Q1 2020 Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to <unk> companies Limited Q1, 2020 earnings Conference call.

At this time all participants are in a listen only mode. After the speakers presentation. There will be a question answer session to ask the question. During the session. You want me to press Star one on your telephone.

Please be advised that today's conference is being recorded.

Our any further system. Please press star zero.

I would now like to hand, the conference over to your Speaker today, why Mcdonald Vice President Investor Relations. Thank you. Please go ahead Sir.

Great. Thank you very much julianne and we apologize for the brief delay getting moving this morning, but I'd like to welcome you to Lovelock companies Limited first quarter 2020 results conference call.

I'm joined in the room today by our executive Chairman, Kevin Weston, Sorry, Davis, our president and their Meyers, our Chief Financial Officer.

Before we begin the call I want to remind due to that today's discussion will include forward looking statements, which may include but are not limited to statements with respect to loveless anticipated future results and the impact of the covert 19 pandemic.

These statements are based on assumptions and reflect management's current expectations in are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectation.

These risks and.

And uncertainties are discussed in the company's materials filed with the Canadian Securities regulators.

Any forward looking statements speak only two as of the date there made the company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise other than what's required by law.

Also certain non-GAAP financial measures may be discussed are referred to today. So please refer to our annual report and other materials filed with the Canadian certain securities regulator for a reconciliation of each of these measures to the most directly comparable GAAP financial measure.

And with that I will turn the call lamented there. Thank you right and good morning, everyone. It's certainly a different world from a little over two months ago, when we reported a fourth quarter results.

Before I get into the numbers, let me begin by express my gratitude to all our colleagues for their incredible dedication throughout this crisis frontline teams on the sporting organization adopted swiftly and was compassion to ensure we continue to deliver the services the Canadians killed dog in a safe and secure environment.

Moving to the quarter on an adjusted consolidated basis I reported revenue grew by 10.7%.

Adjusted EBITDA increased 12.4% adjusted net earnings increased by 21.4% and adjusted earnings per share grew by 24.4% in the quarter.

Our sales were positively impacted towards the end of the quarter by covert 19, and then unprecedented increase in the purchase of essential.

As a reminder, our quarter ended on March 20 person in the final two weeks of the quarter a grocery store stores. So an incredible tropic sport with sales growth of approximately 44%.

Pharmacy saw similar levels of growth the front store up 42% and pharmacy up 26% in the final two weeks.

Significant a quick increasing volumes delivered positive leverage for the business, which were only partially offset by cobot related costs. Those talks started ramping as the quarter close.

We estimate that cobot 19 generated incremental $751 million in revenue in the quarter with a corresponding increase in adjusted diluted earnings per share or 14 cents.

Our same store sales in drug retail grew 10.7% flood store same store sales grew 10.7% well pharmacy same store sales grew 10.6%.

Before we saw significant growth in all categories except.

Pharmacy also saw strong growth with prescription count growth of 5.5% and a 4.8% higher average script volume driven mainly by early Phil and shift to higher days supply of prescriptions the recovered nicely.

Food retail same store sales grew 9.6% in the quarter. Robert article price was 1.5% for the quarter to quarter saw very strong comps in both basket and traffic.

Total retail gross margin was 29.8% excluding the consolidation of franchises retail gross margin declined 30 basis points compared to last year food margins were stable offset by pressure on the drug side largely driven by mix.

Retail last few days percentage of sales was 19.8% excluding the benefit from franchise consolidation retail that's DNA approved by 70 basis point as we benefited from favorable sales leverage.

Retail EBITDA increased 17.9% and EBITDA margin came in at 10% an increase of 60 basis points compared to last year.

Moving to PC financial revenue was approximately flat in the quarter well adjusted EBITDA contribution declined $47 million year over year, primarily as a result of increased provision for the potential credit losses associated with cold Nike.

Adjusted consolidated EBITDA margin was 9.9% than reported normalized for the consolidation of franchising EBITDA margin was flat compared to last year.

In the quarter I press that earnings available to common shareholders was $240 million, 21.2% and fully diluted earnings per share were 66 cents an increase of 24.5%.

Free cash flow was strong with $1.19 billion generated in the quarter as we benefited from the increase in demand towards the end of the corridor.

In the quarter, we repurchased 2.8 million common shares at a total cost of $188 million.

Now, let me spend a little bit if I'm talking about what we're seeing as we look ahead.

As noted in our April Night's press release, there remains a high degree of uncertainty about the duration of the impacts of the Golden 19 pandemic on the Canadian economy.

We expect continued volatility in our business a shopping behaviors continual as does the demand for the types of products and services. We provide light up these uncertainties, we went through our 2020 Ella.

Our focus as we continue to navigate through the cobot crisis has to do the right thing to protect our calling on customers well taken all the necessary actions to meet the needs of consumers. These actions include enhancing customer convenience supporting our colleagues in their stores. He distribution distribution centers were temporary paid premiums and pay protection safeguards.

Securing our operation and providing financial support to our communities and customers.

These investments are significant but we believe they are necessary in the right thing to do.

Look more closely at the second quarter. It is very difficult to predict how sales will evolve.

