store sales (%)
4.8
4.9
3.9
3.1
3.7
3.5
5.5
5.3
3.2
3.0
5.0
5.2
3.1
3.0
4.0
4.1
3.7
3.6
4.6
4.4
Canada
6%
5%
4%
3%
2%
1%
0%
2010A
25 January 2012
2011E
US
2012E
2013E
Note: FY end Dec.
171
Figure 179: SNAPSHOT: North American Home Hardware Industry Canada vs. US
Canadian Hardware Industry
1 Rona
Stores
917
United States Hardware Industry
System
Market
Sales ($B)
$7.2
Share
17.7%
System
Market
Home Depot
Stores
2,248
Sales ($B)
$68.0
Share
26.2%
18.8%
2 Canadian Tire
488
$5.8
14.3%
Lowe's
1,749
$48.8
3 Home Depot
179
$5.6
13.7%
Menard
255
$8.3
3.2%
1,080
$5.0
12.3%
ProBuild
454
$3.5
1.3%
4 Home Hardware
5 Tim-Br-Marts
745
$3.3
8.1%
Fastenal
2,490
$2.3
0.9%
6 ILDC
135
$1.7
4.2%
84 Lumber
274
$1.5
0.6%
0.4%
7 Sexton Group
285
$1.3
3.3%
Sutherland Lumber
56
$1.0
8 BMR Group
183
$1.3
3.2%
Northern Tool & Equip.
65
$0.9
0.3%
9 Castle building Centres
284
$1.0
2.5%
Stock Building Supply
57
$0.9
0.3%
10 Sears Hardware
10 Allroc Building Products

Top Ten
56
$0.7
1.8%
4,352
$33.0
81.2%
Top Ten
111
$0.7
0.3%
7,759
$135.8
52.3%
11 Delroc Industries
117
$0.6
1.5%
11 Builders FirstSource
89
$0.7
0.3%
12 Alpa Lumber
650
$0.6
1.4%
12 Carter Lumber
189
$0.7
0.3%
13 Federated Co-ops
19
$0.5
1.3%
13 Orchard Supply Hardware
88
$0.6
0.2%
14 Kent Building Supplies
210
$0.4
1.0%
14 BMC
77
$0.6
0.2%
15 McCoy's Building Supply
15 TORBSA
Top Fifteen
Remaining
Total Industry
33
$0.4
1.0%
5,381
$35.5
87.5%
$5.1
12.5%
$40.6
100.0%
Top Fifteen
83
$0.5
0.2%
8,285
$138.9
53.5%
Remaining
$120.8
46.5%
Total
$259.7
100.0%
Sources: Barclays Capital estimate, Hardware Merchandising Magazine, Home Channel News, Home Improvement Research Institute
RONA
Home Depot
Lowe's
12 Months Ending
Dec-10
Jan-11
Jan-11
Total Store Count
956
2,248
1,749
Franchise / Affiliate dealers
665
21
235
199

Sales per Corporate Store ($M)
$12.5
$30.2
$27.9
30,827
104,537
113,493
$4,800
$67,997
$48,815
0.1%
-4.2%
0.4%
0.0%
2.9%
1.3%
Gross Margin (%)
27.8%
34.3%
35.1%
EBITDA Margin (%)
7.1%
10.9%
10.5%
4.8%
8.6%
7.3%
Net Margin (%)
3.0%
5.0%
4.1%
Inventory Turns
4.3x
4.3x
3.8x
1.5%
1.6%
1.6%
Net Debt to EBITDA
1.1x
1.2x
1.1x
$192
$3,489
$3,069
FCF Yield (%)
9.9%
6.5%
9.3%
ROE (%)
8.0%
8.2%
10.8%
ROIC (%)
7.6%
6.7%
8.4%
25 January 2012
172
RONA INC.
RONA Inc.(RON.TO): Quarterly and Annual EPS (CAD)
RON CN / RON.TO
2010
Stock Rating
2-EQUAL WEIGHT
FY Dec
Sector View
2-NEUTRAL
Price Target
CAD 10.00
Price (20-Jan-2012)
CAD 9.55
+5%
2011
2012
Change y/y
Actual
Old
New
Cons
Old
New
Q1
0.02A
N/A
-0.13A
N/A
N/A
Q2
0.50A
N/A
0.28A
N/A
N/A
Q3
0.36A
N/A
0.36A
N/A
N/A
N/A
N/A
0%
N/A
Q4
0.14A
N/A
0.17E
N/A
N/A
N/A
N/A
21%
N/A
Year
1.03A
N/A
0.68E
0.76E
N/A
0.91E
0.97E
-34%
34%
P/E
9.3
14.0
Cons
2011
2012
N/A
N/A
-750%
N/A
N/A
N/A
-44%
N/A
10.5


Most of the underlying
fundamentals over the next 12
months point to a range-bound
valuation
We are initiating coverage of RONA Inc. (RON.TO) with a 2-Equal Weight/2-Neutral

rating and a $10 price target, offering investors a total potential return of 6% from recent
levels. RON is recently trading at a 35% discount to the average forward valuation of Home
Depot and Lowes, which is in line with the long-term historical average discount. Our price
target is based on an 11x P/E on our F2012 EPS forecast of $0.91. Our P/E multiple of 11x
is below RONs long-term average of 12x, reflecting a less robust housing and renovation
spending outlook as these drivers are expected to ease toward normalized growth rates
over the next 2-5 years. We see the potential for a short-term trading opportunity in
RONAs shares over the next 12 months driven by: 1) a broad market valuation lift as E.U.
and U.S. uncertainty eases, 2) a potential relative valuation lift if U.S. housing trends
improve, increasing HD or LOW multiples, and 3) a possible 1H12 renovation spending
bounce in Canada that could lift RONAs CSS back into positive territory for the first time
since 2Q10. However, most of the underlying fundamentals over the next 12 months, or
more, point to a range-bound valuation.
Figure 180: Rona P/E Valuation Range
f2012
f2013
BarCap est
Comments
BarCap est
$0.85
$0.91
$0.95
$0.85
$1.02
$0.95
24.1%
32.5%
38.7%
24.1%
48.9%
38.7%
7.0x
$6
$6
$7
$6
$7
$7
8.0x
$7
$7
$8
$7
$8
$8
9.0x
$8
$8
$9
$8
$9
$9
10.0x
$9
$9
$10
$9
$10
$10
11.0x
$9
$10
$10
$9
$11
$10
BarCap target valuation multiple
12.0x
$10
$11
$11
$10
$12
$11
Rona's long-term average P/E
EPS range
y/y growth
P/E Multiple
Rona's trough multiple
13.0x
$11
$12
$12
$11
$13
$12
14.0x
$12
$13
$13
$12
$14
$13
HD & LOW current average P/E
15.0x
$13
$14
$14
$13
$15
$14
HD & LOW 5 Yr. avg. P/E
25 January 2012
173
Figure 181: RONAs Forward P/E history vs. HD and LOW

1-Yr
2-Yr
3-Yr
4-Yr
5-Yr
FY1
FY2
NTM
Avg.
Avg.
Avg.
Avg.
Avg.
Max
Min
Avg.
Home Depot
18.2x
15.9x
16.0x
14.7x
15.1x
15.6x
15.3x
14.9x
35.2x
10.3x
16.3x
Lowe's
16.3x
14.8x
14.8x
13.6x
14.3x
14.9x
14.8x
14.7x
38.3x
11.1x
18.4x
Rona
10.3x
9.0x
10.2x
10.8x
10.9x
10.9x
10.3x
10.5x
17.5x
7.3x
11.7x
Avg. Ex Rona
17.3x 15.3x 15.4x
14.1x
14.7x
15.3x
15.1x
14.8x
36.8x 10.7x 17.3x
Average
15.0x 13.2x 13.7x
13.0x
13.5x
13.8x
13.5x
13.4x
30.4x
Fwd. P/E
All-Time
9.6x
15.4x
Rona's relative valuation vs.

Home Depot
-43%
-43%
-36%
-27%
-28%
-30%
-33%
-29%
-50%
-29%
-28%
Lowe's
-37%
-39%
-31%
-21%
-24%
-27%
-31%
-28%
-54%
-34%
-36%
Average Discount
-40% -41% -33%
-24%
-26%
-29%
-32%
-29%
-52% -32% -32%
Source: FactSet / Reuters.
Figure 182: Home Improvement Retail forward PE trends

25x
20x
15x
10x
5x
0x
2003
2004
2005
2006
2007
RON
2008
2009
HD
LOW
2010
2011
2012
Source: FactSet / Reuters
RONAs shares are currently trading at a 10.2x forward P/E multiple on consensus EPS,
which is in line with its 5-year average. This compares to the stocks long-term average of
12x and average P/E during the North American housing boom of 13x-14x. With
expectations of materially slower renovation spending growth (2%-4%) once the
renovation market stabilizes and Lowes build-out still a risk factor it seems doubtful that
investors will be willing to pay the same normalized P/E multiple for RONAs shares that
they did during the most recent housing/renovation boom - especially if interest rates start
to rise. Beyond recovery/rebound multiple expansion on a normalized basis we do not
expect Ronas forward P/E multiple to settle in above 10x-11x versus the loftier 13x-14x
range they achieved during the housing boom.
As the analysis below shows, if we increase our F2012 CSS forecast from -0.2% to 2%
(more in line with what we expect normalized renovation spending growth will be) and
provide RONA with expense rate leverage through to EBITDA, our earnings estimate
increases to $1.02 from $0.91, matching our current F2013 EPS forecast. While investors
may be willing to pay a recovery multiple for those higher-than-expected F2012 earnings
we believe they should not pay more than 10x-11x for F2013 EPS which would likely be
10% above F2012, or approximately $1.12. Putting a 10x-11x P/E on the F2013 EPS of
$1.12 would support a valuation of $11-$12 two years from now, which is 15%-26% above
25 January 2012
174
the current share price, but limited upside versus any price appreciation the stock might
achieve in response to a more robust 2012.
Figure 183: RONA Upside Scenario Analysis
Upside Scenario to 2012E
2011E
Peak
2012E
2013E
EBITDA
$1.58
EPS
$0.68
$0.91
$1.02
$0.97
$1.02
$1.08
CSS
-7.5%
-0.2%
2.0%
1.0%
2.0%
3.0%
3.0%
EBITDA margin
5.79%
6.35%
6.70%
6.50%
6.63%
6.75%
8.50%
56bps
91bps
71bps
83bps
96bps
271bps
margin var. (vs. '11)

P/E multiple
Target Share Price
10x
$6.85
$9.07
$10.20
$9.71
$10.24
$10.78
$15.82
11x
$7.53
$9.98
$11.22
$10.68
$11.26
$11.86
$17.40
12x
$8.22
$10.89
$12.24
$11.65
$12.29
$12.94
$18.98
13x
$8.90
$11.80
$13.26
$12.62
$13.31
$14.01
$20.56
14x
$9.59
$12.70
$14.28
$13.59
$14.33
$15.09
$22.14
Figure 184: Specialty Retail Comparable Valuations

Price
Market
Ticker 20/01/12 Cap ($M)
Fiscal EPS
FY0
FY1
PE
FY2
FY0
FY1
EPS Growth
FY2
Home Improvement Retailers

RONA
Home Depot
Lowe's
RON
$9.55
$1,215
$ 1.03 $ 0.74 $ 0.93
9.3x
12.9x 10.3x
-28.0%
24.9%
-10.1%
HD
$44.51
$68,615
$ 2.01 $ 2.39
$ 2.74
22.1x
18.6x
16.2x
18.8%
14.7%
36.3%
LOW
$26.53
$33,230
$ 1.42 $ 1.61
$ 1.78
18.7x
16.4x
14.9x
13.6%
10.5%
25.5%
14.8x 15.5x 13.0x
-7.4%
21.0%
10.0%
$ 5.56 $ 5.47 $ 6.15
11.5x 11.6x 10.4x
-1.6%
12.5%
10.7%
17.4%
Home Improvement Retailer Average

