Q2 2020 Loblaw Companies Ltd Earnings Call
Question and answer session to ask a question during the session you'll need to press star one on your telephone.
You require further assistance. Please press star Zero I would now like to hand, the call of richer speaker today right Mcdonald. Thank you. Please go ahead.
Thank you Megan and good morning, everybody welcome to the Loblaw companies Limited second quarter 2020 results conference call.
Joining me. This morning is scaling western our executive Chairman, Sarah Davis, our President and Darren Meyers, our Chief Financial Officer.
Before we begin the call I would like to remind you of the todays discussion will include forward looking statements, which may include but are not limited to statements with respect to loblaws anticipated future result, and the impact of the cobot 19 pandemic.
These statements are based on assumptions and reflect management's current expectations and are subject to a number of risks and uncertainties that could cause actual results or events could differ materially from our expectation.
These risks and uncertainties are discussed in the company's materials filed with the Canadian Securities regulators.
Any forward looking statements speak only 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.
Non-GAAP financial measures may be discussed or referred to today. So please refer to our annual report and other materials filed with the Canadian Sir security regulators for a reconciliation of each of these measures to the most directly comparable GAAP financial measure and with that I will turn the call over to there.
Thank you ROI and good morning, everyone like to start again by thanking our frontline teams in the broader we're gonna agents continue to ensure we deliver the services Canadians rely on its safe and secure environment.
For the quarter, we continue to see elevated sales with a continued shift in foods conventional format and significant growth in our ecommerce platforms. The pandemic has change consumer behavior impacting our mix of sale, which combined with our elevated investments in covert related cost has put pressure on our financial model in the second quarter.
On an adjusted consolidated basis, our reported revenue grew by 7.4% adjusted EBITDA declined 13.5% adjusted net earnings decreased by 28.7% and adjusted earnings per share decreased by 26.7%.
Our same store sales in drug retail decreased 1.1% front store same store sales grew 3.3% well pharmacy same store sales were negative declining by 6.2%.
For the front store the mix of sales changes, we delivered strong growth in food and have a while we experienced pressure in cosmetics and otcs.
In pharmacy revenue was impacted by stockpiling, the first quarter in certain cobot related changes that negatively impacted sales.
Food retail same store sales grew 10, 10% in the quarter.
Food sales growth included significant changes within the category mix and the benefit from strong demand for essential food categories consumers purchase fewer non essential products and demand shifted towards conventional format, where their market division delivering strong same store sales growth of 18.8% and our discount division growing 4.9%.
Our average article price was 4.6% for the quarter. The average article price increase reflected the change in sales mix in the quarter related to the pandemic.
Food retail basket size continued to show an increase during the quarter, while traffic continues to be negative.
Total gross margin was 29.6% in the quarter, excluding the consolidation of franchises retail gross margin declined 90 basis points compared to last year, our margins were negatively impacted by the change in our mix of food and drug sales and declines in both our food and drug rate.
In food, our grocery trading margins were flat, while our rate was negatively impacted by lower sales and right hand side categories.
Drug gross margins were impacted primarily by front store mix driven by lower cosmetics.
Sales.
Retail question as a percentage of sales was 21.3% excluding the benefit from franchise consolidation or retail SGN eight rate increased 90 basis points, primarily driven by higher operating costs related to covance and cost to support the accelerated rated growth in ecommerce partially offset by the sales.
Lift in food benefits from our ongoing process and efficiency initiatives and certain timing of expenditures.
During the quarter cobot related costs increased our spending by an estimated $282 million.
The significant an accelerated growth in our ecommerce business has led to an increasing cost to support the rapid scaling of our capacity to meet demand. We continue to focus on meeting the demands of our customers and have a number of initiatives in place to improve the productivity of the model overtime.
Retail EBITDA decreased $151 million in EBITDA margin came in at 8.3% a decrease of 200 basis points compared to last year.
Moving to PC financial revenue was $233 million down $51 million in the quarter as credit card spending was lower with less interchange income and credit related fees as well as lower sales will immobile due to the partial closure of kiosks adjusted EBITDA contributions declined $8 million year over year, driven by the revenue to.
Clay.
Adjusted consolidated EBITDA margin was 8.5% in the quarter normalized for the consolidations or franchises EBITDA margin declined 190 basis points compared to last year in the quarter IRS net earnings available to common shareholders was $169 million, a decrease of 40.9% and fully diluted earnings per share.
There were 74 cents a decrease of 26.7%.
