Q1 2021 Empire Company Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the Empire first quarter 2021 conference call. At this time, all my son, who listen only mode. Following the presentation, we will conduct a question answer session.
Anytime during this call you would you require assistance. Please press star so for the operator.
This call is being recorded on Thursday September 10, 2020, I would now like turn the conference over to redefine director Investor Relations.
Please go ahead.
Thank you Joanna good afternoon. Thank you all for joining us for first quarter conference call.
Dave will provide summary comments on our results what we're thinking the industry today, and then open the call for questions.
Paul is being recorded on the audio recording will be available on the company's website I'm Parco dot yes.
There was a short summary document outlined appointment harder available on our website.
Joining us call this afternoon or Michael My mind, President Chief Executive Officer, Michael, Though Chief Financial Officer, and PRC, Morocco, Chief operating officer.
Today's discussion includes forward looking statements, we cautioned that such statements are based on management's assumptions and beliefs.
And are subject to uncertainties and other factors that could cause actual results could differ materially.
Friends, who are usually DNA from weren't [laughter] I will now turn the call. It I think.
Thanks, Katy and good afternoon, everyone.
You know so much as happened at our company since we last spoke in June we announced our new three or growth strategy project Horizon, We launched for all our game changing ecommerce solution, we continue to grow or a number of foreign born fresco locations. We ratified are crucial Alberta labor agreement and were upgraded by S&P to an investment grade rating.
Today I want to focus on a few key topics. The early progress we're making on project horizon. Our performance this quarter and an update on that it's we're seeing as a result of cold it.
We announced project horizon, our new three your growth strategy in July.
While our announcement was slightly delayed as a result of cold. The team was already in flight on many of the initiatives through project Horizon, We plan to deliver an incremental $500 million an annualized EBITDA by the end of fiscal 2023.
You know what do we lost project Sunrise over two years ago, we had a few doubters. Many thought we couldn't do it they discounted our goal set the savings wouldn't dropped to the bottom line, but our team came through and we proved me wrong, we delivered on time above target and above expectations and we plan to do so again.
Project Horizon is just as bold and equally as ambitious we know we have a lot of work in front of wants to get to the $500 million, but we are much more optimistic now than we were three years ago.
We are completely different company today than we were when we started sunrise.
We have reset our foundation transforming empire from a regional to a national company. We've sharpened account every now and in my opinion now I'm one of the best executive teams in Canada.
We are sustainable earnings growth, we have standardized our operational processes and we've improved our cost structure.
Although we only announced horizon in July was not a standing start not at all our initiatives are either underway or they are initiatives that I've seen successfully completed another company [laughter] horizon is not rocket science, the only rocket science or the algorithms, we're using involved and the artificial intelligence were using throughout the company.
Many of these initiatives we identified at the start of Sunrise, but we simply need it to do things in the rate order at the right time, we needed to solid foundation to be able to achieve our earnings potential.
Our next growth over the next three years will come from Warner growing market share and to building on the cost of market barge and disciplined we developed during sunrise.
I will speak to you about the initiatives, we have I'm going to grow market share and Mike Ellis will take you through our cost and margin initiatives.
A number of initiatives are underway to sport market share growth, including investing in our store network scaling up grocery ecommerce growing our private label portfolio.
During our western fresco.
So far.
Yes.
First thing investing in our store network toward the end of projects Sunrise reinvesting in our stores became a key priority. We have seen extremely strong returns on these projects. Indeed, they are our best return projects, we have an ambitious store renovation program that ensures we deploy capital.
To revitalize most of our stores over the next seven years, our renovations will range from a refresh to a full reset of the store, but at a minimum you will see enhancements to the core and modifications to our key departments to better support our strategy. So far in the first quarter, we've touched 21 stores over the three years surprising we plan to touch on improving.
Absolutely, 30% of our store network.
Next is expanding foreign born in Ontario far more continues to be a weapon for winning share in urban markets, and Ontario, where we were underpenetrated.
Instead of a pandemic farmboy saw slight decline in their same store sales as a large portion of their offerings is focused on prepared foods. However.
Our same store sales have been restored to even higher than historic levels as the exceptional leadership team at Farmboy continues to successfully innovate to adapt their stores at offerings.
The Farmboy store count will grow in a mix of urban and suburban communities with diverse store sizes and formats to fit the needs of local customers, we've announced plans to open another three or more stores in calendar 2020, and seven in calendar 2021.
This brings farm boys total announced store count to 42 stores and this of course, it's just the beginning.
You know the fresco team is doing a great job too and I want to talk about frescoes western expansion fresco continues to outperform other discounters nationally, while making progress expanding the discount banner to the west.
Our brand equity scores are very high since it started this fiscal year, we opened seven fresco stores, bringing our total store count in the West 22 stores open and we have eight in different stages of development, including two that we announced today in China and Grand Prairie, We're very pleased with our early results from the west.
We also reached a mutually beneficial labor agreement that will allow us to expand fresco in 12 bird.
Final Western province impacting our expansion. This is a huge milestone for the fresco west came and for the company. Our first two fresco stores in Alberta are expected to open in spring 2021.
I want to talk about improving storage space productivity.
Driving better space productivity in the current store network is a crucial engine for long term market share growth.
The foundation of productivity is the customer offerings and assortment in each department as well as the mix Mystore as a whole.
During Sunrise the company revamped its offering through the category resets program with a significant constrain maintaining the current space allocation within stores during project Horizon. The company will drive a step function improvement in space productivity using advanced analytics to optimize every customer facing element to the offering.