General Merchandise
Canadian Tire
CTC/A
$63.70
$4,970
Wal-Mart
WMT
$61.01
$208,941
$ 4.18 $ 4.49
$ 4.91
14.6x
13.6x
12.4x
7.4%
9.3%
Target
TGT
$50.17
$33,694
$ 4.00 $ 4.24
$ 4.30
12.5x
11.8x
11.7x
5.9%
1.4%
7.4%
SHLD
$49.00
$5,237
$ 1.19 $ (5.10) $ (4.86)
41.2x
na
na
-528.2%
-4.6%
-508.5%
Kohl's
KSS
$47.37
$12,005
$ 3.66 $ 4.24
$ 4.95
12.9x
11.2x
9.6x
15.9%
16.6%
35.2%
Nordstroms
JWN
$50.02
$10,475
$ 2.75 $ 3.13
$ 3.58
18.2x
16.0x
14.0x
13.7%
14.5%
30.3%
Dillards
DDS
$46.21
$2,136
$ 2.67 $ 3.91
$ 4.65
17.3x
11.8x
9.9x
46.3%
19.1%
74.3%
Macy's
$35.38
$14,853
$ 1.98 $ 2.79
$ 3.23
17.9x
12.7x
11.0x
41.0%
15.7%
63.2%
JC Penney
JCP
$35.09
$7,493
$ 1.59 $ 1.25
$ 1.66
22.1x
28.1x
21.2x
-21.5%
32.9%
4.3%
Sears Holdings
Corporate Profile
RONA is the largest retailer of hardware, home renovation and gardening products in
Canada with an estimated 18% share of industry sales. The company operates more than
950 corporate, franchise and affiliate stores through various sizes and formats as
highlighted below.
25 January 2012
175
Figure 185: RONA Company Snapshot (f2010)

Type of store
Big-box
Proximity
Canada Banners
RONA; RONA Home & Garden; RONA L'entrepot;
78
RONA Le Regional; Reno-Depot
143
RONA; RONA Le Renovateur; RONA Home Centre
Totem
Materiaux Coupal
Dick's Lumber
STUDIO by RONA
Commercial &
Professional
48
Affiliated dealers
682
60,000 - 165, 000
5,000 - 60,000
30,000
n/a
n/a
8,000
Noble; Plomberie Payette & Perreault; Les Boutique

Eaudace; MPH Supply Ltd; Better Bathrooms; Don
Park; La Boutique de Plomberie Decoration
RONA Home Center, RONA Le Renovateur; RONA Le

Quencaillier, RONA Hardware, RONA L'express, RONA
L'express Materiaux; RONA Building Centre
BOTANIX
n/a
5,000 - 60,000
n/a
TruServ; True Value; Contry Depot; V&S

Total
Sq. Ft/Store
1,000 - 10,000
951

Canadas housing market has avoided the boom/bust scenario of the United States,
experiencing a slowdown as the recession unfolded followed by a strong recovery.
Renovation spending trends have tended to mirror the resale housing trends. The
housing/renovation spending recovery was fuelled by the spending stimulus of: 1) low
interest rates, 2) the 2009/10 home renovation tax credit (HRTC) which expired in February
2010, and 3) the introduction of the HST (Harmonized sales tax) in Ontario in July 2010,
which motivated consumers to move purchases forward to avoid increased tax exposure.
Subsequent to the recovery, the housing (resales and starts) and renovation markets have
experienced choppy but generally positive results, on a rolling 12-month basis, supported
by continuous growth in housing prices.
Figure 186: Resale activity and renovation spending
80%
20%
18%
60%
16%
14%
40%
12%
20%
10%
8%
0%
6%
4%
-20%
2%
-40%
0%
1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11
Resale Activity (left)
Reno. Spend (right)
Source: CREA, Statistics Canada.
25 January 2012
176
Renovation spending slowed as the recession hit as a result, RONA has been struggling
with flat to negative CSS growth for 9 out of the past 11 quarters. RONAs weak CSS have
generally been in line with an industry-wide slowdown of residential renovation spending
that started in 1Q10. As the chart below demonstrates, RONAs same store sales
performance has typically followed, at a discounted absolute level, the growth trends in the
broader renovation market. Unfortunately for Rona this has meant that its same-store sales
have been stuck in largely negative territory since 1Q06, with the exception of the stimulus
induced lifts in 4Q09 and 1Q10, while the reported residential renovation trends have
remained in modest positive growth.
Same-store sales have been

stuck in largely negative territory
since 1Q06
Figure 187: Canadian Renovation Spending Growth vs. Rona CSS

20%
15%
Forecast
10%
5%
0%
-5%
-10%
Renovation Spending (Y/Y)
3Q 12
1Q 12
3Q 11
1Q 11
3Q 10
1Q 10
3Q 09
1Q 09
3Q 08
1Q 08
3Q 07
1Q 07
3Q 06
1Q 06
-15%
RONA CSS
Source: Company reports, Statistics Canada
Ronas negative CSS trends have been directionally similar to those of Home Depot and
Lowes in Canada.
Home Depot Canada experienced a 12-month period of
outperformance as sales rebounded from the constraints of a disruptive SAP enterprise
system installation but its CSS results since 3Q10 have been weak. Lowes Canada, despite
having newer stores that should be comping strongly as they ramp toward maturity, have
been suffering negative CSS for the past five quarters with weaker comps than RONA in
four of those quarters. We suspect, but cannot confirm, that the reason for this disconnect
is that current renovation spending growth is skewed to smaller markets where the Big Box
format is not as prevalent.
Figure 188: Home Improvement Retailers CSS Comparison
1Q 09
2Q 09
3Q 09
4Q 09
1Q 10
2Q 10
3Q 10
4Q 10
1Q 11
2Q 11
3Q 11
Rona
-8.5%
-6.2%
-5.3%
0.7%
10.8%
0.9%
-2.3%
-6.4%
-12.6%
-9.6%
-5.1%
Home Depot
negative
negative
flat
DD positive
positive
flat
-5.6%
negative
negative
flat
N/A
Lowes
LSD
negative
positive
16.0%
14.0%
2.4%
-8.0%
-15.5%
-16.6%
-6.7%
-6.4%
Debt-laden Canadian consumers are retrenching

Canadian consumers have taken full advantage of low interest rates to purchase homes,
cars and other big ticket/interest sensitive items, steadily driving their debt leverage-topersonal income ratio above the levels U.S. consumers achieved at the peak of the housing
boom in the United States. Unfortunately, a lack of meaningful employment growth, wage
25 January 2012
177
growth lagging cost inflation and the overhang of ongoing financial stresses in the E.U. and
United States has made consumers increasingly uneasy about their increased personal debt
exposure. The result appears to be a renewed round of wallet tightening with consumers
spending habits returning to patterns seen as the recession unfolded.
Figure 189: Personal Debt to Disposable Income: Canada vs. US
160%
150%
140%
130%
120%
110%
100%
90%
Canada
2Q-11
1Q-10
4Q-08
3Q-07
2Q-06
1Q-05
4Q-03
3Q-02
2Q-01
1Q-00
4Q-98
3Q-97
2Q-96
1Q-95
4Q-93
3Q-92
2Q-91
1Q-90
80%
US
Source: Statistics Canada; Federal Research Board.
Deleveraging by a heavily debtladen consumer could add

further pressure on big-ticket
discretionary spending
We dont expect the renovation market to settle into a new rhythm of modest growth
until 2013 with 2012 looking to be a bit of a roller coaster ride. Choppy year-over-year
resale housing trends have typically driven similar volatility in renovation spending over the
past two years. Increases in resale housing activity y/y over the past eight months support
the possibility of a modest 1H12 recovery in renovation spending. However, we are
concerned that a generally more cautious consumer may cut back or delay renovation plans
versus what we have seen in the recent past, resulting in flat to negative trends throughout
all of 2012. We also note that deleveraging by a heavily debt-laden consumer could add
further pressure on big-ticket discretionary spending.
Renovation spending typically lags resale housing activity by six months on an upswing,
with a much shorter lag on a downturn. As the following table shows, this historical
relationship, while not highly consistent, does have some patterned correlation with the
renovation spending trends we have seen over the past two years strong resale activity in
3Q09 to 1Q10 fuelled strong renovation spending growth in 4Q09 to 3Q10. Resale housing
activity has been quite volatile by quarter over the past three years partly due to the timing
of stimulus (HRTC and the HST). If the general pattern holds true (6-month lag) renovation
spending should be poised for a meaningful increase in 1H12 as a result of strong resale
activity growth over the past eight consecutive months and potentially into 1H12 against
weaker prior year trends.
25 January 2012
178
Figure 190: Canadian Resale housing activity vs. Renovation spending y/y % chg
Resale Housing Activity (actuals) - Y/Y % chg
Q1
Q2
Q3
Q4
H1
H2
2009
-27.0%
1.4%
17.7%
58.4%
-10.5%
32.7%
7.7%
2010
45.3%
-2.9%
-23.6%
-15.7%
13.6%
-20.1%
-3.9%
-1.2%
13.0%
6.1% e
-3.5%
9.8% e
2.2% e
weak PY
tough PY
2011
-6.5%
2012
easy PY
easy PY tougher PY
Total Yr.
Residential Renovation Spending (NSA) - Y/Y % chg

2009
2010
2011
2012
Q1
0.2%
17.7%
2.3%
easy PY
Q2
Q3
2.0%
3.7%
14.6%
8.3%
1.2%
5.5%
easier PY tougher PY
Q4
11.8%
3.5%
1.2% e
H1
H2
Total Yr.
1.2%
7.5%
4.5%
15.9%
6.0%
10.6%
1.7%
3.4%
2.5% e
weak PY tougher PY
Source: StatsCan, CREA and Barclays Capital estimates
The majority of factors point to a

continuation of low to no growth
until 2013
25 January 2012
While this could provide some long-awaited upside support to RONAs share price through
improved CSS in Q1 and/or Q2 we do not see this as the beginning of a sustainable
recovery. The majority of factors point to a continuation of low to no growth until 2013
when, hopefully, more meaningful employment and/or wage growth combined with more
modest, but stable/consistent resale housing activity establishes steady renovation
spending growth.
Consumer debt leverage is expected to remain a spending constraint until

employment and/or wage growth improves and/or consumers work its debt leverage
down to a more comfortable level.
Employment growth outlook appears to be deteriorating. Despite having a lower

unemployment rate than the US, employment growth in Canada since the initial
recovery has been tepid. The largest segments of employment recovery coming out of
the recession were jobs in construction and government. Slowed growth expectations
for the E.U., emerging markets and potentially the United States combined with: 1)
slowed domestic housing demand, 2) the governments push to cut jobs to manage
ballooning deficits, and 3) a pullback in commodity costs, support a cautious
expectation.
Cost inflation is outpacing wage inflation lead by food and gasoline prices constraining
consumers discretionary spending.
179
Figure 191: Cost inflation trending above wage growth

6%
5%
4%
3%
2%
1%
0%
-1%
Wage Growth
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
-2%
Total CPI
Source: Statistics Canada.
House price risk while we do not expect a widespread decline in house prices, some of
the more heated markets in Western Canada are experiencing a pullback/slower
growth.
Figure 192: House prices cooling in certain markets

35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
Calgary
Edmonton
Vancouver
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
-10.0%
Victoria
Source: CREA.
Lowes remains committed to Canada