Precursor of free cash flow was strong with $334 million generated in the quarter inline with the previous year. Our liquidity remains strong supported by strong balance sheet and the ability to generate significant cash flow from our operations as of Q2 robust consolidated cash and short term investments balance was $2.6 billion.
Note that subsequent to quarter end, we repaid a 350 50 million dollar note that we had refinanced in the second quarter. The company did not repurchase any common shares during the quarter. Looking ahead. The remains a high degree of uncertainty about the duration in the impacts of the cobot 19 pandemic them the Canadian economy.
We expect continued volatility in our business a shopping behaviors evolve as does the demand for the types of products and services we provide.
In the four weeks following the end of the second quarter sales growth and mix continue to evolve as restaurants began to reopen foods retail sales have continued at elevated levels, but have experienced a modest tapering of growth rates in drug retail has experienced continued improvement compared to the second quarter same store sales growth rates.
As we continue to navigate through the covert crisis. Our focus is on doing the right things to protect our colleagues at our customers in the first four weeks in the third quarter, we saw approximately $20 million, an incremental costs related to safety and security in our stores in DC.
Both our processing efficiency initiatives at our Capex program continue and we are investing in our long term strategic initiatives, which in large part of being validated through the pandemic.
In conclusion. This remains a challenging dynamic time, we're confident we are doing the right things to protect our colleagues and customers at the position our business to meet the future 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 the foundation that positions us well for.
The future I'll now turn the call over dessert.
Thank you Darren and good morning have you think back to the start of the second quarter. We are just getting past unbelievably high volumes of panic shopping and of course, the early stages of the global pandemic, we were implementing safety protocols, introducing pay premium changing operating procedures and we are beginning to close departments in our stores, we're seeing very.
Inconsistent buying patterns the quarter ended with the gradual easing of restrictions and the general sense that we're establishing a new norm.
We fared well with strong underlying performance in the face of unexpected challenges more importantly, the quarter was a major confidence builder underlying the strength of our strategy in digital retail on a strong base, we nearly tripled ecommerce sale I'll come back to that and connected health, we ramped up personal care and.
Pharmacy asset experiencing great uptake and doubling digital pharmacy volumes and through our payments on our weren't initiative, we delivered personalized connections and value when they were need at the most we've been building these initiatives for years and it was rewarding to see them gain thats meaningful momentum in such a short period of time.
As you've heard our revenue growth with substantial but an event the impact of co that our business mix resulted an inconsistent growth in food and negative pressure on the drug business and drive we saw a decline of 1.1% with front start growing 3.3, and Rx down 6.2%. There's no question that our usual strengthened.
These areas were dampened by coal bed more specifically people were doing far less convenient shopping and not buying cosmetics in part because we restricted our beauty boutique business choosing to focus on our core essential services in pharmacy prescription sales declined as people worked through some stockpiling from Q1 visited doctors on.
Hospitals laugh and as Bill days were temporarily reduced from 90 days to 30.
We've begun to see strength and convenient beauty and script and we believe this offers business is prime to regain its momentum in food. We saw strong same store sales growth of 10% with distinctly different performance between our discount and market Division.
Since the onset of co that discount stores have been challenged by a swing and shopping habits towards full shop conventional start customers are making that choice even at a cost further out there with an overall lag in non food category, which are an important part of our larger format discount Max like our drug business.
Great confidence and the strength of our discount food network, which account for about 60% of our supermarket business given the sales mix. We are disproportionately exposed to a shift from discount, but we're also uniquely poised for a swing back by choice or necessity discount shoppers will return to discount banners and we will.
Be there for them when they do.
We're already seeing the start of a return to discount and we expect that to quicken if the economy tightened in any meaningful way our competitors are investing in the discount sector and we intend to maintain our share.
Moving to conventional our market division with a clear winner in the quarter showing consistent strength across the country. It was not only our strongest performer internally. It took considerable share from the market at the same time it hit record high levels of customer satisfaction.
As Darren mentioned market Division was also a standout in the shift to E Commerce, which was another bright light for us companywide.
In the quarter, our E Commerce business grew 280% and year to date, we have reached 1.2 billion in E Commerce sale, surpassing our 2019 full year achievement of 1 billion. We're on a run rate sales that we did not expect for years, our national platform has proven to be flexible and scalable.
Providing our customers same day service and a choice of pick up or delivery, because we know that one size does not fit all tripling E. Commerce sales years ahead of plan for incremental costs at the business. We scaled every aspect of our PC express offering from labor technology to micro fulfillment centers all of these costs were anticipated.
They just weren't expected. So soon this creates a short term headwind with long term prama. These are cost that we are willing to bear as we know this is and will continue to be and areas competitive advantage.