Store footprints department space allocation and strategies layouts, and adjacent sees category assortment and localization decisions.
We're also going to win a Canadian ecommerce in response to the increased penetration we have seen in grocery ecommerce throughout the pandemic, we accelerated the customer launch of Warlock, our game changing online grocery home delivery service to meet the increasing demand from customers for delivery.
We began with a relatively small number of skews to test the system I mean have been ramping up big time.
Well our launched in the GE in June and we're very pleased very pleased with a yearly results.
Customer feedback has been overwhelmingly positive and our customer net promoter score is the highest I have seen in my career.
Customers are seeing the benefit of a central fulfillment model and one of my favorite customer quotes to date is I received all that I order and this is no less than a miracle nowadays I immediately saw the benefits of picking from a dedicated warehouse versus store produce was really fresh and well packed on time delivery was exactly within the slot I recall.
So I felt the price of items was good and so where the range of promotions and we did not pay that person to write that.
Positive customer experiences are translating into strong repeat behavior much stronger than we forecast and positive word of mouth referrals. This.
With a strong marketing campaign black blanketing, the Chegg has met steady and strong week over week order volume growth, we're delivering best in class customer service with near perfect.
Near perfect on time and fulfillment rates.
Our second of all our customer fulfillment center will launch in Montreal to service, the Montreal and auto why area in early 2022, we've accelerated our plans for the remaining two velocity ecommerce customer fulfillment centers and have even more confident than ever in that plant that's going to give us a total of four customer fulfillment centers across Canada, covering about 75% of the.
Population, a 90% of the span.
In the few areas of the country, where our customers telephone then centers will not deliver are not yet built we will be introducing ocado has proven store pick solution.
In August we started testing store pick in Nova Scotia with plans to expand the customers by the end of summer and then move west. It is clear now more than ever that we must be able to serve customers, where when and how they want to shop, we're well positioned to win grocer ecommerce in Canada.
We're growing our Empire private label portfolio, we've been working hard to improve our private label business through increased product innovation and the reset of key categories.
Already as a result of these improvements are private label sales have grown faster than the industry. In August we launched a campaign to highlight the rebranding of our entire covenants portfolio very happy with that we will remain focused on improving our private label portfolio as we know it would become increasingly important and uncertain economic times.
And we're going to provide best in class customer personalization.
So we're moving forward aggressively with investments in analytics and technology to deliver on our vision for unique customer experiences.
Building personalization capability enables empire to better identify customer preferences as important direct individualized experience.
And personalized communications.
Moving from mass communication to personalized connections with its customers.
Rely on both of US the goal is to deploy world class and practical personalized communications and offers to inspire customers improve the experienced some relevance of promotions.
Personalization is a key enabler and delivering unique customer experience is driving incremental behaviors and engaging new customers.
Now onto our first quarter results results were strong you saw that grocery sales are still significantly higher than historical levels and we continue to gain market share nationally same store sales excluding fuel were up 11% this quarter slightly below the average of 13% for the first six weeks of the quarter that we gave you on our last call.
Basket size is way up and transaction count is down over prior year, but we see trips slowly increasing week over week as some customers are beginning to initially feel a safe enough to shop, a little more frequently a little more pharmacy has stabilized and its Canadians are gradually been traveling more across Canada, we see fuel.
Leasing.
Q1 sales were impacted in the first six weeks by remnants of the locked down as restriction started to use up and over the last two periods of the quarter, we see a sales sales rate slightly slavery to reduce but still significantly elevated over prior year. We're now halfway through our second quarter and when we look at the last few periods of Q1.
Plus the first five weeks of Q2. The average same store sales has been averaging it's a lot of averages approximately 8% to 10%.
And it's it's sticking around there it's clear that many Canadians food habits remain changed and we predict will stay changed they will stay change due to the severity and length of covered concerns full service continues to outperform discount, but the gap between the two is slightly less than that.
Of course sales are stronger in regions, which are currently most concerned about covance. Looking ahead. We believe same store sales may slow down a bit further, but we see the sticking ness and a good portion of the consumption that shifted from restaurants and hospitality assets is to grocery sales.
Our gross margin dollars were positively impacted by our increased sales gross margin rate was 25.1% up 50 basis points over the prior year the margin rate improve on for improvement over last year is largely due to customers continued preference for one stop shop set our full service banners.
A slightly less promotional environment and the Annualizing Sunrise savings. These positive improvements were partly offset by our service counters being closed for much of the quarter. We have now opened their service counters in almost every store across this country.
EBITDA margin rate was 110 basis points higher than last year and when we look again over the last 12 months, our EBITDA margin continues to grow faster than our major competitors.
Our EPS of 71 cents a quarter is the highest in our company's history.
Lastly, and briefly I'd like to talk a little bit about the trends, we continue to see as a result of coated.
And I'll just pandemic is fundamentally impacted how most Canadian shop for food and continues to do so and many of the trends that we discussed last quarter have continued over the last few months, we still see many many Canadians gravitating toward one stop shop grocery stores that meet all of their household needs full service continue to grow faster than discount this quarter.
Not to the same extend his during our fourth quarter in the key to that pandemic.
And we believe it will continue to do so for the short to medium term as most customers continue to Sicad one stop shops.
Unlike grocery sales in Canada continue to remain at elevated levels, although pulling back from their high as per our internal data as consumers have embraced E. Commerce. All forms wrote this pandemic.