Lowes has reduced its store
growth plans in North America
to approximately 10-15 stores
per year, of which 70% will be
outside the US
Lowes continues to build out its Canadian platform albeit at a slowed pace what
matters is they dont appear to be leaving. Lowes currently has 29 big box home
improvement stores in Canada. For 2011, Lowes is targeting 25 new stores in North
America, with up to one-third (~8 stores) in Canada. For the 2012-2015 period, Lowes has
reduced its store growth plans in North America to approximately 10-15 stores per year, of
which 70% will be outside the United States (i.e. Canada and Mexico). We see Lowes
adding 3-5 new stores per year in Canada. While this is a slower rate of growth compared
to its 2011 objectives, Lowes remains firmly committed to the Canadian market.
We believe the Canadian Big Box market is already well developed. Unfortunately in a
slowed growth, or declining, renovation market Lowes adding any square footage in major
25 January 2012
180
markets can hurt the incumbents. We believe that Canada cannot profitably accommodate
a third Big Box retailer.
Figure 193: Big Box Market Saturation Canada vs. US
United States
1,976
1,723
Home Depot
Lowe's
Rona
Bix Box Stores
Metro Population (M)
Population per Store
Canada
179
29
80
288
23.6
81,854
3,699
258.3
69,834
Source: Company reports, US Census Bureau, Statistics Canada, Barclays Capital estimates.
We estimate that Lowes build-out could be eroding Ronas EPS growth by 2%-3% each
year. In our analysis, we estimate that the total big-box store sales will grow 2%-3% each
year. However, we do not expect any new big box store additions from the incumbents (i.e.
Rona and HD). With Lowes expected to add 3-5 big-box stores per year, we estimate that
the market share loss will translate to 2%-3% EPS drain each year for RONA.
Figure 194: RONAs Big-Box risk to Lowes Build-out
f2007
f2008
f2009
f2010
f2011E
f2012E
f2013E
f2014E
f2015E
165
0
77
242
176
11
77
264
179
16
77
272
179
24
78
281
179
29
80
288
179
34
80
293
179
39
80
298
179
43
80
302
179
47
80
306
Estimated Big Box Sales ($M)

Y/Y Growth (%)
$8,586
$8,159
-5.0%
$8,073
-1.1%
$8,073
0.0%
$8,234
2.0%
$8,399
2.0%
$8,651
3.0%
$8,911
3.0%
$9,178
3.0%
Baseline Big Box Sales per Store
$35.5
$30.9
$29.7
$28.7
$28.6
$28.7
$29.0
$29.5
$30.0
National Big Box Sales ($M)

Home Depot
Lowe's
$5,854
$0
$5,439
$340
$5,313
$475
$5,143
$690
$5,118
$829
$5,131
$975
$5,196
$1,132
$5,281
$1,269
$5,369
$1,410
$2,732
$2,732
$0
$2,483
$2,380
-$103
-$103
$2,428
$2,285
-$143
-$39
$2,450
$2,241
-$209
-$66
$2,543
$2,287
-$256
-$47
$2,594
$2,293
-$301
-$45
$2,672
$2,322
-$350
-$49
$2,752
$2,360
-$392
-$42
$2,835
$2,399
-$435
-$44
-$33
-$12
-$9
-$0.08
-$13
-$5
-$3
-$0.03
-$21
-$8
-$6
-$0.04
-$15
-$6
-$4
-$0.03
4.3%
-$14
-$5
-$4
-$0.03
3.2%
-$16
-$6
-$4
-$0.03
3.0%
-$13
-$5
-$4
-$0.03
2.4%
-$14
-$5
-$4
-$0.03
2.2%
National Big Box Store Count

Home Depot
Lowe's
Rona
Total
Rona - without Lowe's

Rona - with Lowe's
Total Difference
Incremental Drain
Incremental Annual Impact
Gross Profit ($M)
EBITDA ($M)
Net Income ($M)
EPS ($M)
% Drain
RONA is dealing with the New Reality

RONA has cranked up cost containment efforts to offset weakened sales trend. In our
view, RONA has done an admirable job dealing with very challenging market conditions
over the past two-and-a-half years. Through aggressive procurement savings, increased
distribution efficiency, some SG&A cost containment and increased private label
penetration the company has been able to contain the margin compression risk of slowed
to declining sales. This was most evident in the companys recent 3Q11 results, which saw
CSS fall 5% while the gross margin expanded 80 bps and the EBITDA margin remained
25 January 2012
181
essentially flat. Gross margin expansion was driven by procurement savings from suppliers
and a more limited, but still positive contribution from growing private and controlled-brand
product sales. As of September 2011, RONAs private label penetration level was at 26%
compared to 24% a year ago. We expect that RONA will continue to put pressure on its
suppliers as will all retailers who continue to struggle with declining industry demand.
Figure 195: RONA has experienced gross margin gains in 7 of the last 11 quarters
1Q-09
2Q-09
3Q-09
4Q-09
1Q-10
2Q-10
3Q-10
4Q-10
1Q-11
2Q-11
3Q-11
Same Store Sales
-9%
-6%
-5%
1%
11%
1%
-2%
-6%
-13%
-10%
-5%
Revenue Growth
-7%
-7%
-4%
2%
13%
2%
-1%
0%
-4%
-2%
2%
Gross Profit Growth
-6%
-6%
-5%
2%
13%
3%
1%
3%
-6%
-4%
5%
SG&A Growth
EBITDA Growth
-7%
-10%
-2%
-14%
-3%
-8%
1%
3%
9%
48%
5%
0%
3%
-5%
8%
-14%
4%
-95%
8%
-35%
6%
-4%

SG&A as % of Rev Variance
28bps
12bps
20bps
77bps
-22bps
17bps
11bps
-17bps
4bps
-58bps
26bps
40bps
32bps
58bps
86bps
153bps
-74bps
213bps
-46bps
217bps
80bps
81bps
16bps
-57bps
-39bps
28bps
62bps
-14bps
-26bps
-67bps -287bps -263bps
-1bps
Sales ($M)
EBITDA ($M)
$846
$24
$1,370
$131
$1,321
$112
$1,141
$78
$957
$34
$1,404
$129
$1,319
$103
$1,139
$63
$1,347
$99
$918
$2
$1,370
$83
Note: All 2009 figures and 2010 growth/vairance are GAAP. All other figures are IFRS.
Note: EBITDA excludes finance income
For RONA, no acquisition

pipeline means muted sales
RONA continues to press for industry consolidation using every tool in the shed. Ronas
growth in Canada has always involved a significant contribution from acquisitions. Even
before Lowes arrival in Canada, Rona was a leading consolidator, partly in recognition that
Home Depot had a material head-start capturing big box opportunities outside of Quebec.
From 1990 to 2005, Ronas acquisition activity was primarily focussed on Retail/Corporate
acquisitions and Affiliate/Wholesale recruitment. The acquisition of TOTEM in 2005
marked the end of any meaningfully sized retail/corporately owned acquisition targets in
Canada with the exception of Kent in Atlantic Canada. The lack of retail acquisition growth
prospects ultimately lead to Ronas entry into the commercial/professional sector in 2007
through the acquisition of Noble Trade.
Retail acquisitions: Cashway (2000), REVY (2001), Lansing Buildall (2001), TOTEM (2005),
Materiaux Coupal (2006), Dicks Lumber (2007).
Commercial/Professional acquisitions: Noble Trade (2007), Best-MAR (2008), Plomberie
Payette & Perreault (2010), MPH Supply (2010), Don Park (2010), La Boutique de
Plomberie Decoration (2010).
Affiliated dealers : TruServ (2010).
RONA continues to expand its arsenal of consolidation levers. With Lowes continuing to
open new big box stores, albeit at a slowed pace, in the midst of declining industry sales,
RONA is feeling an even greater need to get the consolidation ball rolling to offset any
sales/profit drain Lowes build-out may be placing on RONAs retail network. Over the past
two years Rona has added some new tools to its M&A tool box:
25 January 2012
182
1.
Providing financial support to Affiliate members to acquire local competitors. This

financial support has several approaches. First, RONA has a program that offers
Affiliates who acquire local competitors more favourable purchasing terms. A second
approach involves RONA acquiring affiliate members businesses to facilitate
succession planning. This allows RONA to place the stores in the hands of less risk
averse operators who may be more willing to acquire local competitors.
2.
TruServ acquisition provides independents with a less onerous affiliate structure

choice. RONAs acquisition of TruServ allows it to offer independents a less restrictive
membership agreement option than what the RONA affiliate agreement requires and a
wider merchandise offering that may be a better fit than RONAs predominantly
hardware program. RONA obviously hopes that the TruServ program will allow it to
broaden its appeal to Canadas smaller independents.
Figure 196: Independents operators represent over 50% of stores
Large public
retailers (Home
Depot, Cdn. Tire,
Lowe's)
30%
Rona
19%
Independents
51%
Risks
25 January 2012
Continued weakness in Canadian housing starts and renovation activity will affect
financial performance.
Competitive intensity is increasing as Lowe's continues to build out its Canadian stores,
which is leading to lower sales and margins as promotions increase to drive traffic.
Upside risks to our Rona thesis include acceleration in the housing market or CSS trends.
183
Figure 197: RONA Financial Performance Summary

GAAP
IFRS
IFRS
IFRS
IFRS
f2009A
f2010A
f2011F
f2012F
f2013F
Net Revenue ($ Thousands))
$4,677,359
$4,819,589
$4,767,169
$4,903,316
$4,962,442
Net Revenue Growth (%)
-4.4%
2.6%
-1.1%
2.9%
1.2%
Corporate Square Footage Growth (%)
-0.4%
9.3%
2.3%
1.6%
1.6%
-4.8%
0.5%
-7.5%
-0.2%
2.0%
Gross Margin
27.4%
28.2%
28.3%
28.6%
28.7%
20.0%
21.4%
22.6%
22.2%
22.0%
EBITDA Margin
7.4%
6.9%
5.8%
6.4%
6.7%
8 bps
39 bps
10 bps
22 bps
10 bps
SG&A Variance
40 bps
67 bps
120 bps
-34 bps
-25 bps
EBITDA Variance
-33 bps
-27 bps
-110 bps
56 bps
35 bps
0.60x
0.62x
1.04x
1.01x
0.47x
3.2%
1.5%
1.7%
2.0%
2.0%
$157,342
-$95,611
$12,504
$36,378
$182,270
Free Cash Flow

Return on Equity
9.4%
7.4%
5.1%
6.2%
6.5%
7.7%
6.1%
4.4%
5.4%
5.9%
Figure 198: RONA Free Cash Flow ($M)

Fiscal Year (Dec)
2006
2007
2008
2009
2010
2011E
2012E
2013E
Operating Cash Flow
$283
$286
$264
$258
$264
$245
$292
$313
Change in W/C
Capex
$0
-$9
$83
$50
-$190
-$56
-$86
$45
$283
$277
$347
$308
$74
$190
$206
$358
$51
$43
$151
$158
$2
$80
$100
$100
$232
$234
$196
$150
$72
$110
$106
$258
Dividends
$0
$0
$0
-$2
$0
-$18
-$19
-$19
$5
$5
$6
$170
$0
$3
-$40
$0
-$169
-$229
-$5
-$1
-$98
-$41
$0
$0
Free Cash Flow
Acquisitions
Net Change in Debt
$252
$57
-$167
$45
-$110
-$30
-$26
-$26
Remaining Free cash flow
$320
$68
$30
$362
-$135
$24
$22
$213
$1.99
$2.00
$1.68
$1.20
$0.55
$0.84
$0.83
$2.04
9.2%
9.2%
13.0%
8.9%
3.7%
6.9%
8.5%
20.9%
ROE
15.8%
13.3%
12.4%
9.4%
8.0%
5.1%
6.2%
6.5%
25 January 2012
184
COMPANY SNAPSHOT
RONA
Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (reported) ($)
Diluted shares (m)
2010A
4,820
332
220
200
135
1.03
131
-
2011E
4,767
276
165
144
90
0.68
131
0.14
2012E
4,903
312
198
183
116
0.91
128
0.15
2013E
4,962
333
215
201
129
1.02
126
0.15
CAGR
1.0%
0.0%
-0.7%
0.1%
-1.6%
-0.3%
-1.3%
NA
6.9
4.6
4.2
2.8
6.1
4.6
7.4
5.8
3.5
3.0
1.9
4.4
2.9
5.1
6.4
4.0
3.7
2.4
5.4
3.6
6.2
6.7
4.3
4.1
2.6
5.9
4.0
6.5
Average
6.4
4.1
3.7
2.4
5.5
3.8
6.3

885
Goodwill
529
76
Total assets
2,922
467
29
Total liabilities
1,009
Net debt/(funds)
392
1,877
(190)
Operating cash flow
74
Capital expenditure
72
Free cash flow
2
901
546
167
3,125
456
31
966
288
2,120
(56)
151
80
71
893
546
116
3,196
430
31
986
315
2,171
(86)
155
100
55

EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROIC
ROA
ROE

P/E (x)
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
9.3
4.9
0.2
0.3
0.7
0.0
19.9
1.4
13.9
5.6
5.7
0.3
0.6
1.5
17.7
1.7
10.5
4.9
4.5
0.2
0.6
1.5
16.5
1.4
880
546
250
3,252
405
31
940
155
2,274
45
302
100
202
CAGR
-0.2%
1.0%
48.9%
3.6%
-4.7%
1.4%
-2.3%
-26.6%
6.6%
NA
59.5%
11.4%
NA
Average
9.4
10.8
4.1
4.9
16.7
6.8
0.2
0.3
0.5
0.6
1.6
1.2
15.1
17.3
1.2
1.4
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
2-EQUAL WEIGHT
2-NEUTRAL
$9.55
$10.00
RON
Investment case
We expect Rona's normalized valuation to be
constrained by an easing housing market and
increasing competitive pressures as Lowe's
continues to expand its network in Canada. Our
target P/E multiple of 11x is below RON's long-term
average of 12x reflecting a less robust housing
environment outlook.
Upside case
$11.00
Our Upside case reflects a more robust housing
outlook and slower build-out by Lowes. In this
scenario we assume 10% upside to our Base case
2012E EPS driven by stronger CSS. Applying our
normative P/E of 11x would generate an Upside case
of $11.
Downside case
$8.00
Our Downside scenario reflects increased competive
pressures from Lowe's and a more severe housing
downturn causing increased CSS and margin
pressure, reducing our 2012E EPS by 11%. Applying
a 9.5x P/E (recent trough multiple) generates a
Downside case of $8.
19
14
$8
(-17.5%)
(-16.2%)
Downside
Case
$10
(4.7%)
(3.0%)
Price
Target
$11
(15.1%)
(13.4%)
Upside
Case
4
1/27/2011
1/20/2012
Source: FactSet
Same Store Same Store Sales

Capex/sales (%)
0.5
6.7
0.02
-7.5
2.1
0.02
-0.2
1.9
0.02
2.0
1.8
0.02
-1.3
3.1
1.8
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
2010A
25 January 2012
2011E
2012E
2013E
Note: FY end Dec.
185
Figure 199: SNAPSHOT: North American Convenience Store Industry

Top Ten US Competitors
Top Ten Canadian Competitors
Rank
1
2
3
4
5
6
7
8
9
10
Company
Stores
Mkt Share
Company
7-Eleven Inc.
6,145
4.2%
CoucheTard - Mac's
BP North American
4,727
3.2%
Kwik-Way
Shell/Motiva Enterprises
4,636
3.2%
Petro Canada/Superstop
ExxonMobil Corp.
4,060
2.8%
Shell
ChevronTexaco Corp.
4,015
2.7%
7-Eleven
Couche Tard - Circle K
3,802
2.6%
Esso / On The Run
Speedway SuperAmerica
2,759
1.9%
Husky Oil
Citgo
1,820
1.2%
Gem
Sunoco Inc.
1,811
1.2%
Fas Gas/Race Trac Gas
Valero Energy Corp.
1,671
1.1%
Proprio
Top Ten
35,446
24%
Top Ten
remaining
110,895
76%
remaining
Total
146,341
100%
Total
Source: CS News Top 100 (2010); NACS SOI 2010; CCSA SOI 2010, Canadian Grocer Who's Who 2011, Company reports
2010
ATD
Total US
Store
Couche
Seven
C- stores
Count
Tard
Eleven
Caseys
Pantry
2.9%
6.6%
0.0%
2.8%
1.9%
5.3%
4.4%
1.9%
3.9%
0.2%
5.3%
0.6%
4.2%
3.9%
1.1%
1.1%
Caseys
Apr-11
Pantry
Sep-10
Susser
Dec-10
Delek
Dec-10
1,367
4.1
2,500 - 3,500
$4.1
1,638
4.6
2,800
$4.4
526
1.8
3,400
$5.4
412
1.0
2,465
$3.9
(CA, HI, OR and WA)

(AZ, NV and UT)
15,648
4,336
475
636
3.0%
14.8%
10.9%
9.2%
US Southwest
Florida
US Gulf
US Southeast
US Midwest
US Great Lakes
(CO, KS, MO, NM, OK and TX)

(FL)
(AL, AR, FL, LA, MS and TN)
(AL, GA, NC, SC and VA)
(IL, IN, IA, KY, MI, MO, OH and WI)
(CT, DC, IN, KT, ME, MD, MA, MI, NH,
21,028
9,348
11,947
24,461
24,864
421
416
337
333
497
1.8%
4.4%
2.5%
1.5%
4.0%
687
3.2%
Other
Total US
(AK, DE, IH, NT, ND, SD, WY)
30,520
4,189
1 46,341
3,802
2.6%
Store Count
Avg. Gross Square Footage (Millions)
Sales per Store ($ Millions)
Total Gross Margin
Total EBITDA Margin (%)
Total Operating Margin (%)
Total Net Margin (%)
Merchandise SSS growth
Merchandise Revenue ($ Millions)
Merchandise Gross Margin
Gas Volume (mlns of gallons)
Gas Revenue ($ Millions)
Gas Volume Comps
Gas Dollar Margin - cents per
Total
5,795
20.3
2,500 - 4,500
$3.3
$18,966
7.3%
14.7%
3.9%
2.8%
2.0%
$6,222
$12,744
Capex as a % Total Revenue

1.2%
Net Debt to Total EBITDA
0.3x
FCF ex Capex ($ Millions)
$394
FCF Yield (%)
9.6%
ROE (%)
19.6%
ROIC (%)
18.4%
25 January 2012
Mkt Share
8.6%
5.9%
5.8%
2.8%
2.0%
1.8%
1.3%
1.2%
1.8%
1.1%
32%
68%
100%
Regional Store Count market shares
US West Coast
Arizona
12 Months Ending
Stores
1,993
1,365
1,354
651
465
410
313
268
428
250
7,497
15,731
23,228
Susser
2.5%
0.4%
Couche Tard
Apr-11
Canada
1,993
7.0
2,500 - 4,500
$2.1
USA
3,802
13.3
2,500 - 4,500
$3.9
$4,198
11.8%
20.0%
$14,768
6.1%
13.2%
$5,635
5.3%
15.6%
4.9%
3.4%
1.7%
$7,265
1.7%
12.0%*
3.3%*
1.6%*
1.4%*
$2,824
4.8%
9.8%
1.9%
0.9%
-0.2%
$1,592
-3.6%
11.8%
3.3%
-
1.8%
$2,050
34.3%
678
$2,148
3.9%
5.38 / ltr
4.2%
$4,172
33.1%
3,649
$10,596
0.7%
15.79 / gal
4.8%
$1,611
39.9%
1,394
$3,999
1.6%
15.21 / gal
5.6%
$1,798
33.8%
2,047
$5,414
-4.9%
12.9 / gal
4.0%
$806
33.6%
735
$1,987
4.3%
$384
30.5%
424
$1,208
18.4 / gal
16.1 / gal
3.8%
2.3x
$47
2.8%
15.7%
7.8%
1.4%
3.1%
2.3x
3.8x
$54
-$18
12.3%
-9.6%
26.2%*
-1.8%
10.7%*
-0.6%
*Excludes impairment charges
186
ALIMENTATION COUCHE-TARD (ATD-B)

ATD/B CN / ATD-B.TO
Alimentation Couche-Tard Inc.(ATD-B.TO): Quarterly and Annual EPS (USD)

2011
Stock Rating
2-EQUAL WEIGHT
Sector View
2-NEUTRAL
Price Target
CAD 32.00
Price (20-Jan-2012)
CAD 29.85
+7%
FY Apr
2012
2013
Change y/y
Actual
Old
New
Cons
Old
New
Cons
2012
2013
Q1
0.67A
N/A
0.75A
N/A
N/A
N/A
N/A
12%
N/A
Q2
0.61A
N/A
0.61A
N/A
N/A
N/A
N/A
0%
N/A
Q3
0.38A
N/A
0.45A
N/A
N/A
N/A
N/A
18%
N/A
Q4
0.34A
N/A
0.39E
N/A
N/A
N/A
N/A
15%
N/A
Year
2.01A
N/A
2.20E
2.21E
N/A
2.39E
2.39E
9%
9%
P/E
14.9
13.6
12.5


Near term multiple expansion
appears unlikely
We are initiating coverage of Alimentation Couche-Tard (ATD-B.TO) with a 2-Equal

Weight/2-Neutral rating and $32 price target, offering a potential total return of 8% from
recent levels. Our $32 target is based on a 13.5x P/E multiple on our fiscal 2013 (April) EPS
estimate of US$2.39 (converted at CAD/USD of $1.00). Couche-Tard has a well established
reputation for financial discipline, a long-term track record of delivering above-average ROE
and using excess free cash flow to enhance shareholder returns through a combination of
dividend increases and share buybacks. We believe that these factors along with investors
appetite for higher quality stocks contributed to Couche-Tards share price outperformance
in 2011 (+13% vs. S&P/TSX index at -11%). However, Couche-Tard now trades at 12.6x
NTM consensus EPS, which is in line with its five-year average. While our 13.5x target P/E
implies some valuation uplift from current levels, we are hard-pressed to see any material
multiple expansion in the near term as still high retail gas prices continue to strain
consumer spending power, adding incremental pressure to an already constrained
consumer. As an industry consolidator, acquisitions are a potential upside to our earnings
forecast for Couche-Tard. However, we are not forecasting any large-scale acquisitions
given the unpredictable timing and size of such transactions.
Figure 200: Couche-Tard P/E Valuation Range
F2013E
F2014E
BarCap Est.
BarCap Est.
Comments
EPS Range (US$)

Y/Y % chg
Multiples
$2.30
4.6%
$2.39
8.6%
$2.45
11.5%
$2.45
2.6%
$2.64
10.4%
$2.60
8.9%
9.0x
$21
$21
$22
$22
$24
$23
10.0x
$23
$24
$25
$25
$26
$26
$29
11.0x
$25
$26
$27
$27
$29
12.0x
$28
$29
$29
$29
$32
$31
13.0x
$30
$31
$32
$32
$34
$34
13.5x
$31
$32
$33
$33
$36
$35
14.0x
$32
$33
$34
$34
$37
$36
15.0x
$35
$36
$37
$37
$40
$39
16.0x
$37
$38
$39
$39
$42
$42
17.0x
$39
$41
$42
$42
$45
$44
<= ATD's historical trough P/E
<= 3-yr average multiple

<= BarCap valuation multiple
<= LT Avg. P/E = 15.8x
18.0x
$41
$43
$44
$44
$47
$47
Source: Barclays Capital estimates. EPS range is for illustrative purposes only
25 January 2012
187
Figure 201: Alimentation Couche Tard Forward P/E

23x
Max 21.3x
21x
19x
LT Avg 15.8x
17x
15x
13x
11x
9x
Min 8.8x
7x
5x
2003
2004
2005
2006
2007
2008
2009
2010
FY2
FY0-FY1
2011
2012
Source: FactSet.
Figure 202: North American Convenience Store Historical Forward P/E Peak/Trough Cycles
Price
Market
Ticker 20/01/2012 Cap ($M)
FY0
Fiscal EPS
FY1
FY2
PE
FY1
FY0
EPS Growth
FY1-FY2
CAGR
Couche-Tard Consensus
ATD.B
$29.85
$3,677
$ 1.97 $ 2.21 $ 2.38
15.2x 13.5x 12.5x
11.9%
8.1%
10.0%
Caseys General
The Pantry Inc.
Susser Holdings
CASY
PTRY
SUSS
$53.03
$12.13
$24.01
$2,018
$273
$493
$ 2.59 $ 3.10 $ 3.49

$ 0.78 $ 0.87 $ 1.23
$ 1.10 $ 2.55 $ 1.37
20.5x
15.6x
21.8x
15.2x
9.9x
17.6x
19.6%
11.8%
132.1%
12.7%
40.5%
-46.5%
16.1%
25.3%
11.4%
19.3x 13.5x 14.2x
54.5%
2.2%
17.6%
Average
Source: FactSet. EPS is consensus from FactSet.
17.1x
13.9x
9.4x
Figure 203: Convenience Stores Comparable Valuations