But dynamics from investments in safety to the cost of building E commerce to changing shopping patterns I mean, we need to keep our hands on the financial and operating leverage we need to let Titan and loosen our grip as we see risk and opportunity we are doing just that.
Fundamentally this whole experience has given me a great deal of confidence in our underlying business the strength of our people the mix of our businesses the discipline of our process inefficiencies commitments and our exciting investments and E commerce connected health and payments and reward our strategy remains relevant and promising.
Close by saying that there has never been a period of time, where we have received more feedback from our colleagues and our customers than we have over the past three months, our customers have given our colleagues huge and well deserve credit for all we have done and turn our colleagues have appreciated the support they received as a result, we're getting record results and our customer service.
And our call engages engagement scores. Thank you I'll now turn the call over to gallons. Thank you Sarah and good morning conditions in the second quarter were unusual and challenging and I want to begin by thanking the 200000 colleagues and the leadership all levels to carried us through the team's performance was nothing short of remark.
The quarter confirmed the fundamental importance of a strong core business there were consumer shifts that favorite our market stores and cobot conditions that slowed to discount and shoppers, but at the peak of the crisis more Canadians turned to us to stay healthy and well fed than any other grocer.
We believe this was a function of strong fundamentals no compromise approach to colleague and customer safety and the strength of our forward looking strategy.
The last four months confirmed that the commitments and investments we've made over the last few years will deliver a long term competitive advantage.
On a billion dollar run rate our E commerce business, nearly tripled patients and provinces turned more and more to shoppers virtual care on pharmacy services and customers are clearly leaning towards digital promotions and value generation that only PC optimum can provide.
These trends.
Well not reverse.
Sarah mentioned, maintaining the strength of our core business, while simultaneously pressing our strategic advantages will require continued thoughtful investment we remain resolute in our commitment to do so with long term value creation as our primary objective.
Thank you Galan Megan could do now open the lines for questions. Please.
Certainly our first question comes from Karen <unk> with Barclays. Your line is open.
Very much.
I wanted to US a couple of questions about E com.
So I guess just thinking about as we maybe get into slightly more normal environment, where do you think E. Com will shake out as a percent of sales and then how are you thinking I guess, how are you thinking about your strategy in E com in terms of.
Click and collect versus delivery from a penetration perspective.
Hi, Karen et cetera, So I'll give you a couple of stocks that we have that everybody should also have so basically in 2019, if we look at our billion dollars that we had set on E. Commerce on a 48 billion enterprise to total enterprise everything all included either percentage is about two point.
1%, if you consider 1.2 billion, where our with what we said we had for the first half of this year and if you consider our entire enterprise revenue up 23.7 for that same time period, it's about 5% and when you consider that coming into the year. The first quarter would have.
Then much lower than the second quarter, where we set up with triple. So we now are at a reasonable run rate. We think it will paper a little bit from that pace. So 5% so far year to date with the mix, obviously, a much higher in Q2.
And it will fall back a little bit in Q3, but we'll continue much higher than what we would have seen in Q1.
And so that would be sort of the overall on it and that's total enterprise you can imagine within the food business.
Penetration would be higher than the overall enterprise number and if you consider our discount and arkon our market divisions, they're fairly equivalent in terms of PCX penetration by what happened in Q2 was the conventional or the market division saw a larger growth and penetration prior to that.
Discount would have been a bit higher in terms of penetration those are set at the staff. Some of the staff anyway. When you think of going forward in terms of how do we think about our strategy between.
Click and collect and delivery, we like offering both we think both matter to consumers and that is what tab. We're here to do serve the demand up our consumers I, we saw an increase in delivery and the offer up delivery during cobot, which was higher than the increase in PCX, but it's still on a much lower base.
So for our business.
Largest proportion of our E commerce in grocery would be done still continued to be done through click and collect we expect that will continue.
As we go further about where as we said we're open to demand in either spots in terms of fab.
And making sure our customers get what they want.
Okay and then that's very helpful. Thank you.
Looking at margins and overall, so obviously youve given us.
19, or 20 million I guess uncovered costs for the four week period into Threeq. So.
Thats, what we need to embed for.
All three periods in Threeq.
So then the question is really gross margin.
Which seems to be more of a wildcard how how should we think about gross margin pressures going forward should we start to see gross margins improved sequentially.
There is a little bit more discretionary.
And things like that and the mix and then.
I would tie that into your comment on discount.
I think you said you intend to mange maintained share.
Is that a comment attendant to indicate that maybe that division that it will get a little bit more promotional in order to maintain share.