Buyers ecommerce businesses in Quebec, dry GA dot net NBC through service Thrifty foods had sales growth of approximately 370% this quarter.
We continue to believe that customers will shop stores that invest in safety and sanitation for as long as we are without a vaccine and probably even when we do find what.
Oh provincial restrictions have eased at Empire, we have not let our guard Dan we continued to maintain the increased safety protocols in our stores with occupancy limits, one way I often masks.
When I arrived at Sotheby's, we were non investment grade rated by our credit rating agencies, the senior team and our board made it a priorities are returned empire to the investment grade quality, we knew it could be we focused on operating a more efficient company going to cash flow through sunrise and bringing more disciplined to the cap.
Little allocation process to strengthen the company's balance sheet last July DBRS upgrade as to investment grade and a few weeks ago S&P upgraded us as well, we now have an investment grade credit rating by all our agencies.
And being investment grade provides access to even more cost effective capital.
The momentum at Empire continues thanks to the hard work of our incredible team of 127000 teammates and franchisee partners from coast to coast I've always said retail is a simple business sales margin cost and capital allocation, but the trick is in executing consistently and we are doing just that quarter over quarter year over.
Here, we are making strides toward extracting this company's full sales and earnings potential and most importantly, thrilling our customers and without over to Mike.
Thank you Michael Hi, good afternoon, everyone.
We're almost halfway through our second quarter fiscal 2021 is as Michael said.
Over the past 14 weeks, we've seen same store sales, averaging about 8% to 10%.
Basket sizes are decreasing slightly but we're also seeing customer visits increased.
Looking ahead.
We believe same store sales may reduce a little further I still expect to stickiness consumption that shifted.
The restaurants in hospitality to grocery to persist.
We expect we will continue to encourage $16 million to $20 million in SGN expenses per quarter.
Got it to the increased cost of managed maintaining standardization safety measures and other told that measures.
So.
Margin rate improved 50 basis points from last year.
Through the lock down which is during our fourth quarter and positive off this quarter. We held the line on prices in storage in the benefit of our customers.
Same time, the mix of store sales in all stores changed materially from the prior year with many more sales at regular store pricing.
We also benefited from continued sunrise benefits.
I'll say this is Kevin is close to tell a good which are typically higher margin sales slowly open throughout the first quarter.
Yes, you know you as a percentage of sales was 20.6%.
Improvement 55 basis points over last year.
If you remove the hero pay component of the corporate costs.
Improved approximately 120 basis points.
Including the one time retroactive lump sum lump sum payment.
15.6 million Majorelle Safeway I'll go to teammates for hours worked over the past two years.
EBITDA margin rate was 110 basis points higher than last year.
This was partly offset by corporate expenses first half of this quarter. It seemed a hero pay and the one time volumes. We paid you all frontline and distribution center teammates when the temporary hero pay program completed.
[noise] equity earnings decreased year over year, principally as a result decreased equity earnings from Columbia reach.
This is primarily driven by some bad debt expense, resulting from the impact of told at 19 on the collection of outstanding receivable balances.
Imply makes up over half from base rent in Colombia has a strong flexible balance sheet and remains in good financial false.
The effective tax rate for the quarter was 29.4% higher than the statutory rate primarily due to the revaluation of deferred tax assets.
Excluding the excluding the impact of any unusual transactions or different tax Rachel property sales, we estimate that the effective income tax rate for fiscal 2021 will be between 26 and 28%.
Earnings per share this quarter was net of a five cents per share of wallet dilution.
Although as you all know as a new business. So it is reasonable and expected and we will have a few years of dilution as we build team and the processes required to get our volumes up sale.
We continue to expect dilution of approximately 20 cents.
Tony 21, and that the GCA CFC won't be dilutive for at least the first two years.
As we get to critical mass declines quickly. It's too early just share specific data, we only lunch launched June 22nd, but we're really pleased with our retention rates and customer reactions and repeat rates.
Our cash flow generation continues to be strong during August we returned to investment grade ratings with both although credit rating agencies.
I talk seems to access the debt capital market with improved spreads in addition to renewing our existing credit facilities.
So these has non revolving credit facilities maturing our third quarter, and we are considering refinancing using public debt or a combination Republican bad debt.
We have a disciplined capital allocation process and we invest in projects that have a solid returns for shareholders.
We announced as part of project Horizon that we expect to invest approximately 650 $675 million and capital this year.
Approximately half of this investment will be allocated renovations and new stores. That's 10 to 15 fresh goals first go stores opening in the west and eight Farmboy stores in Ontario.
Approximately 15% total investment will be an advanced analytics technology and other technology systems.
We will invest approximately $65 million in Paula which includes our share of the Montreal CFC build cost.
We renewed our normal course issuer, but in the first quarter to repurchase up to 5 million shares and it is the companys intention to execute on and you got to be this year.
So let me tell rising officially kicked off this quarter.
Michael discussed first element of the project growth in market share and I'll cover.
Building on cost and margin discipline.
This element is a continuation of sunrise plus some additional initiatives.
There's still so much opportunities to remove non value added costs and ensure that we containing costs and optimize our margins as well as the topline gross.
A number of initiatives are underway just building on our cost of margin disciplines, including.
First of all driving non merchandising sourcing efficiencies.
The strategic sourcing team, we created as part of Sunrise is still in place of course, and we'll continue to build further efficiencies and cost reductions in all indirect spend.
Were 26.