Ticker
Price
20/01/2012
Enterprise
Value ($M)
Couche-Tard Consensus
ATD.B
$29.85
Caseys General
The Pantry Inc.
Susser Holdings
CASY
PTRY
SUSS
$53.03
$12.13
$24.01
Average
Fiscal EBITDA
FY0
FY1
FY2
FY0
EV/EBITDA
FY1
FY2
EBITDA Growth
FY0-FY1 FY1-FY2 CAGR
$3,688
$744
$775
$816
5.0x
4.8x
4.5x
4.2%
5.3%
4.7%
$2,559
$1,304
$877
$289
$227
$117
$320
$227
$159
$351
$238
$134
8.8x
5.8x
7.5x
8.0x
5.7x
5.5x
7.3x
5.5x
6.5x
10.5%
0.2%
35.9%
9.6%
4.7%
-15.7%
10.1%
2.4%
7.0%
7.4x
6.4x
6.4x
15.5%
-0.4%
6.5%
Source: FactSet. EBITDA is consensus from FactSet.
Convenience stores can be viewed as relatively defensive since merchandise margin

volatility is typically marginal compared with many general merchandise and specialty
apparel retailers. Although Convenience store merchandise can be viewed as highly
discretionary, the low average price point and high turns nature of many of the
merchandise offerings tends to limit margin volatility. As well, with most C-store locations
having the benefit of weekly gas station traffic they are less likely to fall off consumers list
of stores visited.
Gasoline demand trends have a
very limited affect on earnings
growth
Low gas margins (5%-6% gross margin) mean that gasoline demand trends have a very
limited affect on earnings growth compared to the volatility of gas margins which fluctuate
dramatically week to week with WTI.
We believe that a significant portion of Couche-Tards share price appreciation over the past
12 months have been driven by this relatively defensive appeal and investors accurate
anticipation of dividend increases and active share buybacks.
25 January 2012
188
So far, F2012 has been a good year for Couche-Tard with an above-average level of
acquisition activity (~300 stores as of F3Q12), gas margins running well above their
historical average ($0.185/gal vs. the $0.145 mean) and continued progress on cost
containment (SG&A ex interchange fees, acquisition costs and FX up only 0.7% in F1H12).
Strong cash flows (LTM FCF yield of 6%) and an under-levered balance sheet (0.1x net
debt/EBITDA) have allowed the company to enhance shareholder returns with three
dividend increases in the past 12 months (yield of 2%) and the repurchase of shares
through its NCIB program. We expect share repurchases in F2012 to contribute 3% to EPS
growth.
However, as many retailers have experienced over the past calendar year, consumers
discretionary spending has been constrained as they wait for a stronger employment
outlook and a stabilized housing market in the United States. This has resulted in weakened
gas volume demand and some margin compression in the merchandise segment of their
business in Canada and the US.
In addition, Phillip Morris USA implemented a new pricing structure starting in April 2011
which has eroded Tobacco category profitability. This program, with some modifications,
has been extended through 2012. To counter this, Couche-Tard has launched its own
private label cigarette line to recoup some of the lost margins; however, the program is in its
infancy and with limited management disclosure on the program, its performance to-date is
unknown.
Figure 204: Gasoline demand continues to trend lower
-2.0%
-3.0%
-4.0%
-5.0%
$2.50
Nov-11
Aug-11
May-11
Feb-11
Dec-10
Sep-10
Jun-10
Mar-10
Jan-10
$2.00
Retail Gas Price (left)

Gasoline Demand - 12-week rolling avg. (right)
Source: EIA, OPIS.
25 January 2012
3,020
1.0%
3,000
0.0%
2,980
-1.0%
2,960
2,940
-2.0%
2,920
-3.0%
Vehicle Miles Driven (LTM)
2011
$3.00
2.0%
2010
-1.0%
3,040
2009
$3.50
3.0%
2008
$4.00
3,060
2005
2.0%
1.0%
0.0%
Vehicle Miles (millions)
3.0%
2007
$4.50
Figure 205: High gas prices causing consumers to drive less
2006
Couche-Tard has launched its

own private label cigarette line
Y/Y % change
Source: US Department of Transportation.
189
Figure 206: US Convenience Store Merchandise Performance Trends

Y/Y bps change
Q2/11
Q3/11
Calendar Year
Q1/10
Q2/10
Q3/10
Q4/10
Q1/11
Q2/11
Q3/11
Q1/11
Merchandise CSS
Caseys General Store
Delek Holdings
The Pantry Inc.
Susser Holdings
Couche Tard (US)
Average
3.7%
1.2%
3.6%
2.5%
3.2%
2.8%
2.1%
4.6%
7.7%
3.1%
4.4%
4.4%
7.0%
6.3%
5.7%
3.4%
4.9%
5.5%
7.1%
4.4%
1.3%
7.3%
3.9%
4.8%
4.8%
4.0%
2.0%
2.5%
3.6%
3.4%
6.2%
0.6%
-1.5%
5.8%
1.5%
2.5%
5.8%
2.4%
-0.8%
3.4%
2.5%
2.7%
113
280
(160)
0
40
55bp
410
(400)
(920)
270
(290)
(186bp)
(118)
(390)
(650)
0
(240)
(280bp)
Merchandise Gross Margin

Delek Holdings
The Pantry Inc.
Susser Holdings
Couche Tard (US)
Average
41.1%
30.8%
33.8%
32.7%
33.0%
34.3%
40.3%
31.3%
34.2%
33.3%
32.9%
34.4%
40.6%
30.1%
34.4%
33.8%
33.0%
34.4%
39.2%
29.8%
33.5%
33.9%
33.1%
33.9%
44.4%
30.8%
34.3%
34.0%
33.5%
35.4%
39.9%
30.2%
34.0%
33.7%
33.2%
34.2%
32.5%
29.0%
33.8%
33.8%
32.7%
32.4%
332
0
53
135
48
114bp
(45)
(110)
(21)
44
34
(19bp)
(807)
(110)
(57)
4
(27)
(199bp)
Figure 207: Convenience Store Gasoline Performance Trends

Y/Y bps change
Calendar Year
Q1/10
Q2/10
Q3/10
Q4/10
Q1/11
Q2/11
Q3/11
Q1/11
Q2/11
Q3/11
Gasoline CSV
Delek Holdings
The Pantry Inc.
Susser Holdings
Couche Tard (US)
Avg. CSS Gas Volume
0.2%
-0.3%
-7.5%
-0.2%
-0.7%
-1.7%
1.5%
3.4%
-5.6%
1.8%
1.1%
0.4%
3.6%
5.2%
-7.2%
3.9%
0.5%
1.2%
3.5%
-0.8%
-5.2%
4.3%
0.7%
0.5%
-1.9%
-2.3%
-6.9%
4.5%
0.3%
-1.3%
-2.7%
-1.3%
-9.3%
5.0%
-1.6%
-2.0%
-2.9%
3.2%
-8.3%
5.6%
0.2%
-0.4%
(210)
(200)
60
470
100
44bp
(420)
(470)
(370)
320
(270)
(242bp)
(650)
(200)
(110)
170
(30)
(164bp)
U.S. Gasoline Demand
-1.3%
1.2%
1.4%
0.7%
0.3%
-1.0%
-2.8%
154bp
(220bp)
(416bp)
Gas Margin per Gallon

Delek Holdings
The Pantry Inc.
Susser Holdings
Couche Tard (US)
- Difference ATD - Avg.
Avg. Gas $ Margin / Gallon
$0.131
$0.129
$0.140
$0.111
$0.142
($0.014)
$0.131
$0.164
$0.186
$0.156
$0.248
$0.191
($0.003)
$0.189
$0.149
$0.196
$0.112
$0.228
$0.171
$0.000
$0.171
$0.139
$0.131
$0.104
$0.149
$0.134
($0.003)
$0.131
19.1%
-3.1%
-2.1%
37.8%
-0.1%
10.3%
4.9%
0.0%
6.4%
25.8%
4.3%
8.3%
12.1%
0.0%
20.5%
0.0%
-0.5%
6.4%
$0.156
$0.125
$0.137
$0.153
$0.142
$0.001
$0.143
$0.172
$0.186
$0.166
$0.312
$0.200
$0.010
$0.207
$0.167
$0.196
$0.135
$0.228
$0.170
$0.011
$0.179
Company profile
Couche-Tard is the largest convenience store operator (by store count) in Canada, the
second largest independent in the United States behind 7-Eleven and the sixth ranked
overall in the United States behind the Integrated Oil companies. The company also has
more than 4,000 international licensed locations under the Circle K banner in Asia, UAE, and
Mexico.
25 January 2012
190
Figure 208: Company snapshot

Canada
U.S.
Total
671
1,292
3,446
332
4,117
1,624
$4,198
$14,353
$18,551
23%
77%
100%
$2,050
49%
$4,074
28%
$6,124
33%
$2,148
51%
$10,279
72%
$12,427
67%
$839
$1,894
$2,733
31%
69%
100%
$703
84%
$136
$1,349
71%
$545
$2,052
75%
$681
% of Gross Profit
16%
29%
25%
# Stores with Motor fuel

# Stores without Motor fuel
Revenue ($M)
% of Total Revenue
Merchandise Sales ($M)
% of Sales
Motor Fuel Sales ($M)
% of Sales
Gross Profit ($M)
% of Total Gross Profit
Merchandise Gross Profit ($M)
% of Gross Profit
Motor Fuel Gross Profit ($M)
Management retains voting control within a distinctive shareholder agreement. CoucheTard has two share classes. The multiple voting A shares are entitled to 10 votes per share
(83% of votes), while the subordinated B shares carry one vote per share (17% of votes).
We note that management has a 23% economic interest in the class A multiple voting
shares representing 58% of the companys total voting interest. Under the shareholders
agreement, when each of the majority holders (Alain Bouchard, CEO; Jacques DAmours, VP
Admin.; Richard Fortin, Chairman; and Real Plourde, EVP) reach the age of 65, or they
collectively own less than 50% of voting rights, their holdings of subordinated shares will
automatically convert to the multiple voting shares.

Couche-Tards earnings growth strategy is focused on the following key drivers:
Acquisitions Alimentation Couche-Tard continues to actively pursue reasonably

priced acquisition opportunities as outlined earlier.
Foodservice growth Couche-Tard is in the midst of expanding its food service offering
toward a targeted penetration of 25% of gross profit, up from the current 18%.
Cost reduction efforts benchmarking and an ongoing commitment to cost reduction

have allowed ACT to reduce its SG&A expense rate by almost 100bps in two years. A
more concerted, centralized procurement effort was launched in 2008/09, which has
made a meaningful contribution to ACTs gross margin capacity; unfortunately it has
acted more as a buffer to downward margin pressure over the past four years.
Return of excess free cash flow although acquisitions and reinvestment in its
business is the preferred use of funds, Alimentation Couche-Tard takes a balanced
approach to the deployment of free cash flow as evidenced by its active use of the share
buyback program.
As an industry consolidator, acquisition is part of the companys ongoing growth

strategy F2012 has been an active acquisition year. The C-store industry is highly
fragmented and largely dominated by single-store operators (accounting for 63% of Cstores in the United States). The top 10 C-store chains represent only 24% and 32% of the
industry store count in the United States and Canada, respectively. Major integrated oil
companies continue to have a significant presence in the c-store space; however, over the
25 January 2012
191
past decade the integrated oil companies have increasingly divested their gas station/Cstore locations seeing that portion of their business as a low return use of capital. This
trend has provided Couche-Tard and other well-capitalized competitors an opportunity to
act as industry consolidators.
Since F2004, Couche-Tard has
acquired an additional 1,000
stores
Since the 1,663-store Circle K acquisition in F2004, Couche-Tard has acquired an