Expect potential reductions in some discretionary spending categories as we expect the current social this since they were apartments will also impact our sales trajectory.

Since the beginning of the second quarter, we've experienced a pronounced change the trajectory of ourselves.

For the first five weeks food sales growth was approximately 10% well drug sales declined approximately 6%.

This combined with an estimated $90 million per month or bigger level cobot investment to keep our store say for our customers that are going well quick financial pressure on our business.

Well as opposed to efficiency initiatives at our Capex program continue with some adjustments necessary to ensure that a retail operations are not impacted during this busy and critical paired we continue to invest in our long term strategic initiatives.

I looked at what did he remains strong supported by strong balance sheet and the ability to generate significant cash flow from our operations.

As of Q1 was consolidated cash and short term investments balance was $2.2 billion.

This includes $350 million, which we drew on in the quarter from our committed credit facility to backstop at $350 million dollar bond maturing on June 18 2020.

There are strong investment grade credit rating in good standing in the credit markets, we intend to access the been bond market to refinance maturing debt.

VC backed it also increases funding activity, both price and subsequent to the balance sheet day to maintain a surplus liquidity position relative to regulatory requirements overall, we feel confident in our liquidity position.

Also note that we are very pleased to have received the court of appeal ruling in our favor overturning the 2018 lower court decision related to Glenn here on there.

In conclusion that this is certainly a challenging time, we believe we're doing the right thing to protect our colleagues in customers well taken all the necessary actions to meet the needs of consumers. While we expect short term challenges we are well positioned to continue to help Canadians navigate through today's extremely challenging time and to continue to build on a foundation that positions us well for the future.

Well now turn the call over to Sarah.

Thank you Darin and good morning, everyone. We began the year much. If we ended 2019 well within our expected performance range with continued strength that shoppers drug Mart and good sign the share growth in our grocery business that's without the impact of cobot 19, we're trending toward a very complete quarter all elements of our strategy. We're in a way.

Sure.

As it turned out Q1 with a tale of 14 days when the government offered their pandemic warning and suggested Canadians prepare for a long stretch at home, we saw rushed to retail, but no doubt study could have anticipated in a matter of Dave customer accounts and basket size Spike for fault sales of paper frozen meat products skyrocketed.

Ecommerce traffic tripled restaurants closed in our prepared meals business and recipe, making categories took off and pharmacies were lined with patients filling prescriptions seeking help essential and advice <unk> wealth.

While the extreme stockpiling is over we're clearly still facing new consumer behaviors and an altered continuously changing trading environment.

We meet daily now quite a few key priority keeping people safe and well served optimizing store operations and E commerce and adapting business strategies to prepare for what comes next.

Today, we must not only anticipate a return to pass shopping and consumer habits, but also planned for the fact that many recent changes will not reverse entirely.

First we have to look at our piano and bring it back into balance over time as Darren said that will be a big time, particularly in the second quarter the impact of wage increases safety and social distancing investments made in Q1 will fall heavily in Q2, we have committed hundreds of millions of dollars thoughtfully and.

Sizably, but the safety and security of our colleagues and our customers.

Next we need but that's our plans for the back half of 2020 fine tuning up the economy opens and we better understand the expectations for social distant thing and other safety control. We also need to monitor near term conditions for our core business. That's for example, early stockpiling benefit at all of our stores, but the market division has been a bigger.

Benefactor of the sustained increase buying.

People are shopping while buying more favoring one stop shop without long line and focusing less on price these conditions benefit market stores, but a prolonged economic pinch or resurgent a general merchandise may favor discount stores, we're well positioned either way, but it is something we'll watch care.

Our fully at shoppers, we must understand the opportunity to assist the primary care response to co that well also assessing the current drag on certain in store categories like beauty.

Finally, we need to look to the future out emerging trend and Matt I'm against our own business strategy, particularly in areas, where we have been investing for many years for example, the industry with using fewer Flyers. So we're offering more personal offers through PC optimum.

We have demonstrated our connected health strategy, facilitating virtual physician console and using our pharmacy community health hub.

And we are clearly in a new phase for E Commerce, our online apparel beauty and pharmacy businesses are up our PC expressed online grocery volumes are three times the norm hitting levels, we didn't expect for many years.

Within weeks, we scaled our online capacity by enhancing technology, increasing labor hours, adding overnight picking flops and optimizing source Bay, we scaled the system and are now refining how it works at high volume.

Enterprise wide I believe we have executed on our strategy as well and made the right choices in our co. Good response. It makes me both proud and thankful proud that our customer satisfaction scores have climbed steadily since mid March in some cases dramatically and thankful for the effort of our team, which has been tireless and caring for nearly two.

That's right I can't say enough about the pharmacists cashier stop Clark managers franchise owners truck drivers pickers, and our distribution centers and our vendor partners and farmers youre, keeping the food and drug systems Rolling.

I've been sending daily notes during nearly 200000, Callie sharing news observations and customer praise for their efforts and many have been responding with suggestions stories of encouragement of their own I received one email early in this crisis from a colleague and our replenishment team at what's short and under simple message that quoted Winston Churchill.