The one dollar company and we'll just scandals Gil I have a lot of confidence that the team will continue to find benefits for many years.
Secondly, we will continue to build merchandising sourcing efficiencies.
We continued to make investments in advanced data.
Category planning process watching whats all supplier partners to ensure we bring to guess best value and offered to our customers.
Now that we've completed category resets and we have our private label team.
Fully in place, we believe they all categories, where the sourcing costs could be by them.
[noise] 30 were investing in best in class analytics to enable effective promotions.
Last analytic tools will be leveraged buyout category merchants nationally across formats, which will expand our margins by improving on net cost of promotions, while continuing to improve value for our customers.
Fourth optimizing our supply chain productivity.
Quarter, we opened our newest distribution center in BC, which consolidated suite previous gecs into one facility securing a centralized location and increases our capacity and efficiency in depth traction that networks.
We will also be looking to optimize our logistics networks and consolidate.
Processes across the entire country.
And lastly, improving system in process, we will continue to leverage technology to improve our systems and processes. These will yield efficiencies and cost reductions in our back office and I'll support functions.
Our systems, we have we're belts regionally, which makes them less efficient in our national structure.
On hold us back materially.
Teammates look forward to the efficiency they will have pulling data from one system and improving processes across the country.
Fiscal 2021 started local several exciting milestones.
Launch of Walla.
Testing curbside pickup in Nova Scotia, that's just a couple of the additional stores announced the first going west upon boarding Ontario.
Ratified a new CB April many ill, let us Safeway stores.
We were upgraded to investment grade credit agencies and this is just the beginning we have the package and the for the next three years of horizon.
We're off to offer a strong stars.
And what's that Kt I'll hand, the call back to you for questions.
Thank you Mike.
[laughter].
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
Hey, Tom I'm technology, Nova Quest.
<unk> I speakerphone, please let the handset before passing any Keith.
Your first question comes from can shop from Barclays. Please go ahead.
Hi, Thanks very much.
I asked a couple of questions on E. Commerce in terms of the Ocado update at that 20 cents per share for fiscal 2001 <unk>. The first question I have got include Curbside and then I guess do you have any color here could you provide any color on what that it seems in terms of total sales and E com.
And then on Curbside I'm, just curious what the driver of that decision was and maybe a little color like who's doing picking.
How is the Ocado platform integrated then that you pay fee for at things like that and then I had one other question.
Thanks, Karen if again, if we forget due to answer any of those questions. Let me know I'll answer the financial questions first and I'll pass on to Michael for the logistics of curbside pickup. So the dilution number for this year does include any costs related to curbside pickup.
We have said before that we don't anticipate.
Add initiative to be consequential to earnings in the year. So yes. It would included.
At this point, we're not gonna be disclosing sales numbers I will say that our sales numbers are.
Why don't our business plan very happy with it.
But beyond that we're looking for both the dollar number to the sales for or ball.
In terms of the logistics accounts I pick up I'll pass it over to Michael. Thank you Yeah, I mean, it's a it's pretty simple system or using the front end a the great front end that.
We haven't while the customers are liking that in the kind of thing were doing on curbside.
And it's.
Our own teams in the stores that are doing the picking and interacting using the right protocols in terms of safety in.
And hospitality that we are proud of already in the GTK. So that's how we're doing not you know it's a great question, you know were Mike and I have always been a big believers and centralized.
Fulfillment ER and in terms of E Commerce and.
In it and we still believe that but at the end of the day, where cost customer focused company our customers are telling us they want ecommerce.
And Ocado store picked solution has been tested in more markets and <unk> and more stores now and we wanted to use a of well and ocado solution. When we did store pick.
So we're going to take advantage of that and put it in earlier than we initially planned for and why we're targeting two types of areas to put it into areas will never have a CSC.
Where we do not intend to lose market share and expect a halo effect on our bricks and mortar and to areas, where we will probably places CFC in the future and we want to get that business that I didn't convert customers over when the cfcs belt okay.
Roughly the look with the lions share of sales profitability or are in the cfcs and a central pick.
Solution, but we're in the business a certain customers and will serve customers and Canadians and so Oh, let's say most of the sales and Oh and most of our business will be through the C assays, but those two instances we thought was related to start.
So so can you maybe just elaborate a little bit on.
Subsided when you're looking at what you're offering is versus your competitors. What you think your competitive advantage would be on a curbside.
I mean, our our competitive advantage is not a stark as it is we have a huge competitive advantage, obviously with the CFC smart mamis at curbside is not as big a strategic a competitive advantage other than we have a great stores and unbelievably great teammates as we see an especially through.
Good Oh, so that's the that's the kind of throw the customer we were were very.
We're both process oriented and customer oriented now and that combination is really paying off and even in the tests, where we're doing in a in Nova Scotia that that's what we're getting the feedback we get from our own employee the most and got the from the customers.
But that's that permeates, our whole business and that's always your ears strategic advantage here with your server customers do a good way and do you have a process. So it's Rick replicable and consistent across the country and and we're getting real good.
Okay and then my.
Question would be you made a comment that prepared remarks discount format outperformed your peers wondering if you could give a little more granularity on that.
I think that's the case.
<unk> from all the studies, we lucked out in our own internal and external work. We've looked at we are we gain market share against our discount competitors across the <unk> across the industry.
Okay, great. Thanks.
Thank you. The next question comes from my P.T. from Sad to see what markets. Please go ahead.
Hey, good afternoon, with with regards to project Horizon, and your financial targets could you give us a sense of how to think about the timing and the composition of the improvements you have plant.