additional 1,000 stores through more than 25 separate transactions. While the timing
and size of future acquisitions is difficult to predict, Couche-Tard continues to play an active
role in consolidation, as evidenced by its recent acquisition of 322 stores (plus 65 reseller
contracts) from Exxon Mobil and the failed unsolicited bid for Caseys General Stores in
F2011. As that failed bid demonstrated, Alimentation Couche-Tard is a financially
disciplined company that is willing to walk away from potential acquisitions if the purchase
price puts an acceptable return at risk.
F2012 has been Couche-Tards most active company-operated acquisition year since
F2007. So far in F2012 ACT has announced the acquisition of 465 stores, many of which
will be consolidated into its results starting in 3Q12.
Figure 209: Couche-Tard Acquisition Summary
Company-operated
F2004
F2005
1,706
627
Affiliated Stores
F2006
F2007
F2008
F2009
F2010
F2011 F2012E
45
75
421
46
107
70
47
190
27
75
444
275
Couche-Tard has achieved a compelling ROE track record and has a strong financial
position that can support continued acquisition activity. Couche-Tards financial and
operational discipline has allowed it to deliver industry-leading ROE despite the challenges
of volatile gas margins and acquisition integration risk. As of F2Q12A, Couche-Tard had net
debt of $90mn, and a net debt/EBITDA ratio of 0.1x (versus the public peer group average
of 2.9x) providing it with acquisition leverage capacity of at least $1.8bn (2.5x net
debt/EBITDA), if the need arises. Couche-Tard already has access to over $895mn in
liquidity through a combination of cash ($489mn) and unused authorized credit
agreements ($407mn). In addition, the companys cash flow generation capacity enables it
to boost returns to shareholders through dividend increases and/or share buybacks.
Figure 210: Couche-Tard Company-Generated Returns
Fiscal Year (Apr)
2008
2009
2010
2011
CAGR
2012E
2013E
Net earnings growth
-8.2%
33.7%
11.8%
33.6%
25.9%
6.7%
3.0%
EPS growth due to changes in WASO
-5.9%
16.9%
5.4%
0.4%
7.3%
2.8%
5.7%
Total EPS growth
-14.1%
50.6%
17.2%
34.0%
33.2%
9.5%
8.6%
0.7%
1.0%
Dividend yield
Company generated return
-13.4% 51.6%
0.8%
0.9%
0.9%
0.9%
1.0%
18.0%
34.9%
34.1%
10.3%
9.7%
5.2%
6.5%
-30.7%
34.7%
17.2%
ROE
15.1%
19.1%
17.5%
19.6%
19.9%
19.6%
1.3x
1.0x
0.8x
0.3x
0.3x
0.2x
Net debt to EBITDA
Source: FactSet Bloomberg, Company Reports, Barclays Capital estimates
In a slowed growth environment Couche-Tard has increasingly deployed FCF toward

dividend increases and share buybacks the dividend has been increased three times in
the past year. In the absence of acquisitions and other Capex priorities, ACT has often
25 January 2012
192
deployed FCF toward share repurchases. ACT recently renewed its NCIB which allows it to
repurchase up to 2.7mn Class A shares (5% of outstanding shares) and 11.1mn Class B
shares (or 10% of the outstanding) up to October 24, 2012. Since the implementation of
the program, Couche-Tard has repurchased 1.8mn Class B shares. Under its previous NCIB
(expired Oct. 20, 2011), Couche-Tard repurchased 13,700 Class A and 7.1mn Class B
shares, which represents 0.5% and 63%, respectively, of the amount permitted for
repurchase.
Figure 211: Couche-Tard Free Cash Flow ($ mn)
Fiscal Year (Apr)
2007
2008
2009
2010
2011
2012E
2013E
2014E
Operating Cash Flow
$372
$397
$473
$538
$628
$647
$647
$687
$31
-$37
$30
-$47
-$9
$103
$6
$0
Change in W/C
$403
$360
$503
$491
$619
$750
$653
$686
Capex
-$373
-$280
-$238
-$275
-$225
-$225
-$250
-$300
Free Cash Flow
$30
$80
$265
$216
$394
$525
$403
$386
Dividends
-$20
-$26
-$24
-$25
-$33
-$48
-$53
-$57
$1
-$97
-$98
-$54
-$62
-$265
-$264
-$147
Acquisitions
-$601
-$71
-$81
-$156
-$39
-$235
-$63
-$50
Net Change in Debt
$346
-$14
-$117
-$47
-$196
$80
$0
$0
Remaining cash flow
-$244
-$128
-$55
-$66
$65
$56
$24
$132
net debt / EBITDA
1.5x
1.3x
1.0x
0.8x
0.3x
0.3x
0.2x
0.1x
$0.14
$0.39
$1.34
$1.15
$2.09
$2.86
$2.32
$2.30
0.6%
2.0%
9.8%
6.2%
8.8%
9.9%
7.5%
7.4%
ROE
18.0%
15.1%
19.1%
17.5%
19.6%
19.9%
19.6%
18.8%
Source: FactSet, Bloomberg, Company Reports, Barclays Capital estimates
Couche-Tard has significant

room to grow in the food service
category
Increased focus on food service development could increase EPS by as much as 15%.
Couche-Tard has set a penetration target of 25% of gross profit versus the current rate of
18% for its expanded food service growth initiative. Over the past five years, Couche-Tard
has grown its food service sales at a 6.4% CAGR, modestly outpacing the industry average
growth rate of 6%. At the end of F2011, Couche-Tards food service sales represented
approximately 10.5% of total merchandise sales and 18% of merchandise gross profits.
Couche-Tard has significant room to grow in this category as its penetration remains below
the U.S. C-store industry average for food service penetration of 13% and 22% of
merchandise sales and gross profits, respectively. In fact, the company has already
achieved higher food service penetration in Western Canada and in some regions in the
United States.
Management is targeting food service penetration of 15% of sales and 25% of gross profit
dollars over the next five-plus years. We estimate that each 100-bp increase in food service
penetration as a percentage of gross profit could add $0.04/share, or a 2% uplift to
earnings. Achieving managements targeted penetration rate would add $0.30 to EPS, or an
incremental EPS increase of 15%.
25 January 2012
193
Figure 212: Achieving foodservice penetration target could generate 15% EPS uplift
Penetration (as % of gross profit)
F2011
18.0%
Increase in Food Service Penetarion

Mgmt.
+50 bps
+100 bps
+200 bps
Target
18.5%
19.0%
20.0%
25.0%
Food Service sales

% of in-store sales
$640.5
10.5%
$659.5
10.8%
$369
$2.01
Incremental Gross profit/EPS impact vs. F2011

$5
$10
$21
$76
$0.02
$0.04
$0.08
$0.30
1.0%
2.1%
4.2%
15.1%
Gross profit
EPS
% increase
$679.0
11.1%
$718.2
11.7%
$922.5
15.1%
Ongoing cost-containment focus has delivered up to a 100bp improvement in ACTs

SG&A expense rate, increasing earnings power by up to $0.05 per share. Excluding FX
and credit card fees, operating expenses as a percentage of merchandise sales have
declined in 10 of the past 11 quarters. The results reflect managements continued efforts
to reduce costs and improve operating efficiency. This has been achieved through
numerous store and corporate level initiatives, which was kick-started in mid-2008 as the
recession hit by an initial hiring freeze and reduced executive compensation. Benchmarking
identified several opportunities which resulted in several initiatives such as the installation
of a labour scheduling program, sharing of best practices within the companys divisions
and the closure of underperforming stores.
Figure 213: Couche-Tard Operating Expense History
4Q 09
1Q 10
2Q 10
3Q 10
4Q 10
1Q 11
2Q 11
3Q 11
4Q 11
1Q 12
2Q 12
31.4%
28.3%
28.7%
31.3%
30.5%
27.8%
28.2%
30.8%
30.5%
27.5%
27.9%
-120 bps
-90 bps
-240 bps
-130 bps
-90 bps
-50 bps
-50 bps
-50 bps
0 bps
-30 bps
-30 bps
OPEX (% of merch. sales ex. FX

and credit card fees)
Y/Y change
Source: Company Reports, Barclays Estimates
Fuel margins are a tailwind for F2012E, but an expected headwind in F2013E. Motor fuel
represents more than two-thirds of Couche-Tards total sales; however, it carries a
significantly lower profit margin compared to in-store merchandise (33% vs. 56%), which
reduces the gross profit importance of gasoline sales to only 25%. Fuel margins have been
very volatile over the past five years as the wholesale price of gasoline which is largely
dependent on the price of crude oil has been highly volatile pre- and post-recession. In
general, retail fuel margins tend to expand in an environment with rapidly declining energy
prices; however, retail gas prices remain sticky when wholesale prices fall. While gas
margins can fluctuate significantly on a quarter-to-quarter basis, over the long run they
have typically reverted to a $0.14-$0.15 per gallon mean.
We expect Couche-Tard to
generate near-record gas
margins in F2012E
25 January 2012
Based on recent fluctuations in WTI, we expect Couche-Tard to generate near-record gas

margins in F2012E as the general downtrend in oil prices during the first half of the fiscal
year has generated robust fuel margins. However, we are forecasting a moderation in fuel
margins in F2013, reflecting our outlook for steady increases in crude oil and gasoline
prices. We estimate that a $0.01/gallon change in U.S. gas margins impacts EPS by $0.17
or approximately 7%.
194
Figure 214: Couche-Tard US Gas Margin forecast ($/gal)
$140
WTI (LHS)
$4.50
$4.00
Retail Price (RHS)
$120
$0.1755
$100
$0.1663
$3.50
$0.1541
$80
$60
$0.1451
$0.1358
$3.00
$2.50
$2.00
$0.1579
$1.50
$40
$1.00
$20
$0.50
$0
$0.00
$/gallon
Q1
2008
$0.1673
2009
$0.1555
2010
$0.1543
2011
$0.1912
2012E
$0.1995
2013E
$0.1529
Q2
Q3
$0.1304
$0.1438
$0.2488
$0.1821
$0.1578
$0.1288
$0.1712
$0.1338
$0.1704
$0.1567
$0.1553
$0.1527
Q4
$0.1002
$0.1138
$0.1421
$0.1424
$0.1467
$0.1531
FY
$0.1358
$0.1755
$0.1451
$0.1579
$0.1668
$0.1541
Source: OPIS, Company reports, Barclays Capital estimates.
Favourable changes to debit card rules are unlikely to materially increase EPS growth.
On June 29, 2011, the U.S. Federal Reserve announced the final rules under the Durbin
amendment which set the maximum allowable interchange fee at 21 cents plus 5 bps of the
transaction amount on every debit card transaction (effective October 1, 2011). Given that
ACT does not disclose specific transaction details (i.e., the percent of purchases paid with
debit; average transaction sizes), our ability to accurately forecast the potential savings from
the new interchange fee legislation is significantly limited. Under a number of general
assumptions, we estimate that ACTs EPS could benefit by $0.15, assuming that the
company does not pass through any savings to customers. Again, we emphasize that our
analysis is, at best, a directional measure of the potential cost savings. Given that we expect
most, if not all, of the savings to be passed on to consumers, the absolute magnitude of
savings from the legislated changes is less relevant as the net EPS impact will be immaterial.
We note that the legislation does not include restrictions on credit card interchange fees.
Future regulations that reduce interchange fees on credit transactions could generate more
meaningful savings for the company; however, there is currently no proposed legislation on
this issue at the moment.
25 January 2012
195
Figure 215: New debit interchange rules not expected to generate significant savings
Couche Tard - Annualized Estimated Impact of Fee Reform
Current Debit & Credit card fee changes
Debit interchange fee reduction
Alternate payment method: credit & debit
Declining debit/credit PMT on small transactions
EBT savings
Merch
$0.4
$0.9
$6.3
$7.5
Gas
$16.7
$3.4
$9.8
$29.8
Total
$17.0
$4.3
$16.1
$37.4
Debit interchange fee reduction

Alternate payment method: credit & debit
Declining debit/credit PMT on small transactions
$0.00
$0.00
$0.03
$0.07
$0.01
$0.04
$0.07
$0.02
$0.06
Estimated EPS savings of changes
$0.03
$0.12
$0.15
Source: Company reports, Federal Reserve, Barclays Capital estimates.
Risks
A Canadian and global economic slowdown could pressure multiples downward.
Higher gas prices can reduce store traffic; higher gas prices also increase the cost of
credit card fees.
Risk of over-paying for acquisitions; acquisition strategies also present integration risk.
Figure 216: Alimentation Couche-Tard Financial Summary