At Rad. After all this is over all that well matter. It's how we treat each other I couldn't agree more I will now turn the call over to gallon. Thank you Sarah the global Cobot 19 pandemic has led to unprecedented circumstances at loblaw as an essential services, providing access to food drugs in health care services across the country our focus has.

An anchored in an absolute commitment to do what is asked of US all at the same time, keeping our colleagues and customers say.

Although we appear to be moving into a new phase of the crisis. It is far from over and we remain committed to sustaining the measures needed to support our communities appropriately until the pandemic is behind us.

On the front line about commitment are nearly 200000 of our colleagues I offer them my sincere. Thanks for the way they are rising to that chopped.

At this point, it's very difficult to anticipate precisely how our business will change in any emerging new normal. However, there are certain customer trends, we expect to accelerate substantially from pre cobot run rates.

We believe that online grocery shopping will retain a significant proportion of the current sales penetration that's error for referred to and that our company's national leadership position here will serve us well.

We're also seeing more and more customers responding to digital promotion strategies setting the stage for a potentially significant change in how Canadians shop, and not context, the strength of PC optimum and Loblaws one to one communication channel will be an increasingly valuable asset.

And finally, the adoption of digital health care services has also grown rapidly over the last few weeks as patients become increasingly familiar with these services and provinces recognized they're important role as part of existing provincial health care reimbursement programs. We believe that their use will remain at substantially elevated levels.

In the coming months the company will continue to move quickly to build on its strength in each of these areas of opportunity. We do so from a position of strong financial liquidity and rooted in a compelling strategy and we remain steadfastly focused on that day to day challenges facing our company with a close eye on how best to serve can aid.

And in the future.

I'd now like to open the call for any questions.

Thank you as a reminder.

I'm pleased to then go ahead.

Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.

Your first question comes from Karen short from Barclays. Your line is open.

Hi, Thanks, very much I'm wondering if you could just talk a little bit about I guess first starting with the E com.

He said, obviously that was up three fold and it looks like you've made a lot of changes to meet that demand, but can you talk about what you think that you know sustainable run rate is that in terms of dollars and what the mixes between say like click and collect versus actual delivery and then I had a couple other question.

Okay. So I'll take that it Sarah Hi, Karen So I wouldn't say in terms of ecommerce we have seen a a three top bald increase in the penetration.

That means that in many of the stores were offered Weve a were up into the double digits in terms of penetration.

Ensued, we don't know exactly where it's going to land.

But we're pretty pleased with our business because it's very scalable <unk> national in scale, we can offer at based on what customers want right across the country and we can scale it up and down there's a lot of variable costs and now that we've got it scale to a high level, we can pull back on that if we need to or we continue what we can continue at the level that we.

Got so difficult to predict we expect that it will continue higher than it was pretty cold bad, but we do think it will settle in at a lower level than where we are right now and so I think there was a kick in part to your question as well.

Well, just wondering where liberate the behavior yeah yeah.

Okay. So I would say that delivery has had a higher increase but it does on a smaller base. So overall the majority of our business in terms of grocery online, it's still being done through click and collect and pick up at star.

Okay, and then I guess a couple of questions just on that the costs that you called out the 90 million and incremental cost for the period first of all I just want to clarify he said period, but then I think in the prepared remarks. You also had the same comment related to five weeks I want to clarify if that's a five week number that's a month or four week period, because normally I think.

At the parent being four weeks and then the other question I just wanted to ask as you gave a comment on net sales in the last two weeks and then also the EPS contribution, but that would imply like north of 20 plus percent in terms of contribution margin on EBIT I think in the last three weeks.

<unk>. So can you maybe just parse that out a little bit.

Yeah, Hi, Karen it's Darren.

Yes. So on your first question is that within four weeks that cost US were four week period and the five weeks as we just want to give everybody all the investors. The most relevant data we have since of the most.

Most recent data we have the five week period. So we gave a five week sale picture, but the cost is definitely a four week.

Before we come out in our period four weeks.

On your your second question I'm, sorry wouldn't second question was.

Well when I supposed to happen, where we definitely going to flow through was incredibly strong we'll have to think about in is as this was announced by the government at the level of stockpiling traffic. We saw was through the roof and so from a store perspective and operations perspective, you know, we're really I'm just trying to keep up from a labor point of.

You could vary heightened demand for the flow through was very good even despite the fact that there were some cold weather related costs. So in that final period as well.

Okay and then just last question on the 90 million I know, obviously that some of it as well a lot of it is incremental hours and things like that but do you have any sense. When you when we get into and I guess the knew what people are saying new abnormal post coated period would look like how much of that is just embedded costs that you will have now like from a cleaning.

You know disinfecting type of perspective, once the labor hours can maybe normalize a little bit.

Karen I mean, it's a where it's incredibly hard for us to predict the future after all but somewhere we're going to try not to give any color going after the pandemic I would say these are temporary cost right now that we expect to continue through the pandemic way, it's too difficult for any of us to predict what happens afterwards.

Okay. Thanks very much.

Your next question comes from Mark Petri from T.I.B.C. Your line is open.