Yes, let me touch on the first part carrying so from a gross margin perspective, you got it exactly right in terms of the the key variables, which is really around the mix and if assuming we see some increases in in shoppers in cosmetics and things like that we should start to see an improvement in a moment going to give a forecast on it and.
Part of it will be if you think about a from a year over year basis is a growing is not growing has the right hand side doing so there's a lot of is a lot of question marks out there and it will depend how the honestly opens up.
But we are seeing some improvements.
I wouldn't say, we're going to see dramatic changes.
And then I'll just say on the share comment I.
I would say that our goal it's not it's no different than our strategy has always been we intend to maintain our share how we just have seen some heightened activity in the discount at sector and so our my point is just that we intend to maintain our share in that space.
Okay, and just to clarify.
19 million.
For the four week period, and that's the run rate, we should think about for all three months rain in the quarter.
We have four months in this quarter.
Im not given we're not giving guidance for the quarter, but I think it's good representation of the spend level that we what we should continue to have.
Thanks very much.
And we just I think what Darren staying is trying to give you what we know it's hard to predict exactly how the pandemic will continue if everything goes as it is it will maintain but it's possible that it could you could have a resurgence somewhere in which case, we might have to spend more.
Okay. That's helpful. Thanks.
Our next question is from Irene RBC capital markets. Your line is open.
Thanks, and good morning, everyone and just one and I actually think SGN eight.
I think that you're going to quarter you cut back on some discretionary SGN H kind of wondering what you're thinking is score for Q3 around promotional investment maybe some of that some of the other discretionary spend that you back on.
Yeah, I really I mean, we definitely and I mentioned that in my prepared remarks, we did do a nice job cutting back on discretionary spend with especially with everything being closed down I do expect we do expect that to increase in the third quarter. So think about things like marketing spend will be back closer to normal levels versus.
Much more reduced amounts in the second quarter. So we will see a bit of a headwind on a relative basis to Q2 from discretionary spend.
We still think.
Guinea, though and all the things that we're doing still to manage costs.
Yes, thats great. Thank you.
Obviously, just moving on to E commerce.
You did a fabulous job scaling up the business in short order just kind of wondering now that we're moving cost a little bit sure that most acute phase of the crunch, how you're viewing the economics of of E Commerce, and where you see area is that you really need to obtain.
And where you see area that you will be easy for.
Easy one for you to try and fair.
Yes, let me give let me start becoming a bit of color answer can certainly jump in with her comments first thing I'd say on a variable basis. The business is profitable, but we recognize it's more expensive channel and certainly as Sarah mentioned as we accelerated multiple years really within a quarter, there's been a lot of costs and effort thrown into the.
That including multiple emmis season lots of changes with within the business. So right now we are still focusing on meeting the customer demand on improving the service, but over time, we see those things maturing and getting getting the model more economic and that again will happen overtime and the other thing just to record.
Hi, guys is part of the model as we've talked about many times is within the brick and mortar. We're we continue to apply process efficiencies to to make that channel more efficient, which part part on the E Commerce channel and just given the accelerated pace of this increase obviously that hasn't happened yet because this is going to multiple years within a quarter. So.
We'll be pushing on both the efficiency of E commerce and on the continued efficiency within the brick and mortar business over time.
That's great. Thank you and then just one final one for me please.
We didn't have that announcements from Walmart earlier this week around significant investments to just scale their ecommerce capabilities, but also on store renovations. So just kind of wondering what's your view we as you.
Your discount footprint can whether you need to accelerate.
And the investments in store renovations or.
Coming back the shares or the commentary around you will invest to juggle by each year share.
Okay. Good morning, So I think from our perspective, we spend about 1 billion won every year in terms of our capital expenditures in terms of what we spend it on.
Part of that would be renovation. So we actually feel that were in fairly good shape and turned in terms of our renovation cycle there might be some areas that we think we need to spend some extra money, but I wouldn't think about it as being a big additional capex spend for us.
In terms of making sure that our assets are ready we feel like they are in pretty good shape.
And I think what Walmart was doing in their announcement with grouping a few years together to get to.
Three and a half billion that they were announcing as well. So when you think about ours a billion one a year that part of our normal course renovations would be part of that our E. Commerce any expansions in ecommerce would be part of that as well.
That's great. Thank you.
Your next question comes from Michael have announced with TD Securities. Your line is open.
Yes. Thanks, I just wanted to touch back on the ecommerce site and now you.
You touched on on the economics, but.
There was a report our recently.
The MSCI is our.