(US$ M)
Canadian Revenue
Y/Y Growth (%)
Merchandise SSS (%)
Same Store Fuel Volume (%)
2009A
$3,173
5.7%
2.2%
3.7%
2010A
$3,634
14.5%
4.8%
3.0%
2011A
$4,198
15.5%
1.8%
3.9%
2012E
$4,853
15.6%
1.7%
-1.5%
2013E
$4,947
1.9%
1.5%
0.8%
U.S. Revenue
Y/Y Growth (%)
Merchandise SSS (%)
Same Store Fuel Volume (%)
$12,608
1.9%
0.6%
-6.4%
$12,806
1.6%
2.9%
1.0%
$14,768
15.3%
4.2%
0.7%
$16,996
15.1%
2.4%
-0.2%
$17,164
1.0%
1.8%
1.0%
Total Revenue
Y/Y Growth (%)
$15,781
2.7%
$16,440
4.2%
$18,966
15.4%
$21,850
15.2%
$22,111
1.2%
Gross Margin (%)

SG&A as % Revenue (%)
EBITDA Margin (%)
15.4%
11.7%
3.7%
15.5%
11.7%
3.8%
14.7%
10.8%
3.9%
13.1%
9.7%
3.4%
13.5%
10.0%
3.5%

SG&A as % Revenue Variance
96 bp
40 bp
56 bp
10 bp
0 bp
11 bp
-85 bp
-95 bp
11 bp
-155 bp
-101 bp
-54 bp
40 bp
28 bp
12 bp
0.8x
1.7%
$216
17.5%
14.3%
0.3x
1.2%
$394
19.6%
18.4%
0.3x
1.0%
$525
19.9%
17.8%
0.2x
1.1%
$403
19.6%
17.7%
Net Debt/EBITDA
1.0x
Capex/Sales
1.5%
Free Cash Flow (OCF-Capex/WC)
$265
ROE
19.1%
ROIC
14.6%
25 January 2012
196
COMPANY SNAPSHOT
Alimentation Couche Tard

Income statement (US$mn)
Revenue
EBITDA
EBIT
Pre-tax income
Net income
EPS (reported) (US$)
Diluted shares (m)
2011A
18,550
726
512
503
368
2.01
188
0.20
2012E
22,275
758
529
536
403
2.20
183
0.27
2013E
22,111
776
544
552
415
2.39
174
0.31
2014E
22,585
823
579
588
442
2.64
168
0.35
CAGR
6.8%
4.3%
4.2%
5.4%
6.3%
9.5%
-3.7%
19.6%

EBITDA margin
EBIT margin
Pre-tax margin
Net margin
ROIC
ROA
ROE
3.9
2.8
2.7
2.0
18.4
9.5
19.6
3.4
2.4
2.4
1.8
17.8
9.5
19.9
3.5
2.5
2.5
1.9
17.7
9.5
19.6
3.6
2.6
2.6
2.0
18.0
9.6
18.8
Average
3.6
2.5
2.6
1.9
18.0
9.5
19.5
Balance sheet and cash flow (US$mn)

1,935
630
310
Total assets
3,926
502
Total liabilities
1,945
Net debt/(funds)
206
1,981
(9)
Operating cash flow
619
Capital expenditure
225
Net cash flow
100
2,080
430
366
4,228
578
2,205
212
2,022
103
750
225
57
2,161
430
390
4,352
578
2,231
188
2,121
6
653
250
24
CAGR
2,267
5.4%
430 -11.9%
522 19.0%
4,607
5.5%
578
4.8%
2,248
4.9%
56 -35.3%
2,359
6.0%
(0)
NA
686
3.5%
300 10.1%
132 10.0%
Stock Rating
Sector View
Price (20-Jan-2012)
Price Target
Ticker
2-EQUAL WEIGHT
2-NEUTRAL
$29.85
$32.00
ATD.B
Investment case
ATD is a strong C-store operator and financially
disciplined company, as evidenced by its consistent
earnings growth and effective FCF use. Our 13.5x
target P/E reflects the earnings lift from its food
service initiative and cost containment; however,
near-term headwinds caused by high retail gas
prices may limit valuation upside.
Upside case
$35.00
Our Upside case reflects expanded in-store margins
driven by higher food service penetration and further
cost savings. In this scenario we derive an Upside
case of $35 predicated on a 14x P/E multiple on
2013E EPS of $2.53.
Downside case
$29.00
Rising gas prices could limit fuel demand and reduce
in-store traffic. Higher gas prices could also increase
credit card fees and squeeze fuel margins. Our
downside scenario is based on a 13x P/E multiple on
2013E EPS of $2.22.
P/E (x)
EV/EBITDA (x)
FCF yield (%)
Price/sales (x)
Price/BV (x)
Dividend yield (%)
19.6
10.5
1.3
0.4
3.7
0.5
20.2
0.7
17.9
9.8
0.8
0.3
3.6
0.7
22.2
0.8
16.5
9.1
0.3
0.3
3.2
0.8
21.4
0.7
15.0
8.1
2.0
0.3
2.8
0.9
19.7
0.7
Average
17.3
9.4
1.1
0.3
3.3
0.7
20.9
0.7
42
37
32
27
22
17
12
$33
$32
$29
(10.5%)
(7.2%)
(-2.84%)
Downside
Case
1/27/2011
Price
Target
$35
(17.2%)
Upside
Case
1/20/2012
Source: FactSet

Store count
Merch same store sales (%)
Same store fuel volume (%)
Gross profit per gallon (US$)
Same Store Sales

5,795
6.6
6.9
0.16
6,140
3.5
2.4
0.17
6,255
3.2
-0.8
0.15
6,345
4.0
1.8
0.15
4.3
2.6
15.7
8.0%
Merchandise
Fuel Volume
6.0%
4.0%
2.0%
0.0%
-2.0%
2011A
25 January 2012
2012E
2013E
2014E
Note: FY end Apr.
197
Valuation Methodology and Risks

Alimentation Couche-Tard Inc. (ATD/B CN / ATD-B.TO)
Valuation Methodology: Our price target of $32 is based on a forward P/E multiple of 13.5x our F2013 EPS estimate of $2.39
Risks which May Impede the Achievement of the Price Target: 1) Potential US and Canadian economic slowdowns would lower the sales and
profitability at Couche Tard.
2) Increased gas prices usually lead to less miles travelled by consumers and would impact the financial performance at Couche Tard.
Canadian Tire Corp., Ltd. (CTC/A CN / CTC-A.TO)
Valuation Methodology: Our price target of $74 is based on a forward P/E multiple of 12x our F2012 EPS estimate of $6.14
Risks which May Impede the Achievement of the Price Target: 1) Canadian economic slowdown would lower sales and financial performance.
2) Wal-Mart's current buildout and the 2013 entry of Target will increase the competitive intensity of the market, potentially leading to lower
sales and margins as promotions increase to drive traffic.
3) The recent acquisition of Forzani poses intergration risks.
Dollarama Inc. (DOL CN / DOL.TO)
Risks which May Impede the Achievement of the Price Target: 1) Dollarama sources many of their products overseas and any increased cost of
acquiring products would impact the company's financial performance.
2) The consensus view for Dollarama's growth is aggressive and any significant slowdown in reported growth could lead to valuation multiple
contraction.
Empire Co., Ltd. (EMP/A CN / EMP-A.TO)
Valuation Methodology: Our price target of $57 is based on an NAV using a 5x forward EV/EBITDA multiple on our F2013 Sobeys EBITDA
estimate of $838mln
Risks which May Impede the Achievement of the Price Target: 1) All food retailers are facing margin deterioration based on a weakened
Canadian consumer, an intensely promotional environment in response to Wal-Mart's national Supercenter buildout, and food cost increases
from producers. 2) Sobeys is currently building an automated distribution center in Quebec, which can often lead to execution risks, though we
note that their first automated distribution center in Vaughan, Ontario, was completed and activated seamlessly.
3) Empire, through its Genstar Partnership, is also exposed to the Canadian residential housing market that is potentially weakening.
George Weston Ltd. (WN CN / WN.TO)
Valuation Methodology: Our price target of $69 is based on an NAV using a 7x forward EV/EBITDA multiple on our F2012 estimated Weston
Foods EBITDA of $329mln.
Risks which May Impede the Achievement of the Price Target: 1) George Weston is facing margin deterioration based on increased commodity
costs (particularly wheat) and the inability to effectively pass on price increases to food retailers due to the economic condition of the Canadian
consumer.
2) As a majority owner of Loblaw, George Weston's continued financial performance may be impacted by the ability of Loblaw to execute on its
5-year IT/supply chain infrastructure overhaul program without disruption to the customer.
Jean Coutu Group (PJC/A CN / PJC-A.TO)
Valuation Methodology: Our price target of $14 is based on a forward PE multiple of 14.5x our F2013 EPS estimate of $0.98
Risks which May Impede the Achievement of the Price Target: 1) Further government policy changes related to pharmacy profitability,
particularly in Quebec, pose significant financial performance risks on Jean Coutu
2) In response to constrained Canadian consumers, drug retailers have increased promotional activity at the front-end of the store and this may
negatively impact margins.
Loblaw Cos., Ltd. (L CN / L.TO)
Canadian consumer, an intensely promotional environment in response to Wal-Mart's national Supercentre buildout, and food cost increases
from producers. 2) Loblaw is in the final stages of a 5-year IT/supply chain infrastructure overhaul and will continue to be at high risk for
execution and migration errors as the new systems roll out to stores in 2012 and 2013.
Metro Inc. (MRU/A CN / MRU-A.TO)
from producers. 2) Metro is particularly at risk from Wal-Mart's SuperCenter buildout as the company has now turned its focus to Quebec,
25 January 2012
198
Valuation Methodology and Risks

Metro's key market. The Quebec SuperCentre buildout is expected to last until the end of 2013.
North West Co., Inc. (NWC CN / NWC.TO)
Valuation Methodology: Our price target of $20 is based on a forward EV/EBITDA multiple of 8.5x our F2013 EBITDA estimate of $134mln
from producers. 2) Government policy changes to programs like Nutrition North and the Alaska Permanent Fund can effect North West
Company's sales and operational efficiency.
3) Deterioration in community relations would impact the company's financial performance.
RONA Inc. (RON CN / RON.TO)
Risks which May Impede the Achievement of the Price Target: 1) Continued weakness in Canadian housing starts and renovation activity will
affect financial performance.
2) Lowe's continues to build out their Canadian stores which is increasing the competitive intensity of the market leading to lower sales and
margins as promotions increase to drive traffic.
Shoppers Drug Mart Corp. (SC CN / SC.TO)
Risks which May Impede the Achievement of the Price Target: 1) Further government policy changes related to pharmacy profitability (for
example British Columbia's reopening of the drug reform discussion) pose significant financial performance risks to Shoppers Drug Mart
2) In response to constrained Canadian consumers, drug retailers have increased promotional activity at the front-end of the store and this may
negatively impact margins.
Tim Hortons Inc. (THI CN / THI.TO)
Risks which May Impede the Achievement of the Price Target: 1) Increased coffee prices may contract Tim Hortons' margins.
2) A weakened North American consumer could lead to lower sales at the franchise level and lower royalty revenue at the corporate level.
3) Disappointing international growth may impact Tim Hortons' valuation multiple.
25 January 2012
199
ANALYST(S) CERTIFICATION(S)
I, Jim Durran, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the
subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to
the specific recommendations or views expressed in this research report.
IMPORTANT DISCLOSURES CONTINUED