Hey, good morning, I just wanted to ask about your approach to promotions primarily in the food channel, but also but also drug I guess I know you've made some adjustments the distribution and that varies by banner, but overall.

In the dynamics around promotions change over the last I guess eight weeks and obviously not really appropriate to drive traffic, but of course, you still want to bring excellent value to your customer. So how do you sort of balance those dynamics.

Okay. So I'll start with that hi, Mark I'm, So I would say that what we've committed to is that we would continue to provide as much value to our customers as we did a pretty cold bad. So weve continued with the promotional activity, but yes, we have had to adjust that to make sure that we didn't have promote rushes into our stores. So.

For example, we did do I know tax events across our superstar business, we extended it normally it would be over a weekend given that most were encouraging customers to come one time per week per family, we had over a seven day period.

So great value for our customers, but at the same time being respectful for what we're asking our customers to make sure that they say say as do our colleagues I would say we're also looking at some changes in terms of the amount of paper, we're using a we have gone to more digital flyers in our discount business they've gone to 100% digital.

In some of the superstar business, we've reduced the Flyers and cut back some of it is dependent on that some of the provincial guidelines as well I would say on the shopper side pretty similar they've gone to some promotional activity through digital trying to keep the exact same price position through.

Just to make sure our customers continue to get value and just reflecting some of the rules that we've got to that we're working with them.

Okay. Thanks, I mean, I guess, just sort of netting it all out I'm just curious about your perspectives on on gross margin.

At least in the short term I mean, obviously, you know bigger basket size lower shrink those are all beneficial presumably there's also less contribution from some from suppliers in terms of but in terms of trade spend. So just wondering how investors should think about gross margin in the short term.

Hi, Mark.

I would.

Again, we're going to.

We're going to hold back from given color as to predicting what will happen in gross margin I think there's a there's a there's a few moving parts, which I think you touched on it in your and your question there and it's just difficult to see how these are going to play out we are seeing more cost pressure from vendors as well and.

Our goal is to keep costs prices as well as we can for Canadian So there's a lot of moving parts in terms of gross margin in its difficult to predict right now.

Okay, there's a little bit I'm back change too because what we have seen as an increase in some of the obviously in sales that's sort of the pantry building, but we're seeing a decline in our general merchandise business, which also has an impact on margin, so apparel and general merchandise and beauty are all down.

They're all a relatively high margin parts of our business.

But we've seen the very high margins or increases in sales in terms of the being part of our business.

Okay. Thanks, that's helpful. I mean, I guess just touching on that are you able to quantify or.

Do you share the quantification of the impact from the general merchandise and apparel decline on your food same store sales comp I guess, either for Q1 or maybe more importantly for the Q2 to date number.

I'm not going I'm not going to provide that today, Mark I'd say in the Q1 and once you know given the growth. We saw was less impactful certainly in Q2 this had a bigger.

In the five leases had a bigger impact.

In particular, as you know with shot which shoppers dropping down there is a bigger impact in there some impact on the from side as well.

We're not going to break that out today.

Okay. Thanks all of that.

Yes, thanks Mark.

Your next question comes from Patricia Baker from Scotiabank. Your line is open.

Good morning, everyone I'm I've Ive a few questions. My major questions have didnt have been addressed but so I just want to get a clarification first of something you said in your opening remarks, and I I missed my phone cutouts I missed the beginning of what you said, but I heard the last part of a phrase which had will fall heavily in Q2.

And so were you referring to the call the the cost.

Yeah. So the impact of the cost that started in Q1, but not in a significant way the 90 million that Darren mentioned per period, well have an impact clearly on Q2.

Right and you and at the word.

The definition of the word fall here with more like and we'll hit in Q2, rather than ball as in decline.

Oh I see what you may know at wellhead, Yeah, [laughter] make sure that perfectly clear okay. Ben just talking about your the online and the big surge. There you said Triple Oh, you end up three times and you also indicated that you're on.

In line businesses way ahead of where are you would've expected to be in in in 2020, you. Just give me some sense of is your online business as a as it as it as a percent of sales isn't where you would expect it to a BNN 2021 2022.

We what we're saying a couple of years I've had up where we work, though I would say two or three years ahead, it's hard to know exactly because obviously things I have an impact on that but it would be a couple of years ahead of where we were anticipating okay. That's very helpful. And then when did you start to see the right hand side of the store or general merchandise and apparel start to drop.

Off.

We thought in the last two weeks. So they were definitely negative in the last two weeks of Q1 and they've continued negative in most of the week of five Q2, so far and apparel has been a larger drop that's right apparels down more general merchandise, we have seen some depending on what's happening in this.

Our we have seen that we've seen sale and those one side, so not as big a drag.

But apparel husband down.

Okay have you done anything on the apparel side like sort of.

Lower your your inventories or a delay purchasing or anything.

We have so we're absolutely preparing for what the back half of the year will look like of course apparel has long lead time, so geared limited in what you can do.

But we are reducing our buys a where we can and also looking at a changing some of the merchandise that we are coming at a getting in terms of Oh, the type of merchandise for getting as well the definitely factoring that in and I would say that failed online or actually Ah Ah, but it's a small base so not as much to offset the decrease.