Sure we.
As we've said many of the horizon benefit so a continuation of work that we started.
During the summer the first three years.
And so you know benefits from the new.
The new Farmboy stores that discount a rollout.
The immediate quick wins, we are having on some of it are up a promotional optimization.
Yes continued.
Hi work on a on the indirect cost reduction just to name a few.
Are those all initiatives that.
Net debt were invested in and and Walt will clearly be a part about 21 and going forward numbers.
But they are.
Yes, I do initiatives that started either increasing their contribution to earnings or beginning that contribution to earnings and in years, two and three we have the renovation program. For example that will continue all the way through the three years.
By the time, we get to the third year and were almost complete touching 30% of the network. We expect that compounding effect of the sales to be greater in year. Three for example.
Some of the work that we're thinking about doing on changing adjacent sees a store layouts that sort of thing is likely to only beginning in yet. So we had towards the end of year three so you know.
I guess, that's a long answer.
Which says that we expect.
Fairly steady and consistently increasing earnings.
The three years with the implication being that the third you will be the largest.
But theres no.
Significant.
Delays or a big chunk so.
Okay benefits that are anticipated to kind of show up in year three.
Similar to what we had for example, with category reset which was a very long term.
Hi project in the planning and ended up paying what mostly yet suite, we don't have a large lumpy numbers like that.
So I think you can expect fairly steady earnings accretion over the three years third your big the greatest.
Okay. That's helpful.
Obviously, you're only a few months into all of it I just wanted to ask a bigger picture question about sort of connection and the synergies.
Between the online platform and your physical store business, obviously, we can see the farmboy in shallow product and branding on the on Bob but thinking beyond that and just wondering how you look at that sort of connection how important that is to leverage a and well how we should start to think about.
That over the next you know I don't know whatever 12 24 months.
You're thinking about the right way as we gear up and it was part of our plans at the beginning and and obviously, we see synergies across our business as you pointed out, but it's bigger than that I mean, they the ability to understand customers that and different times, their shopping with us or or or attracting a competitive or shaw.
Offers who are currently shopping our competitors, who we can now when they do their bricks and mortar shopping we can more readily attract to our stores or bricks and mortar stores or get traction with current customers new customers the be able to use personalization and and data to be able to.
Serve those those customers is a huge part of our plans and is already well underway.
So with that way that's back and the other thing that as I cant remember Mark if you agree with me on this I think you do but but that the when you're when you are really good at ecommerce that it really does reflect well back onto the brand into the bricks and mortar and and and and we expect that to accrue to us as well.
Yeah, Okay, that's helpful and <unk>.
We're not newbies at this right, we're not Rockies, where we have had the number one market share in Quebec for a long period of time another.
And and so we have the the makings of you know we've done this before it's just not at that not at this level.
Thanks for the question.
Yeah, no understood and I guess sort of observer sort of related to that just my last question you know in terms of the all in economics.
I'll go losses to the to the existing business you know how does that change when you launch into markets, where you have a stronger physical store presence in a greater market share I'd I'd expect you'd be able to leverage some of the infrastructure you've already built but also you know the level of cannibalization or the risk is much higher. So just wondering how you think about that.
And I don't know if you can put it in the context of the 20 cents of your one dilution for the first CFC, how we should think about that for you know two three and four.
I do want to start and if there's anything yet Uh huh.
Perspective on that Mark is a.
And you know.
I think they said this before we have not assumed.
That our success in Gralise go to end up with with any any cannibalization or any significant cannibalization of existing bricks and mortar stores, we do think that done properly.
And in particular, our ability to link customers and shop online with customers that Lincoln.
That's chopping up bricks and mortar stores.
Net debt synergy in the Halo effect is going to help bolster the formats, so where we're not assuming.
A negative impact on a on how stores, we just think the brands will become stronger and.
We will when in both both formats.
That's been our experience in Quebec, you know, we've we've been added as Michael said, some tooling and.
And you know it I'd say didn't come back in different is just going to get better because we're going to have a and even even improve.
Offering.
But we think that's a that's still going to be positive for the the odds you guys store network.
That's interesting markets, we can I get it both ways and in the greater Toronto area.
We're not taking any business ourselves, we're just taking customers from everybody else because we we currently have a lower market share we're building not and so that's all good and then when we go to go back a we haven't built in a customer group, who is already dying to try if we.
Our volume goes out quicker our basket size is gonna be larger and our cost obviously at scale are so much better and the customer experience is better so.
And a weird way I can argue both its <unk> I'm excited about both and I'm not even sure I was going to say one is better than the other I'm not sure. So just because you know it's either good already have that business or it is good and not have any business what are the other.
It's interesting.
Yeah, no doubt about that alright, although thats. It. Thanks, thanks for joining us on it.
Thank you. The next question comes from Peter Sklar from BMO capital markets. Please go ahead.
Okay. I believe you said that you're going to be spending 15% of your capex on a on advanced analytics.
That that is a lot <unk> can you elaborate a little bit about where you know how you're spending that money, what you're spending it on the end.
Like I assume you haven't advanced analytics team or you're developing a team and how do you recruit and find those people 'cause. It just seems like every retailer is talking about analytics now. So so maybe just talk a little bit about that.
Thanks.
So many people told me over the years that I speak to quickly so.
What I want to actually what I actually said is advanced analytics and other.
Technology investments, so, yes that would encompass oh all of the investments we're making in.
