Our Strategy at Work

1 9 9 9 A N N U A L R E P O R T our strategy at work front cover photo: Northern staff in Rossville, Manitoba show off team spirit after their store was reprofiled with expanded food selling space and lower pricing. In response to customers’ comments of “My, oh, my how things have changed,” staff initiated a themed campaign complete with t-shirts, buttons and display signs. clockwise from top left to right: Eva Alainja, Iqaluit, Nunavut Ula Arnaquq, Iqaluit, Nunavut Paulusi Davidee, Iqaluit, Nunavut Northern living, Iqaluit, Nunavut Wilfred Ferland, Rossville, Manitoba Tasha Kootoo-Reist, Iqaluit, Nunavut N O R T H W E S T C O M P A N Y F U N D 1999 financial highlights 52 weeks ended 52 weeks ended 53 weeks ended (in thousands of Canadian dollars) January 29, 2000 January 30, 1999 January 31, 1998 RESULTS FOR THE YEAR Sales and other revenue $626,469 $629,118 $ 616,710 Earnings before interest, unusual item, and income taxes (EBIUT) 39,809 42,831 39,587 Earnings 27,957 16,145 21,037 Pre-tax cash flow 46,503 54,731 47,586 FINANCIAL POSITION Total assets $387,537 $ 387,411 $ 425,136 Total debt 171,475 173,973 201,408 Total equity 169,905 164,117 160,160 PER UNIT/SHARE ($) Earnings for the year before unusual item $ 1.86 $ 1.82 $ 1.40 Earnings for the year 1.86 1.08 1.40 Pre-tax cash flow 3.10 3.65 3.17 Cash distributions/dividends paid during the year 1.44 1.00 0.60 Equity 11.33 10.94 10.68 Market price – year end 11.75 15.50 14.00 – high 15.95 16.65 14.80 – low 11.25 11.55 10.25 FINANCIAL RATIOS Debt to equity 1.01 : 1 1.06 : 1 1.26 : 1 Return on net assets* 11.6% 12.1% 11.4% Return on average equity before unusual item 16.8% 17.6% 13.9% *Earnings before interest, unusual item and income taxes as a percent of average net assets employed. SALES & OTHER REVENUE EBIUT PRE-TAX CASH FLOW EARNINGS PER UNIT † ($ in millions) ($ in millions) ($ in millions) † before unusual item 700 55 50 50 $2.00 600 629 626 48 1.86 617 47 1.82 43 40 40 $1.60 500 40 40 1.40 400 30 30 $1.20 300 20 20 $0.80 200 10 10 $0.40 100 0 0 0 0 1997 1998 1999 1997 1998 1999 1997 1998 1999 1997 1998 1999 We are the leading retailer serving remote, northern communities. Our vision is to grow with our customers and be the most successful small market retailer in North America. R E P O R T T O U N I T H O L D E R S our strategy at work At The North West Company, we have a straightforward In last year’s annual report, three key strategies goal — to grow profitably as the first choice for shoppers were set out: across northern Canada and Alaska. Our plan to make 1. Streamline our business. this happen is called Vision 2000+ and, in 1999, we 2. Focus on what our customers value most invested to make it a reality. and what creates value for us. Along the way we experienced additional costs, risks 3. Be the best at selling. and challenges that contributed to an earnings decline After reducing head office costs by $4.2 million in in Canadian operations. Based on these results, there 1998 and restructuring the planning, buying, have been questions as to whether we can deliver on distribution and selling roles in the Company, our our goal. Our answer is clear. While our earnings in priorities shifted to Strategy #2. 1999 were disappointing, our work and our focus In 1999, we created a new product mix in 48 of remains correct. our Canadian stores, shifting our selling space to a Earnings for the year before unusual items were stronger, expanded assortment of food and everyday up slightly to $28 million ($1.86 per unit) from general merchandise items. Sales in these categories $27.3 million ($1.82 per unit), after a 29.7% increase increased 5% over our base performance, in line with in 1998. Sales were down 0.4% to $626.5 million our expectations. However, the complexity involved in as we absorbed the top-line impact of closing 19 “reprofiling” our stores slowed us down and we were non-core, under-performing locations in 1998. Our not able to complete the process in as many locations Alaska retail business continued to shine, delivering a as we had hoped. One challenge is the very tight 10.3% increase in sales and 42% increase in operating window of opportunity we have available to ship new cash flow (earnings before interest, income taxes and equipment and products into locations serviced by amortization or EBITA). Canadian financial performance sealift or winter roads. This was a problem of execution fell short of expectations with EBIUTA (earnings before and it has provided an opportunity for improvement interest, unusual item, income taxes and amortization) that we’ve addressed for 2000. dropping 8.4%, largely due to delays in building food sales momentum coupled with a higher than planned blend of lower margin hardlines sales. left page: above: Edward Kennedy, President & C.E.O. Focus on value and selling means more of The North West Company, in Iqaluit, selling space dedicated to dominant Nunavut for the opening of a new fresh food, quality and variety. 