The more efficient.
Economic model when it comes to.
Two ecommerce and grocers and I'm wondering if you have any early insights you can dollars from.
Testing of the MSG and that you have made any decisions yet as to your long term your system.
Hi, Michael et cetera, So I would say we have so as I mentioned, we did actually do opened one automated micro fulfillment and then we actually added four manual one in order to amp up our capacity and so together they now pick orders for 20 high volume locations in the DTA and they are.
Operating at greater efficiency and speed than what we're seeing in store and so we like what we're seeing but still pretty early days they haven't.
They havent all they were very quickly put together, while the automated one was more planned but the four manual ones were very quickly put together and so still some early days, we feel like theres lots of opportunity.
To enhance that so I think it would be part of our strategy, but no specifics on a rollout yet.
And the automated versus manual.
Economics.
Right now on the automated is performing picks quicker than the manual but it comes with the capital cost. So so it's just figuring out the all in and can we get the manual to be as efficient as the automated is it worth the spend it might be worth it and if you very high dense areas in Canada to have the.
Automated fulfillment center, but micro fulfillment center, but it wouldn't be something that we would have widespread across the country at least that's what we're thinking right now and Mike I decide we'd also expect the cost of the automated fulfillment centers to come down over time.
So we'll continue to look at all these different options.
Okay great.
And then you're you're also touched on the right hand side of the store.
Can you give us an idea of.
How much of a drag that might have been on the discount same store sales and and how youre seeing that improve so far.
This quarter.
I don't have the numbers specific just the discount but overall.
An impact or same store sales by about 140 basis points and you can think about a discount would be.
We'd have a higher proportion of that and I think it is important no within that we did see improvements in.
In the GM side of the business I know, we've talked about that allowed in the past US apparel was still down pharmacy was a big drag. This this quarter in terms of the in store pharmacies.
So I think as the as things open up we would expect and to start seeing improvements and right hand side.
We'll see how apparel plays out though as the year goes on.
Okay and on the drive.
I think quite sure. What you said that arent you said there is a significant increase adding so far in Q3 or just an increased but.
Can you clarify that and can also.
Ill touch on.
Yes, how much of an impact that 90 days.
Going back to 90 days scripts.
We have seen anywhere I don't think we're going to quantify the increase but we have seen an increase in the first period. So it's not declining in the first period. So we're seeing so some growth there and I don't think we're going to give you the.
The script number for this quarter, but it did impact maybe about a third of the the softness last quarter in terms of in terms of our number we think it will even out so what is that the trouble with the 30 day in the 90 day. It's just causes very lumpy performance. So you thought we saw.
An impact negatively in in Q2, we will see a positive impact in Q3, but over the for periods of the quarter It will probably even itself out.
So it is that it does have an impact but overall, we would like to see the script counts. We do think they'll go up we are starting to see that in terms of people being out in about a little bit more more visits to doctors and hospitals all of those things that result in script count growth.
Okay, and thanks, and just last short one.
I see that you.
You renewed your answer I.
Can you talk about what your intentions are for that so the juergen mentioned by anything so far.
Yeah, Mike as we said in the last call. We had the pause that we didn't do any buybacks this quarter our intent.
We are going to call that when we're going to start it but our intent is to start them into second half.
Okay. Thank you.
Your next question is from Mark Ritchie with RBC capital markets. Your line is open.
Hi, good morning.
Obviously appreciate that the sales mix is pretty volatile and has is that a pretty material impact on gross margin.
But separate from the mix could you just talked about the margin performance within some of the major buckets.
Of your business within both food and and drug please.
I think.
Mark the only thing I would call it which I said is.
With within food, it's really being stable. So if you look at the core the core margin is actually being stable year over year. So it's more the.
It's more of these other areas that have caused the headwind to us. So there's nothing I would specifically call out more than just the mix of sales and in some of those higher priced higher margin items just.
Less other examples of give use is.
You know the.
The in store food prepared food, we shut those down during the quarter. So a lot of youre seeing a lot of mix impact some of whom from just the change of within the quarter and I'd say on the draft side on shopper side note thing same answer no specific change in margin in terms of margin on food or margin.
On beauty or margin on the Iraq. It's just that the mix was so different in that front star was up beauty was down and drug was down and so has an overall a negative impact.
On margin with.
Food being a lower margin than either Rx or beauty.
Okay. Thanks.
Thanks for all the comments do on the on the ecommerce business. That's a that's really helpful.
I guess somewhat different but but related I'm just curious how all of that growth in the digital part of the business affects how you think about.