In new processes personalization.
Analytics.
Proving a a regional.
The boxes.
Et cetera, et cetera, et cetera, so sorry, sorry, if I misled you on that Peter Okay.
Yes, it's absolutely not advanced analytics only it's a it's it's it sounds technology spend so what we were really what I'm really trying to point out.
Is that we've we've made a decision as part of our strategy to.
Similar to a decision that Michael made two years ago. Yeah. It was for example to invest consistently in marketing, which we've done over the three years. We've also made a decision do best very consistently.
No information technology that which would include advanced analytics another.
Tools for our merchandising operations people you know in every one of the three years of our horizon and we just we decided to put a number two it in.
In a in this year and you can expect that to be pretty consistent going forward.
Okay.
And then the other area I would ask if you addressed can you talk a little bit about like all these store conversions, a new stores you're doing so for example, there's the fresco conversions out west and then Theres the up the Farmboy expansion in Ontario can you talk a little bit about like how those.
Yes, how those stores perform and what the ramp looks like and over what period of time do they lose money in how long does it take before they generate the you know the sales level returns you're looking for.
So I, just wonder to or a little different I certainly do you maybe deal somewhat first so.
No. That's not format has has proven to be.
A winner every time, we've opened a store century, what's the company and certainly when we looked at and did the due diligence on up on that business.
The ramp up is quick the margins are strong and that's that's a a format that gets to maturity.
Yeah pretty quickly and is.
And just profitable Uh huh.
Though they very very shortly after launch so so that's.
That is one of things we believe we certainly like about that format and it's.
It's just something that a the jail and his team.
Oh Egistics exceptional assets.
So it doesn't happen easily.
It's a massive amount of planning and and incredible amounts of recruiting the right team and and training them and making sure that you know that they're doing it the farmboy away from day, one so so that but that's a quick ramp up and.
In a fairly quick faster profitability.
In terms of the discount expansion.
You know two things happening there first of all some of them.
Probably most of them are all going into stores that.
Really I think ill suited for the area that they're in because it's more suited to discount or potentially we have other.
Full circle stores in the area that can pick up the slacks.
And so yeah, we frequently take over a store, obviously with low capital costs and an ability to to immediately.
And the margins and improve the sales performance. So we do start with that with that benefit.
At the same time, we're going into a new market as a new format and and do employees in many cases and so the ramp up no stores.
He is slower.
We have said in the past that we expect a new store in that geography to be dilutive in year, one at least and that's that has proven out but now we have stores than a lapping.
They are.
Doing well in spite of pretty skin significant competition, so nobody likes lose market share.
We are happy with their performance and ER and the new team, particularly as we start to get to scale, which means you know.
More than one or two stores in that area or geography.
We're also able to.
Consecutively improves our.
Labor efficiency and that on budget expectations. So so thats a slow build just because of the nature of the expansion.
Yeah, but it's a it is.
Before we turn our expectations.
Oh boy, so what's the right.
And Mike when you do these conversions how does that getting incorporated into it you know the same store sales numbers that you provide I assume when a stores closed for conversion. It comes out at the calculation and when does it come back in I assume not on the day one of launch you wait 13 months or whatever.
It would come back in a way that's when it's what itself and then we call against the old Safeway sales. So we we treated as the same as the same store.
Okay.
Okay, great. Thank you.
Thank you. My next question comes from participating from Scotiabank. Please go ahead.
Thank you very much.
Michael I, just want to come back to have well off for for a second so you market you market that about offering as well all by Sobi and I'm, just it's probably too early to tell yet, but I'm just wondering what do you foresee that.
A lot itself is actually going to I'll provide some halo effect to the Sobi stores, and then secondly, some enhancements or strengthening of the somebody's naming soaking sprint.
Yeah, I mean, that's it's a great question and completely.
That is exactly what we did I mean, where you have a lot of.
I have a lot of choices, when you're putting that putting together a.
A new company in this case, we wanted to take advantage of a couple of things. They want it to declare that this was a a new business that was E commerce and with different I don't like when people call. It like the Soviet Dot Com <unk>.
Oh, I don't think it works out well the same time, we wanted customers because there's so much trust in the Sobi his name and and and that some of these.
Ecommerce companies don't have a well how do I say it nicely don't have a great supply of really quality food or we want to people that know it came from toby's and and when we go to other markets from from that local market, but at the same time, we believe both could have a halo effect on the other so you would try for.
A lot more because it was associated with Sobeys, which is as a very good strong brand connotation.
I mean, we've seen studies and so when you are greater in Congress. The Brandloyalty can be as high a 14 times is strong.
It would put a high halo effect on us, especially because it is the fast in the market that the customer service is second to none in its well it's really cool. So that's the way we thought about it.
Okay. Thank you that's very helpful. Then in your in your opening remarks, you did talk about the renovations as being one of the key drivers to drive Oh Marketshare and you noted that those are higher <unk> highest return projects in the company.
Thank you mentioned that you've got 21 underweight currently just curious.
Of those 21 or those geographically dispersed thirties geographically concentrated.
They are just thinking back to my best to ends that the the easy answers if their geographic Jude Affleck dispersed attrition so over the okay over the whole three years will really be covering.
The whole country, but you need in any one of the three years or probably little more over.
Emphasize towards one region, just because the way it works or survive or 2021.
Its across the entire country.
Probably a little less so.
Ontario, I think.
This year and little more.
In the east and west, but but nothing nothing that I'd point to is as it was very significant over waiting.