In the bricks and mortar okay, just with respect to shoppers drug Mart and when did you start to see the decline there did that that start when the government started to a lower expect you to lower the density of people in the store and when you limited you know putting the social distancing measure.

[music].

Well shoppers was up significantly for the last two weeks of Q1 and that I would say as the stockpiling a stop that leveled off a we would've seen a decline in the pharmacy business and the beauty business would have dropped before that so the beauty business dropped in Q1 in the last two weeks and has continued.

And we have changed the so there's a couple things happening in beauty. It wasn't the focus of what people were coming into the stores for we changed the roll up the beauty advisers and did just hop them help out in store.

And we weren't actively selling beauty at that time as well some of that we're starting to change now depending on the store and that of course as he said the impact of reducing the number of people in store would have also had an impact the change in that number of days of five supply also would've had an impact at of course, just the stock.

Piling people have bought off their prescriptions for a number for a period of time, all about would've had an impact of metal decline and we're seeing in Q2, okay. Excellent. So just sticking to shop assistant My last question. So we don't know how long this is going to laugh and as you indicated the first five weeks. They saw 6% decline sales are you looking at potential things that you could do.

To help associate owners should this you know should should that impact there they'll their business.

We have been looking at all aspect because we have a lot of franchise owners on the food side of our business and of course the colleagues in our business as well. So we have been looking at time at ways. There are some shopper starts that happened closed because they are and in shopping mall, so that will be something that we factor in.

Okay. Thank you so much Sarah.

Your next question comes from Peter Sklar from BMO capital markets. Your line is open.

Hi, Good morning, just a question on the.

On the credit card business.

You took the allowance up in the quarter for obvious reasons just.

I quickly did the math it looks like you took the allowance up about 175 basis points, So I'm not sure.

Can you talk about like is that right as the allowance rate up about 175 basis points and also can you talk about other indicators of credit performance such as a pass due or write off rates anything you could provide.

Peter I know, what the exact number promise I want to be misquoted.

Or whether that's exactly right. So I'd have to run them up after but as you mentioned I mean, the provision is that the PCL provision is very forward walking and so it looks at a whole bunch of macroeconomic trends. The idea is that you're taking the hit before things happen looking at what could happen in the economy.

And so that's the why we saw the 45 million dollar increase there and dumb, but from what we're seeing so far I mean, we're a very high transaction portfolio.

We're not seeing any major changes at this time in terms of payment patterns. You wouldn't expect problem you could see that yet. This is the economy goes into a further recession you start seeing as people are more cash strapped to start see anything, but so far we haven't seen a a lot of change there were obviously watch.

For that closely and we'll have to continue to update our bcl provision as we look at more of the macroeconomic trends that are out there I think what we have seen on our our credit card with a reduction in spend so we have a significant reduction in spend people, obviously aren't traveling aren't buying some of the things that they normally what we are seeing an increase in the spend.

On food has you could imagine, but overall the spend is down for the receivable balance is actually coming down and the payment the payments have not changed significantly. So we're in a good position, we feel but as Darren mentioned that you see all is based on economic trends. It's based on unemployment rates lots of other things that are future looking.

As well and the final and just on that point the source of Oh, we do expect to see some pressure still from the back in Q2, because it is a it's based on a a high transaction portfolio, we're seeing lower purchases. So obviously, there will be some impact from that.

And when you describe it there and as a high transaction portfolio does that mean also relative to the portfolios.

Their credit card companies like people pay off their balances they they don't borrow the way they do with other cardholders.

Exactly Peter So a lot of the the earnings are based on interchange as opposed to interest in our portfolio. So as people spend less that has an impact on that at the amount of interchange.

Okay.

That's all I have thanks.

It's Peter.

Your next question comes in I mean, now tell from RBC capital markets. Your line is open.

Thanks, and good morning.

Questions, if I may coming back to the current trends or the sales trends in store could you talk a little bit about what you're seeing around you know category.

Sure how between the normalization centric story is it more now the periphery, but.

Label those types of things.

High I mean, that's oh, okay. The biggest trends that I did mention and and my comments about hasn't come up at the question is actually the trend in between our two divisions in foods I do want a sort of highlight that is a big trend, though market division our conventional stores are seeing.

Very large growth continued to see very large growth and I would say our discount stores have not seen the same growth, which is why when they're in talks about the first five weeks, having 10% growth and food that is skewed quite significantly between the two division, which is interesting to see <unk> because I would have said over the past few years, we would.

I have seen discount and as a Canadian market a discount would have been a growing faster now we're seeing the office that during this pandemic, we're attributing it to the fact that theres less people are only doing one shot stuff, they're only doing one shot in the weeks they want to make sure that they have the best assortment. They want to make sure that they go into the store that perhaps has a shorter life.

Line is not quite as crowded with some of the smaller discount stores and they're not shopping around so many of our customers would go to multiple banners and now they're doing one shop and they're choosing a market division store and so we are seeing that and as I said, they're looking for the higher assortment and the shorter lines as well as Dom I would say their problem.