For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report,
please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to
http://publicresearch.barcap.com or call 1-212-526-1072.
The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total
revenues, a portion of which is generated by investment banking activities.
Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA.
These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE
Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analysts
account.
Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays Capital policy prohibits them from
accepting payment or reimbursement by any covered company of the their travel expenses for such visits.
In order to access Barclays Capital's Statement regarding Research Dissemination Policies and Procedures, please refer to
https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html.
Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative
analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other
types of research products, whether as a result of differing time horizons, methodologies, or otherwise.
Primary Stocks (Ticker, Date, Price)
Alimentation Couche-Tard Inc. (ATD-B.TO, 20-Jan-2012, CAD 29.85), 2-Equal Weight/2-Neutral
Canadian Tire Corp., Ltd. (CTC-A.TO, 20-Jan-2012, CAD 63.70), 1-Overweight/2-Neutral
Dollarama Inc. (DOL.TO, 20-Jan-2012, CAD 44.00), 1-Overweight/2-Neutral
Empire Co., Ltd. (EMP-A.TO, 20-Jan-2012, CAD 56.43), 2-Equal Weight/2-Neutral
George Weston Ltd. (WN.TO, 20-Jan-2012, CAD 66.12), 2-Equal Weight/2-Neutral
Jean Coutu Group (PJC-A.TO, 20-Jan-2012, CAD 13.27), 2-Equal Weight/2-Neutral
Loblaw Cos., Ltd. (L.TO, 20-Jan-2012, CAD 37.30), 2-Equal Weight/2-Neutral
Metro Inc. (MRU-A.TO, 20-Jan-2012, CAD 51.58), 2-Equal Weight/2-Neutral
North West Co., Inc. (NWC.TO, 20-Jan-2012, CAD 19.95), 2-Equal Weight/2-Neutral
RONA Inc. (RON.TO, 20-Jan-2012, CAD 9.55), 2-Equal Weight/2-Neutral
Shoppers Drug Mart Corp. (SC.TO, 20-Jan-2012, CAD 41.45), 2-Equal Weight/2-Neutral
Tim Hortons Inc. (THI.TO, 20-Jan-2012, CAD 48.80), 1-Overweight/2-Neutral
Other Material Conflicts
Barclays Capital is providing investment banking services to Ralcorp Holdings Inc in relation to the proposed spin-off of its Post Holdings Inc
subsidiary.
Guide to the Barclays Capital Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions
below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the "sector
coverage universe").
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors
should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month
investment horizon.
2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12month investment horizon.
3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month
investment horizon.
25 January 2012
200

RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or
to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory
capacity in a merger or strategic transaction involving the company.
Sector View
1-Positive - sector coverage universe fundamentals/valuations are improving.
2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals/valuations are deteriorating.
Below is the list of companies that constitute the "sector coverage universe":
Alimentation Couche-Tard Inc. (ATD-B.TO)
Canadian Tire Corp., Ltd. (CTC-A.TO)
Dollarama Inc. (DOL.TO)
Empire Co., Ltd. (EMP-A.TO)
George Weston Ltd. (WN.TO)
Jean Coutu Group (PJC-A.TO)
Loblaw Cos., Ltd. (L.TO)
Metro Inc. (MRU-A.TO)
North West Co., Inc. (NWC.TO)
RONA Inc. (RON.TO)
Shoppers Drug Mart Corp. (SC.TO)
Tim Hortons Inc. (THI.TO)
Distribution of Ratings:
Barclays Capital Inc. Equity Research has 2181 companies under coverage.
43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 53% of
companies with this rating are investment banking clients of the Firm.
42% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 49% of
13% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 39% of
Guide to the Barclays Capital Price Target:
Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will
trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price
target over the same 12-month period.
Barclays Capital offices involved in the production of equity research:
London
Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)
New York
Barclays Capital Inc. (BCI, New York)
Tokyo
Barclays Capital Japan Limited (BCJL, Tokyo)
So Paulo
Banco Barclays S.A. (BBSA, So Paulo)
Hong Kong
Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)
Toronto
Barclays Capital Canada Inc. (BCC, Toronto)
Johannesburg
Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)
Mexico City
Barclays Bank Mexico, S.A. (BBMX, Mexico City)
Taiwan
Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan)
Seoul
Barclays Capital Securities Limited (BCSL, Seoul)
Mumbai
25 January 2012
201

Barclays Securities (India) Private Limited (BSIPL, Mumbai)
Singapore
Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)
25 January 2012
202
DISCLAIMER:
This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It is
provided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients of
this report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument.
Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays Capital, nor any affiliate, nor any of their respective officers, directors,
partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings
or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents.
Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be
reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject to
change, and Barclays Capital has no obligation to update its opinions or the information in this publication.
The analyst recommendations in this publication reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any other
interests, including those of Barclays Capital and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual
financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays Capital recommends that
investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of and
income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The
information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future
results.
This communication is being made available in the UK and Europe primarily to persons who are investment professionals as that term is defined in Article 19 of the
Financial Services and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professional
experience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such persons.
Barclays Capital is authorized and regulated by the Financial Services Authority ('FSA') and member of the London Stock Exchange.
Barclays Capital Inc., U.S. registered broker/dealer and member of FINRA (www.finra.org), is distributing this material in the United States and, in connection therewith
accepts responsibility for its contents. Any U.S. person wishing to effect a transaction in any security discussed herein should do so only by contacting a representative
of Barclays Capital Inc. in the U.S. at 745 Seventh Avenue, New York, New York 10019.
Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit
otherwise.
This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer and member of IIROC (www.iiroc.ca).
Subject to the conditions of this publication as set out above, Absa Capital, the Investment Banking Division of Absa Bank Limited, an authorised financial services
provider (Registration No.: 1986/004794/06), is distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. This
publication is not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary Services Act, 37 of 2002, or
any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person or
entity wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Absa Capital in South Africa, 15 Alice Lane,
Sandton, Johannesburg, Gauteng 2196. Absa Capital is an affiliate of Barclays Capital.
In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research reports are distributed to institutional
investors in Japan by Barclays Capital Japan Limited. Barclays Capital Japan Limited is a joint-stock company incorporated in Japan with registered office of 6-10-1
Roppongi, Minato-ku, Tokyo 106-6131, Japan. It is a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services
Agency of Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143.
Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the Hong Kong Monetary Authority.
Registered Office: 41/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong.
This material is issued in Taiwan by Barclays Capital Securities Taiwan Limited. This material on securities not traded in Taiwan is not to be construed as
'recommendation' in Taiwan. Barclays Capital Securities Taiwan Limited does not accept orders from clients to trade in such securities. This material may not be
distributed to the public media or used by the public media without prior written consent of Barclays Capital.
This material is distributed in South Korea by Barclays Capital Securities Limited, Seoul Branch.
All equity research material is distributed in India by Barclays Securities (India) Private Limited (SEBI Registration No: INB/INF 231292732 (NSE), INB/INF 011292738
(BSE), Registered Office: 208 | Ceejay House | Dr. Annie Besant Road | Shivsagar Estate | Worli | Mumbai - 400 018 | India, Phone: + 91 22 67196363). Other research
reports are distributed in India by Barclays Bank PLC, India Branch.
Barclays Bank PLC Frankfurt Branch distributes this material in Germany under the supervision of Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin).
This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd.
This material is distributed in Brazil by Banco Barclays S.A.
This material is distributed in Mexico by Barclays Bank Mexico, S.A.
Barclays Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Barclays Bank PLCDIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence.
Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a branch of a commercial bank incorporated
outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi
(Licence No.: 13/952/2008, Registered Office: Al Jazira Towers, Hamdan Street, PO Box 2734, Abu Dhabi).
Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory Authority (QFCRA). Barclays Bank PLCQFC Branch may only undertake the regulated activities that fall within the scope of its existing QFCRA licence. Principal place of business in Qatar: Qatar Financial
Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar.
This material is distributed in Dubai, the UAE and Qatar by Barclays Bank PLC. Related financial products or services are only available to Professional Clients as defined
by the DFSA, and Business Customers as defined by the QFCRA.
This material is distributed in Saudi Arabia by Barclays Saudi Arabia ('BSA'). It is not the intention of the Publication to be used or deemed as recommendation, option or
advice for any action (s) that may take place in future. Barclays Saudi Arabia is a Closed Joint Stock Company, (CMA License No. 09141-37). Registered office Al
Faisaliah Tower | Level 18 | Riyadh 11311 | Kingdom of Saudi Arabia. Authorised and regulated by the Capital Market Authority, Commercial Registration Number:
1010283024.
This material is distributed in Russia by OOO Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License
#177-11850-100000; Dealer License #177-11855-010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21.
This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the Monetary Authority of Singapore. For
matters in connection with this report, recipients in Singapore may contact the Singapore branch of Barclays Bank PLC, whose registered address is One Raffles Quay
Level 28, South Tower, Singapore 048583.
Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed at 'wholesale clients' as defined by
Australian Corporations Act 2001.
IRS Circular 230 Prepared Materials Disclaimer: Barclays Capital and its affiliates do not provide tax advice and nothing contained herein should be construed to be tax
advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be used, and cannot be
used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing of the transactions or other matters
addressed herein. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor.
Barclays Capital is not responsible for, and makes no warranties whatsoever as to, the content of any third-party web site accessed via a hyperlink in this publication and
such information is not incorporated by reference.
Copyright Barclays Bank PLC (2012). All rights reserved. No part of this publication may be reproduced in any manner without the prior written permission of Barclays
Capital or any of its affiliates. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information
regarding this publication will be furnished upon request.
US08-000001

Barclays Canadian Retail Consumer Still Working Toward The New Normal Initiatin PDF

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Barclays Canadian Retail Consumer Still Working Toward The New Normal Initiatin PDF

Caricato da

Copyright:

Formati disponibili

EQUITY RESEARCH

CANADIAN RETAIL & CONSUMER

Barclays Capital | Canadian Retail & Consumer

Canadian Retail & Consumer

EPS FY1 (E)

EPS FY2 (E)

Alimentation Couche-Tard Inc. (ATD/B CN / ATD-B.TO)

Canadian Tire Corp., Ltd. (CTC/A CN / CTC-A.TO)

Dollarama Inc. (DOL CN / DOL.TO)

Empire Co., Ltd. (EMP/A CN / EMP-A.TO)

George Weston Ltd. (WN CN / WN.TO)

Jean Coutu Group (PJC/A CN / PJC-A.TO)

Loblaw Cos., Ltd. (L CN / L.TO)

Metro Inc. (MRU/A CN / MRU-A.TO)

North West Co., Inc. (NWC CN / NWC.TO)

RONA Inc. (RON CN / RON.TO)

Shoppers Drug Mart Corp. (SC CN / SC.TO)

Tim Hortons Inc. (THI CN / THI.TO)

Barclays Capital | Canadian Retail & Consumer

CANADAS CONSUMER SPENDING OUTLOOK ITS TOUGH OUT THERE............................15

Barclays Capital | Canadian Retail & Consumer

CANADIAN RETAIL & CONSUMER: EXPECT A CHALLENGING YEAR AHEAD

Rank "Relative" Safe Havens

Shoppers Drug Mart

Food Manufacturing - CPG

Source: Barclays Capital ratings and estimates.

A brief look back at 2011

Barclays Capital | Canadian Retail & Consumer

Figure 2: Canadian Retail / Consumer 2011 share price appreciation

2011 Price Appreciation

Percent Change in FY2 EPS Estimate

Percent Change in Forward P/E Multiple

Source: FactSet, Reuters

2012 Outlook: a year of consumer belt tightening

Barclays Capital | Canadian Retail & Consumer

U.S. retailer invasion picks up steam: Zellers one-two punch

Food Retail in the midst of the perfect storm

Drugstore Retail easing drain of drug reform, but fully valued

Barclays Capital | Canadian Retail & Consumer

Top Picks: we prefer high quality defensive investments

CDN Food Retail Average

Shoppers Drug Mart

CDN Drugstore Average

Safe Haven Average

Discretionary Grp. Average

Defensive bias in the immediate term:

Barclays Capital | Canadian Retail & Consumer

Dollaramas ample FCF is more

Valuation is attractive relative to peers. Tims is currently trading at a wider discount

Aggressive store network growth opportunity in an underdeveloped market.

Productivity and efficiency enhancements expected to result in material cost savings.

Barclays Capital | Canadian Retail & Consumer

Figure 5: Summary of Canadian Retail/Consumer Sector Coverage

BarCap EPS estimates

Rating Yr. End Cap ($M)

Target Ttl Return

North West Co.

GEN'L MERCHANDISE/SPECIALTY RETAIL

QUICK SERVE RESTAURANT (QSR)

Note: ATD EPS estimates are in US$'s

Barclays Capital | Canadian Retail & Consumer

Valuation supported by strong earnings growth. In the context of weakening