Okay, Thanks, and I'm, the curbside pickup in Nova Scotia can you.
Two things <unk> when you were in the opening remarks talked about the curbside pickup in Nova Scotia, and then you said you'll be then you'll be going out west. So I'm, assuming that's critically pickup in Nova Scotia being done because that's in a market where you will never happen you have teach and the west is referring to are you doing your be option, which is a you know seating curbside pickup.
Before you, putting the Oh CSC is that correct and then secondly, how many locations are you doing it in Nova Scotia and isn't it.
Both in urban and you know more rural markets.
Hi, it's Michael.
Sure I hear supposition is.
Exactly the right direction.
And we're not going to divulge how many stores, we're gonna putting in right now because we just for competitive reasons, you know what why helping compete against us but at the same time, we're looking at all sorts of range of of five stores that Ah I mean, right now we're testing it in Illinois.
In an urban center, Halifax, and we're testing it in a lesser been center and picked accounting. So we think it has it has attributes <unk> Canadians and in urban suburban and rural.
Okay. That's very helpful. Then my last question is just a clarification you talked about from boy and how that their same store sales were.
Down because of the removal of Oh, the foodservice et cetera, like you said that their sales are now strat stronger than normal I just wanted to make sure that what you're saying is that.
<unk> is now seeing thanks starts now that our no stronger than maybe even having their history.
I I don't know their whole history, because I've only know what it for a couple of years and what's the bluffing entirely a Japanese well chastised me if I try to gas, but I will say that in and are like that let me back I'm pleased to be there used to very very high same store sales in fact, we're doing our due diligence Mike and I were looking at number isn't.
We had to do a little bit more due diligence. It was so good I'd I'd say that they're doing even better now because of the changes they made the store and because of you know the awful pandemic reflector <unk>.
Okay. Thank you historically better as far as I know.
Mike what do you think.
During the quarter.
Yeah, I mean, I think the messages that their.
You know their business has been reconfigured to some extent in there in the service departments.
And Dave.
You have reacted well too.
Adverse circumstances in those parts of the store.
Yeah, it's extremely well and and ER and the sales of the sales have come up but you really first quarter the country message.
As a result.
Yeah.
Super well then thank you.
Well done it to Jeff in jail.
Their teams.
Yeah.
Thank you. My next question comes from the South Street from National Bank. Please go ahead.
Hi, Thanks for taking my questions.
Michael I know, you're getting focused on return on capital and.
When the Sun Black Bison was announced mostly what some surprised that the actual multiple number just wondering if you reflect back on farmboy.
Acquisitions, hitting your hurdle rate.
No I I was wrong, it's much better than I thought it would be this acquisition. So we'd had and plan for they sort of successor growth or <unk> and even the conversions were saying, we're seeing that so performing on all levels much better at the time, Oh people asked why to pay that multiple and we said it was a.
Because it was worth it and [laughter] and a it's even more worth it as we look back over.
However, it's been here and I have two years whatever it is now.
Yeah that we've been partnered with a with a farm boy so very very very pleased.
Okay and I.
And I know that.
Someone merchandise is being offered by Paula.
Has has any thoughts there.
Regarding merchandise money that circulated back into the Soviets network and as seen on yet these kind of her for synergies.
Yes, that's the network Great question I I was speaking to someone here goes down I said I Dick.
Think about notwithstanding <unk> I think we're getting the financial and strategic returns.
I don't even know how to quantify what bringing great merchants with new ideas brings to a larger organization with more scale.
Okay and to those ideas.
And.
Probably the proudest I've been in terms of.
The team other than Kogut if how.
Your salary, our COO like that and who runs discount and Sarah Joyce.
Who who runs well Uh huh.
Hello, Please standby.
So operator can you hear.
Hello.
It's gone back on.
Michelle you back on.
I am.
Great.
[noise] Luckily our storage systems are better than this one I'm using.
<unk>.
So I'm back on might not if I'm not gone.
Okay. Good so where are what I was talking about was that in areas, where did you hear me talk.
[laughter].
Sorry, just cut out again I know you said something then so.
Well, what we're doing because I'm very proud of what we're doing and we're bringing all the expertise from <unk>.
In areas like private label and produce in merchandising in customer service and it's helping us across discount full service and and in a in E. Commerce. So very very pleased to be what you would call River city.
We never anticipated such a a benefit and did as it is difficult to quantify but but very very big.
Okay, I'm down just switching topics here on a BLA I'm not sure you're able to provide us with specific detail, but even high level detail on basket size margin a comp composition promo intensity and use that colors. It inline with what I thought maybe you can reference your store network and haven't compare.
Yes.
I'm sure as I as I mentioned, where we're not going to be providing specific statistics, because it is competitive but yes. Some of the things that you pointed out so where you know how would you know well now basket size for example, compared to our expectations.
Basket sizes.
Significantly greater than the minimum basket, we require on the site and is.
Probably just a snick short of where we expected to be at this point.
The reason for that is that you know because of the supply chain. A challenge is somehow suppliers that we started off with a with a smaller assortment, which we've been adding to materially over the.
You know every week since we started and so that just fine.
Medix tries to slightly smaller basket size, but it we've been very very happy to see there was only slightly smaller so as we get to a whole assortment.
We expect that to be a to be a very positive number.
In terms of Oliver as the other statistics like you know drops for vans customer retention rates are the repeatability the.
Frequency of reordering.
You know all of those statistics or are they running at or ahead of expectations at this point.