A little bit left conscious upright at this point in time and as there and they're also taking up more of the spend from restaurant and other off offers that they could have better now close. So that's what we're seeing in terms of within the store. We're definitely seeing you know high growth in area.

As for people cooking from scratch, which we also would have said prior to this tobin time would've been a declining area not as many people cooking at home and now there's a big resurgence the lots of flower and cooking baking supplies were still seeing a lot of that of course, you've heard about you know people talking on paper.

Meet would be another area, so definitely Proteus, we're seeing strength and all of our key food categories. As you know we've closed some of our eight tomorrow, if our home meal replacement. So any of the hot categories. Those are closed so not a so that would have an impact on cell phone interesting dynamic happening and then of course, our discount division is also.

No more heavily skewed to having a the right hand side general merchandise I'm more beauty and of course, the apparel that we talked about so interesting dynamic there.

Very absolutely and just a just a point of clarification a couple of quick clarification pace. When you talk about shields being up 10%.

Yes, I'm thinking for example, it much here in Qubec, where grocery stores are closed on Sundays that is a total weekly span.

Number.

Yeah.

Okay, and the 6% decline at shopper is that full store or is that just could you clarify what that 6%, but well start pollstar. That's the full store, okay. Because presumably we're also seeing some normalization of Rx because you know we saw some look forward.

Hi, So it's both Rx and trying to correct. That's right yeah. Okay. I'll start and then and then final question I notice that there was no dividend increase announcement today and also no commentary around the FCC I'd be and I was wondering if you could just walk us through your current thinking on bugs.

Absolutely, yes, I mean first of all we remain committed to returning capital to shareholders part of our value accretion model, where certainly still committed to that on the dividend. We are I think it's eight years now in a row of giving annual increases in our intent is still to do an annual increase we just didn't announce one.

This quarter just in light of the current environment. We just didn't pick now with the right time to announce that that's something we'll continue to look at it on the buybacks I mean, we've a very strong balance sheet. Our goal is to continue to return again capital to shareholders I think in the short term, we will take a pause on buybacks just as we see this oh.

But our intention is to continue to buybacks, which is the reason you would've seen the normal course as you again.

Today.

That's great. Thank you.

Your next question comes from Michael Van Aelst from TD Securities. Your line is open.

Hi, Good morning, just have a few follow ups with most of its been covered but when you talked about the 10% increase in food in the 6% drop in drugs for the first five weeks can you give us a little bit a color how that's trended over that five weeks, because we know who is really strong at the end of Q1.

Does it start stronger at the beginning of Q2, and then they either and I were starting to see any signs of Andrew de stocking yet.

Hi, Mike I was a it was almost as we flipped the quarter. We saw very for change I think they came from from all the.

The different package put him by government.

The isolation that needed. So we saw the draw very very quickly.

I wouldn't say that some of the trends.

Certainly we saw beauty sales getting higher declines through this period of five weeks is starting to feel a little bit of pick up in that area, but it's still negative so little bit aside of optimism there we might see some improvement also as people have you know they did their earlier fills when they them for longer period of time, they're going.

Eventually need to come back and get their fills on on the on their medications, we think that should drive some demand and then on the on the food side.

I think we saw very large drops on in apparel as the as the first weeks of this starve is starting to see a little bit improvements, there as well, but still a pretty significant negatives and those in those numbers.

So overall.

Sorry, Okay, what sounds like it was relatively stable throughout the throughout the five weeks, but maybe a little bit better in the last period.

Last week I think that's a that's that's probably the right way to think about it right now and.

Changes every every day, we look which is why we're giving you what we know enough trying to predict where it goes because I'm just changes so quickly writer and even though the total number show steady over the five week that category within limits that is moving around to Darren point, you know we've seen their apparel down and then not as far down and so.

Seen movement within the overall, it's been pretty steady.

Okay, Great and then.

And then I wanted to try and.

Got you that clarify the E commerce penetration.

Comments, you made because you said your ecommerce has tripled and there's a lot.

The general thought out there as an ecommerce for the industry has been closer to one that youre probably higher.

Yeah, you also said that in the stores, where you off right many of them are.

Are you seeing double digit penetration. So can you let it so we don't assume that you're you're close to double digits in penetration can you give us a little bit more clarity as to where are your ecommerce penetration is on food.

Yeah. That's a good question. So I think the way that we look at it is a the E com team looks at it in based on their base, so where they offer E commerce in which stores across it and so we've got a I think we talk about having about 75% penetration in stores and then it would have gone.

From a round L three and a half a percent of those you know about to above a 10 into double digits in some stores about sort of the round about math of how we get to triple in some stores GTK for example, worst penetrating higher than that and so those are national numbers when I say, a you know that.

Tripling, we would have seen higher demand in the DTA.

So that would mean, 75% times over 10%.

Yeah.

Percentto penetration.

I think right, we're trying to figure out the specific mouth. So maybe he can go through it with you about that so that's the way that we look at it.

So if you <unk> you said, you're a few years.

You all are ahead of expectations, but if youre in a lot out now.

Yeah.

Assuming you expect to pull back here just on your comments or where do you think it'll settle down in the next two to three years.