3 NorthMart store. NWF 1999 ANNUAL REPORT R E P O R T T O U N I T H O L D E R S During 1999, we moved forward in other In 2000, our focus will be on execution and important areas. We expanded our offering of lower commitment. We have made progress on building price-point merchandise to our largest and lowest a stronger, more competitive North West Company. income customer group. We tested new formats in We expect to keep our focus this year and make our our catalogue business and increased sales by 34% strategy work even better for us. One of our goals is through this channel. We strengthened our executive to keep a healthier balance between building for the team in Marketing and Sales and Operations, future and capturing profitable sales opportunities that and we completed a major installation of Year 2000 are available now. We expect to reprofile an additional compliant technology, on time and on budget. 70 stores and achieve a higher payback after applying In 2000, we will continue to adjust pricing to ensure lessons from our 1999 experience. We will be pursuing we are at a fair convenience premium to more distant aggressive growth targets for our wholesale business shopping alternatives. in Alaska. Finally, alliances with other retail, In Alaska, our repositioning work started four years distribution, transportation and technology partners ago with a streamlined cost structure and a stronger are part of our plan in 2000 as we seek to grow with management team. Since then we’ve upgraded others, at a lower cost. and expanded our selling space and refocused our Our financial target for this year is to achieve merchandise mix, similar to what we are now doing earnings growth in both Canada and Alaska, based in Canada. The results have been very encouraging. on sustainable competitive strength. Earnings will Same store sales growth was 7.8% last year. continue to lag our repositioning efforts over the next Operating profit rates increased to 4.1% of sales in two quarters and will remain soft before accelerating 1999, compared to 2.8% in 1998 and 1.4% in 1997. in the second half of the year. We consider our cash- Operating cash flow was up 42% to $6.0 million U.S., generating position to be strong enough to support moving Alaska closer to an attractive rate of return. quarterly cash distributions of 30 cents per unit with Our investor return goal is to be consistently in a final distribution of approximately 54 cents per unit the top quartile of performance. In 1999, we achieved payable in cash or units, depending on our a respectable 16.8% return on average equity, placing performance and outlook at that time. us near the top of Canadian retailers on the Toronto At North West, we expect a lot from each other Stock Exchange (TSE). However, our unit price fell and we are especially proud of how our people have 24% in value. This was partially offset by $21.6 million risen to the challenge. From the western reaches in cash distributions to unitholders, a 44% increase of Alaska’s Aleutian islands to our flagship store in over last year. The net result was a total market return Iqaluit, the capital of Canada’s new eastern territory, of -15%, which was the same as the performance of the talents, energy and commitment of Nor’Westers the TSE merchandising index. has been exceptional and it continues to make our We take our investment performance seriously. vision come alive. Superior long-term value for our investors depends on our ability to enhance value for our customers. We believe the platform we’re building makes this possible by positioning us as the leading retail brand EDWARD KENNEDY, PRESIDENT & C.E.O. in our markets. Our progress shows that our strategy is working — for the long haul. IAN SUTHERLAND, CHAIRMAN April 20, 2000 4 NWF 1999 ANNUAL REPORT right: Hilda Albert helps Michelle Menow and son, John Charles Menow, with an in-store promotion that fulfills everyday needs at Rossville, Manitoba.

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