Your promotions and marketing strategies, and obviously you know you've shifted some of your fires to digital.
The loyalty program gives you flexibility in terms of reaching customers. How has all of this affected how you think about sort of marketing and promotions.
Well I think what we how we feel is that the fact that we've invested the money in sort of our payments and rewards part of our our strategy. We feel very good about that because during the pandemic. It did give us a voice to be able to talk to all of our customers through the loyalty program. It allowed us to in some parts of the country.
We were Flyers paper fires were not allowed for periods of time it allowed us to continue with digital Flyers.
We did we have continued in places where it worked unbelievably well to be able to have that direct relationship with customers.
My.
Personal offers for customers to come into our stores.
We are trying it.
That it does give us a boy to be able to reach our customers in a different way.
Tell them a different stories. So it will have an impact on our marketing going forward at as a as you highlighted and it does give us a new avenues. So we're quite pleased with that and how it worked through through the through Q2 and three the pandemic.
Thanks for that the other thing I wanted to ask about I guess, what there's two other things, but one the first is loblaw media and just wondering we haven't really hurt too much about it Im just wondering if you can give us an update about how that has.
As evolves over the course of the year. So far is it's a as its begin to roll.
Yeah, I would say, we haven't update provided that because it really wasn't a highlight in the quarter as you can imagine it wasn't our focus area or the focus area of any of our the CPG companies that we partner with.
So I would say more to come on that will give you a better update in Q3, but it really wasn't.
A focus area for us as we went through the pandemic in Q2.
But are you in a position now where it can become a bit more of a focus for the second half deer, and then into next year.
Yes, absolutely.
Yeah, it's absolutely part of our strategy just wasnt the area, we worked on in the quarter so absolutely.
Yes understood. Thanks, and then just last.
With regards to connected health care I mean, it's obviously been a huge focus for you guys. So over the course of the loss number of years.
Clearly the pandemic has has put digital health care sort of at the forefront I'm just wondering if the economic model has become more clear at all or if you've had sort of tangible steps forward.
Within within that segment as it relates to sort of government support or sort of government pushing in that direction.
Okay. So a couple of points there. So first off I would just highlight that digital health is still a route relatively small part of our business, but what we were are looking at is large increases in demand. So thats. What we saw in Q2 and of course that that gives us confidence and when you think of our digital pharmacy volume doubling.
We also saw an increase in patient physician video services that we offered were up 10 time, what we would have seen pre coal bed.
We also entered into two partnership offerings with primary care and mental health services digitally so with.
Silver cloud in April and those resulted in.
More than half a million Canadians lots you went on to see those services. So we're definitely seeing demand.
For some of these that areas in health and then the other thing we're seeing our to trend. So one consumers who are willing to pay for some of these health services, which is clearly a positive trend second.
The regulatory trends, so provinces that are making scope changes for doctors and pharmacists and meaningful way more meaningful than we've seen in the past decade in terms of allowing for more expanded scope a practice for pharmacists. So we would say the huge consumer demand.
The change in terms of trends with consumers being willing to pay and regulatory changes being a now seeing are all positive towards our connected health strategy, but having said that it's still a relatively small part of our business, but we are looking for some front there for sure.
Okay. Appreciate all the comments thanks.
Your next question comes from Peter Sklar with BMO capital markets. Your line is open.
Okay. Thank you.
First question on the grocery business the shift you saw during the quarter.
Discount to conventional during the cold period.
Although expected I would've thought it that shift was more dramatically than you anticipated and so can you talk a little bit how you.
Was there.
Interruption to your logistics or operations and how would that.
An impact on your financial results for the second quarter.
Well I wouldn't say I don't know that we knew that it was expect Ed the newtek conventional I think in hindsight, you think of it and it does make sense I would say I'm not sure I totally know what you mean in terms of what how it had an impact on our supply chain threat I think we have a centralized supply chain so whatever.
Based on demand and what comes out of the stores. So it would have adjusted immediately to make sure that that demand was fulfilled in the in the market starts as opposed to the discount stores. So from a service level perspective, the switch wouldn't have had an impact on our sale I would say the difference in assortment in terms of what off.
Effort in a conventional store our market store would've had an impact first as a discount store. So when you consider I know for health with limited assortment.
And in each item only a couple of offered a versus the conventional store that would have more offers within each item or within each group of items that would have had an impact in the switch as well because if you had service level issues from vendors in a couple of items in a no frills that would have a bigger impact.
Than in the conventional store, where you just have more assortment. So that would have have an impact not sure. If I answered your question Duff and Peter will that was a good.