That's good question I don't know, we don't really know we know that we know that we have a lot of demand right now and we have had you know obviously wait times I've been longer than we would've liked which is why we've had to scale up our capacity in a in an incredible amount of time and have that flexibility, but we are a.

We've been adding slot we've been picking at night, we've been seizing the opportunity on Sundays and come back.

In order to be able to do some picking so a adding the capacity and so we have it. So we know that going forward, we can deal with that if it stays but we do think that as the economy opens up and people are allowed out people will like to still go back to the starts as our gas. So I don't know a what exactly that.

Titration is going to be bought whatever way I feel like we've got a good model, where we can scale up and we can scale down depending on what the consumers looking for.

Okay, Great and then on that your strategy using around cost.

We are.

Take fees.

At least during cold, but is there any intention.

To put those back in place home scolded or are those more likely to be more prominent and then what are you doing on like what do you see in your in terms of home delivery. It sounds like seems like you're ramping up.

Home delivery efforts in different parts of the country can you talk about Margo, where your intentions are there.

Yeah. So we did drop the fees because we felt that was the right thing to do for Canadians, Jerry independent Mac and give them the opportunity for those that might have a underlying health issues the opportunity to to not have to go into stores. So definitely that would be why we dropped the fees were looking at the right time to perhaps bring back the fee but.

We haven't made affirmed decision one way or another yet we're really just trying to make our way through this a pandemic and in terms of delivery. Yeah. We have a we have both offering and we do have a white label offering.

In order so that you can go onto the loblaws or whatever I saw that you shop at site and you can choose whether you pick up or you want to have delivery. So we have been partnering with instacart, but we also have a our own white label delivery option as well now.

And how extensive is that.

And then as a supplement right now it but there's no fee and what it will be going forward is yet to be determined.

Okay. Thank you.

Your next question comes from Crispy from Deutsche Bank. Your line is open.

Good morning, I, just want to start maybe with a couple of questions were down and then a couple of four for Sarah So darn why don't you just to clarify on your comments about the cost of 90 million additional cost for for the full week just on a high level basis. If I were trying to model, but the cost for Q2 can I just go 90 times three.

And that's sort of rough either the number year over year, increasing cost than you expected to increase Q2.

You'll have to make the assumption that how long do you think the costs will go for it because they are tied to.

Thanks, being isolated Sophie if everything opens up and it all depends on the we've got up at the right precautions in place depending on what the government filling us to do and in what what's happening out there, but as a proxy for today I think what's your best that this that.

Okay. That's helpful. And then just under 6% decline that shoppers I assure you gave a breakdown between what was the pharmacy in front store.

We did we did not give a breakdown of.

Okay and when you are you built to people to show that.

Not more than the color that we gave which is you know things what.

Well medix has being down or beauties being down more since the quarter. Both what we try to give you. Some direction overboard are going to give the the absolutes today [noise], Okay and just last on the number question not I'm GPS rules as you alluded to in the press release, if we exclude that 14 cents from cobot your EPS would've been up 6% year over year.

But I also exclude the highest how you credit losses in PC financials, which was a fairly meaningful dry.

Got you should have a nice double digit EPS schools for the company I am I missing some there it seems like your underlying trend was actually quite strongly be excluded the direct and indirect imports of coal.

During the fourth 14 cents included the magic.

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So you're right just just over 6% would have been the number and it would have been right on plan. We were quite pleased with our performance going into Covre, making a lot of improvements in business and but yet so would have been Saxon.

And to an all in number okay, perfect and then church, maybe first a question on loyalty since all the travel related loyalty program should not obviously these days with people between punch line. It just seems to me there's a great opportunities for the company to bring leverage the PC optimum tortue from even more people into your ecosystem I guess.

My first question is do you agree with this feeling and secondly.

What are the plans in the works to choose to achieve that.

Well that's a good question I would say, we absolutely believe that our loyalty program. Its a great one and if there is the opportunity to bring more people and as there is other loyalty programs are focused on travel and other things that they won't be doing for a little while so we do think that there's the opportunity I think that.

We are we did mention that both bill and I I'm seeing it as a great opportunity for us going forward. The one to one connection has a couple lot benefits to at one as we don't have as many if the industry States you were Flyers. It does give us the ability to to talk to our customers want to one I also think it's a very compelling.

Offer that we should be able to get more people to sign up for it as well we already have a lot of customers, who have signed up but we're always happy to have more for sure.

Okay, and then maybe just one on online grocery side I think what's your maybe your appears to talk about high incremental nature of online business with a large part your sales coming at the expense of your competitors that can you imagine this has been emphasize what the outbreak. So my questions are number one are you able to track what percentage are you all nine customers seeking Alaska.

Our new lots of customers and then number two is what steps are you taking to ensure that you keep those new customers once things returned to normal.

We have been able to track <unk> the number of five new customers. We have we've also been able to track the number of customers. We did have that are now choosing to go online. So we do have some interesting data and we absolutely we'd like to keep these customers.

We'd also love to keep them as conventional our market to visiting customers as well. So we are looking at to attack that to make sure that we keep as many as we can.