That was what I was looking for and on the financial impact I believe.
Conventional carries higher margins then.
Discount sort of the the financial model would have changed a little bit.
That's right.
Okay.
The other thing I wanted to ask you about just in terms of consumer behavior.
And during the Cobot period, I think there was a period, where you eliminated pick ups fees.
And then the just the.
The fees are back in place now for your click and collect model. So I'm just wondering what kind of consumer reaction you've received.
With.
I'm going through a period, where they're not paying fees and then the fees have been implemented again are you getting any feedback or pushback from your consumer on that I.
I would say on what we can see is that our own sat scores have continued to increase so our customer satisfaction scores with and and that's a key metric for us to make sure that our customers are happy. So we have seen that I think our customers understood and that we temporarily reduce that these are eliminated the fees as we went through the.
The the pen down that we have also offer different offerings. So that if you go on certain days of the week. The fee is wave. So there is so for those who care a lot about the fee. There is a way to manage their shop in order to get a day without a fee. So we're doing not to manage volumes by day.
But customers are reacting to it and team they just change their shopping habits, if it matters to that so no not a lot no from our that it would say that we are adjusting positive improvements in terms of our customer satisfaction.
Okay, and lastly center I wanted to ask you.
That's a.
Sure incident happened where the.
The the Ceos of the various grocers, where someone to Ottawa I believe you testified before.
Yes, I didn't hear them entry committee.
Like there was kind of a flurry in the press then it's all gone quiet and I'm just wondering what what is like what's you're aware of snacks is it possible that this committee could convened again and recalled you or I'm just wondering how it was all left with the Companys.
I think what you would have seen in the parliamentary committee is what I know as well I would say I don't know if they have they have the option to call. It back Theres nothing to make me or others belief that we will be called back in any way I think they made their it they ask their questions we answered them.
And as far as I'm concerned, it's done, but I wouldn't say that I mean anything possible. They could ask us to come back, but that's not part of they haven't notified us if they intend to.
And has there been any reaction that you're aware ups from regulators like antitrust regulators.
Have you had.
Any interactions as a result.
No no none whatsoever.
Okay. Thank you.
Our next question is from Chris Lee.
Your line is open.
Hi, good morning, and whole big ones, keeping well just on the shoppers front store business as consumers continues to place high value on convenience and the new world are there opportunities to accelerate some of the changes within the product assortment like.
Great emphasis on sort of grocery to try to capitalize on that behavioral shift.
Yeah. That's a great question, so absolutely I think that as an enterprise solving meals for Canadians is definitely what we want to do and that comes in a whole bunch of different ways, but definitely I'm using shoppers as a way to provide convenient food for Canadians, especially in the urban centers.
And is definitely part about strategy and it was always part of our strategy, but we did see a little bit of an emphasis.
On that as we went through co that as well. So once again another piece of our strategy that we got a little bit of confidence as we went through cobot. So that's a good question.
That's helpful. Then maybe just relate to that is in addition to having more self checkout kiosk shoppers are there other customer facing technologies that you guys looking at to try to speed up the process as traffic picks up again as people gravity towards more the convenience channel.
Well that's a good question I don't think we have anything specific in terms of it I would say that it could be store specific I would say in general.
I wouldn't say that we would have a speed of checkout issue in shoppers there might be a few stores, where we would need to add a few more self checkout certainly for peak time.
But theres not an overall.
You know strategy in order to change the layout or checkout other than adding more.
Self checkout as it turned out to other people remember about it was actually 2016, when we put our first self checkout into a shoppers and really not that long ago and the penetration is almost that 40%. It certainly was during covance abusing it so people customers have adjusted and do like the self checkout, so there might be an opportunity.
I would add some more but that's the only thing I can think up okay. That's helpful and while we're on that how how many stores have to self checkout now.
In shoppers I don't I'm going to GAAP, but it's going to be in the 400, something like that but I can get up ROI, maybe can get back to you with the exact number okay. That's great and then maybe just a couple ones.
Online as competition frontline intensified how sophisticated is the system to retain holding back customers and so for example, if a regular piece express customer hasn't shop with you for a while there's just there's some have the ability to detect absence and incentive targeted offers to try to when her back.
Yes, it does.
Leaving you know as telling all our secret it wouldn't know the system would absolutely no if a customer who normally shop wasn't.
Okay, and then I know in Montreal, and I think part to Toronto, you're traveling a model where you have your level employees pickup products, but then you outsource the home delivery part to third party.
Transportation companies I know, it's still a pilot, but it seems like is it is a a longer term part of this strategy. Just wondering if it can you elaborate on that how the expense so far.
And the cetera.
Still pretty early I would say, but and definitely we are going through such that a crazy time. So it would be well have to try it out for a bit longer but definitely trying different things. So we like the delivery to the home as well as we as I said earlier like to happen mix of delivery.
Instacart has been a very good partner to us. So we will continue in that partnership and then we are trying a couple up the urban centers, our own delivery outsourced to a third party about picked by off yet.
So far so I've got I would.
Perfect and then my last question is I know over the years industry has invested a lot of capital in trying to enhance the shopping experience inside the store and money areas to for the meal replacement program, what do you see as some of the opportunities and perhaps challenges going forward.
Well no replacement.
Well I think part of that as just the making sure that you understand what customers.
Want and need in terms of what they're going into a store for or what they would like to deliver to their home. So when you think of a meal.
That would be delivered to their home would they want this all different types that it could be it could be that they want to make it themselves like a meal kit or could be that they just want to hot dinner serve to their home and in the same way that they would order restaurant food and habit Hoover Hoover delivered to them. So.
So I think in store, it's a different experience because you're walking into a store and so I think having this it I think the key is to have different opportunities for different things that they can have but it is a different circumstance than having it delivered onto your home or even picked up and brought home to eat right away. So I would think just understanding exact.
The what customers are doing in each space is the key and we've been spending quite a bit of time working on that to make sure that our offerings to the demands of our customers.
Great. Thanks very much.
Our final question comes from Josh.
National Bank your line is open.
Hi, Thanks for taking my question.
And I might be a bit early here and I'm jumping on the E. Commerce question line again.
Regarding micro fulfillment centers.
When you installed one or are there any considerations or real estate and the landlords in terms of could you could split the split install the DC other considerations with zoning and perhaps unions and safety laws.
Hello can get perspective on that.
So absolutely there would be a lot of considerations that would go into picking the site, but I think generally it would be the size of the store would be a key factor it would be the volume. So the density up the area for the store that it would be serving because we want to be as close as we possibly can to our customers.
And then yes, there would be some zoning and there would be there's the I'm not really from a from a union perspective, we wouldn't see that were not it wouldn't be taking work away I'm any in any way as long as there. So we havent had that as an issue, but there would be a few factors like the size of store and density up the stores at whatsoever.
Okay.
And with respect to with respect to the online number that you provided us thanks for that.
With that penetration rate go down if you exclude Joe crash and would it be meaningful.
No no. It wouldn't go down I would say I would say it's about the same what we're seeing on Joe fresh and it's just it would be a small part of our business.
Okay.
And I appreciate that cobot has caused a lot of consumer trend changes.
All at once and I understand that shoppers he kind of beauty businesses like the more coveted businesses for shoppers and.
But would work from home do you perceive that impacting maybe some trends at the beauty business going home or is that is a too early to say at this point.
I think I think people will go out again, and we'll still want to look beautiful. So I think it will come back.
Okay, and regarding the E commerce, and shoppers and and delivery, it's scripts and and obviously, the the pharmacy and the Backfit shoppers as as of traffic driver in as people walk through the stores. So I'm wondering.
At this accelerates or if it does accelerate do you have intelligence on how it impacts associated front store sales and do you guys tactics to replace maybe those last front store sales deliver Rx.
Well I think the kiefer shoppers and having that.
A lot of it itself pick up in star as well so that would be a major part of it. It's just that you digitally are aware of when it's going to be ready and so you could come in to the traffic would still be there, but yes. If there was a big switch to everything that you can deliver it to the home we would have to come up with different things to attract people into our stores, but I think can be.
<unk> and location has always been.
Something that is important to the shoppers business and that will continue to be there it'll have be driven by friends store sales dude.
All of those convenience items that people will continue to walk into those shoppers for.
Okay, and and I was hoping you could give us maybe some perspective on a basket size or maybe basket difference between.
Click and clack and delivery.
[noise] meaningful differences.
I would say click and collect is generally a bigger basket than the delivery S.
On average it would be a bigger basket and of course through Cove. It it would be an even bigger basket of people I really did consolidate their shop.
And we would've seen an increase in the size of delivery basket as we went through cove, it as well, but I would still say click and collect as a larger basket and delivery.
Okay, Yeah, Thanks, a lot.
[noise] no further questions at this time I turn the call back to presenters for clothing or my.
Great. Thanks, everybody.
If you have any follow up questions. Please give me a showed and circle November 12th on your calendars for the release a R. Q3 results are a great day.
This concludes today's conference call you may know disconnect.
[music].