Great all the best you're getting a colleague signs is challenging times.

Yes.

Your next question comes from Vishal Shreedhar from National Bank. Your line is open.

Hi, Thanks for taking my questions.

I got dropped off the call earlier, so I might've missed it caused by the asking.

With the change in the exchange rate and the higher costs, which are no doubt heightened demand for certain products potential shortages and others do you see inflation cutting back to the system into larger way, maybe not next quarter, but call it two quarters out.

Hi, Michelle.

I made some comments before we are seeing increased costs from then from from our supply chain of course every there's just a lot more cost and that will supply chain system today, and we do expect that to put pressure.

As we go forward on on costs, which therefore will put pressure on price you know our goal is obviously to keep prices as low as we possibly can.

But I do think it's reasonable to expect to see some inflation.

As we go into the back [noise].

I'm not going to try to predict the number though of course I would say on the U.S. exchange and fortunate timing in the sense that are going into the summer growing see at season in Canada. So we will file buy more of our produce.

We will come from Canada, so it won't be as big an impact but to Darrens point, we are seeing some inflation across the board.

Okay and.

Just a just moving back to the so called.

Congress topic, a little bit here, obviously loblaws view in the past what's in that click and collect will be the favored ways for consumers to shop.

Within digital but do you want to offer a multitude of options for the consumer So just wondering what you're seeing a quicker.

Gross and I know smaller base for ship to home has that changed your view on click and collect and any way. It are you still think which than the past.

I think it changes our view I think our strategy has always been to be flexible and open and to understand what consumers wanted to make sure that we have to an offering that time that will is appealing to them. So right now the vast majority of our online business. The business is click and collect but as you mentioned.

And as I said, a that delivery part has increased more but I don't think it changes our view really it's just the higher demand in total overall.

Okay, and you mentioned, a white label offerings for.

To leverage at home can you just explain what that means.

Yeah, So right now in the partnership with Instacart the way that at work that you would or you would go on to Instacart website, and you would order what you want and you would choose lop off at the store that you want it to order from now you can go onto a lot walk website and order delivery and it will be fulfilled through instacart, but it allows.

You to go into ours, we think that path is that a good offering for us to offer our customers.

Okay and is the cost and revenue model difference due to the two offers.

For now.

No. It's just where you go where the customers are where the customers go to to pick their order to choose their order online.

It's just that's where the differentiation.

Okay and in the in the disclosure documents natural noted that.

We reduced reduce capex, a little bit wont focusing on the process efficiency initiatives. Just wondering if that capex reduction is it's just an effort to be prudent and thats because management change it skews on some investments.

Because construction is difficult at this moment in time to count goes towards the color retrofits towards like you'd like.

Any help there, yes, but everything I mean really we're focused on maintaining operations were going through this difficult time. So we're trying not to do anything that would be disruptive to the stores and then there's also challenges in the construction side, just given what that will industry is going through as well. So you're just seeing a bit of all of those things that will.

Into a slightly lower capex certainly during this period of time.

Okay and on the cost that you mentioned so the sales moderating did a great job explaining the trends that you're seeing early in Q2 sales moderating costs, keeping up and it may not have got this but.

Did you make any reference to weather the increased sales will offset the heightened cost or what was the comments that.

Well just have to wait and see.

I will let you do the math, but if you look at the increase in sales and a decrease in shopping the drugs side.

With the cost, it's obviously a pressure to the pressure to the numbers it would be that they would set so the answer to that no but I'll. Let you guys do the modeling as to where you think that things could come out that's just.

A period of time as well, but but at this point from what we've seen no we're not offset the cost.

Okay wonderful thanks for the color.

Thanks to show.

Your next question comes from Patricia Baker from Scotiabank. Your line is open I. Thank you very much a couple of follow ups with respect to the white label delivery is that only in the Loblaw banner.

No it might have been just pilot in the law, but the idea would be that it would be across all of them.

Okay, so what's available across the country.

It either is or it will be I think it is in various one perhaps not all of them, but I'll get back to you a lot where I can get back to you on specifically, what's one super Okay. And then just one more online question, what's the customer experience currently with respect to wait times since a lot availability delays.

It's been that so it did a it didnt. It was of course with all the demand we did have delays, particularly in or some other major centers, but we're down to six days on average and what plans to get down back to the daily being able to do it within the day that obviously, our ultimate model.

I for customers to order in the morning, and be able to pick up in the afternoon and so we've been adding capacity as fast as we can in order to be to get back to that but were around six days right now and it depends across the country and it depends exactly on the day, but around six.

Excellent. Thanks Sara.

But I would say if I can make a little bit of pets for it is that our overall I think customers understand the pressure and also understand that this is the pressure not just to ask but to others to offer online as well and so despite a the wait times are there our overall satisfaction is about.

I'd and it's been steadily increasing every week or so we are happy to see that.

We have no further questions in queue I turn the call back over to the presenters for closing remarks.

Great. Thank you everybody for your time. This morning. Please give me a shed if you have any follow up questions and you can mark your calendar for July 20, Threerd, when we will be back online discussing our Q2 results.

Thanks, very much have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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