Okay, and then maybe I'll just asking another question here just on tens of one or is.
Is there is there any amount of two hour orders, let's say that inline with what you thought it would be and it's a rather small percentage.
Vast majority has a 24 hour orders is that a fair way of thinking about it.
Did you could you help me with what what did you say two hour 24 hour orders, Yeah, I said short dated two hour orders, let's say, it's got a small percentage of the orders in the 24 hour window for an order is that like the basketball computers.
Yes, so so that that's not that's really not how this system is designed to operate how we measure it you get selected liver slot.
And depending on when you water that delivery slot you know depending on where you. When you order and we are left that delivery slots could be same day that it is more generally.
Are likely to be next day, but we have some customers who are you want to start ordering earlier this week.
So on Monday, or Tuesday, because they want to delivery sought on the physio Friday, and Saturday and Sunday ill, Justin and work on there wasn't a week. So [laughter] it really does Barry right across the gamut.
And it's way way too early to.
We'll see where that's going to pull out total attendance up.
How far ahead customers will play so delivery slots. So you know, it's very much extra customer choice a customer decided when they wanted to longer.
And and that's when they get a we we comps do that.
Two high return or on for example, that's not just on how we can figure doesn't work and ticket to capture.
Yeah that your entire wiki shop, and deliberate to you in good order and you could talk.
Thanks to the color.
Thank you. The next question comes from Ivy metallic from RBC capital markets. Please go ahead.
Hey, sand and good afternoon, everyone <unk> I like to see I'll talk a little bit more if you don't mind around changing the store layout changes the category and I and and how I bought ties in private label and also what your Jack dissolved our with private label.
And how much here you are taking that time, Blake private label and incorporating it into what you're planning on Chile.
And then.
Please standby wanting to connect.
Yeah, I mean, it seemed like so right.
Yeah Yeah.
So we.
We're not going to we're not going to spend a lot of time talking about each I was just because its competitively love a sense too much but I give you kind of calibre. So obviously, we you know you know where we've taken the farmboy private label credit on the walled off site or both Farmboy in Baller Super excited about that's doing very well.
Beyond that.
There's some obvious synergies in and a Indian taking the just thought leadership and what the the fanboy.
Team has done a in terms of yes.
Building, a it really premium and very successful private label business and ER and we have active and very collaborative conversations between our private label team here, and there's and ER and Weve recently moved down into into a higher gear and we've made that a little more formal so so there there's.
There's much more and more integration.
Of the Oh, I'd say on more of the creativity innovation side at this point.
In terms of putting a program together for sort of so you don't really both companies private label. So so they've benefited from a scale up and we're benefiting from their experience.
That's great that's very helpful and actually think about the category we sensor in the early thoughts around gas is there anything you can you share with that's around.
So with respect to just store layout, and and where we should expect to see the change is and how extensive all of this may be.
Yeah, Michael I, you know, obviously, the I'm not going to share the details of it and it depends on which stores and what we're trying to accomplish but I think we have to be cognizant that we not disrupt the customer while we're putting this through so we have sort of plan, but or our first of all.
Go with stage by stage, and then and then don't all the currency or the same time. So that's what we're that's what we're up against sitting here and and you know and it takes some people you know they think that when we use data. We just do data in it some algorithm to tells US what to do <unk> data help smart.
And then start operators make smart decisions.
And and a you know you don't that is not going to help about operator, and and and dad and and a good operator using the right data, we're seeing make better decisions because they can't see all that permutations and the millions and billions of different.
Data points, so what we're saying and I think that's not stressed and up in this industry is not dido, north and or people that data and people and that the best results were saying and they're very good or when we have our great merchants working without doubt and been given the tools to do their job properly.
No that's great. Thank you and then a question I night at rents <unk>.
Have you been intensity is as we're seeing traffic slowly ever so slowly come come back a little better are you seeing anyway, and so getting their elbows and trying to maybe get a little bit more aggressive to take advantage of that.
Hi.
I think its a.
I think it's different pattern now.
Getting back in the new normal so I can.
Independent make as we said, we'll move mix has been different basket size was bigger and.
He did do reissue promotion was lower.
Now with the new normal we seen.
Every player coming back in a pretty cool good mode. So yes, we see more promotional intensity then we so doing depending Nick but I think we coming back.
And then the pre bend to make normal that would see and it says September is that.
Time in merchandising back to school and but this year, it's a it's very different.
No comparable with last year because.
Independent make steal their but yes, I think we seen people are more everybody I just their promotion and no more back in new normal. So yes, we're seeing a bit more promotional intensity in these days then we so during the summer and.
That's very helpful. Thank you and just one final one of my my Alright, what kind of conversations are you having with suppliers around he has potential price increase and request for price increases is they themselves are facing higher operating costs.
Okay. So.
So what does a.
<unk>.
During a pandemic we have been very.
Every we took the I'd like not increasing retail prices are independent.
And I think everybody has focused on manufacturing and and.
And producing stuff.
And merchandise for getting to shelves and it's what we focused on on both site since their supplier.
We continue do I think everybody so gross.
So we continue to maintain that hard line not decreasing retail price. This thing. So we had same thing for the costing.
Except there's some come into the where we ask you play with the market conditions, so like <unk>.
But its where we are intimate relationship with supplier I can we.
The true to our value it so.
We had a strong partnership what supplier, we addressing use you supplier by supplier category by category and we are discussing with them when negotiating with them like we did in a bass they might do we have strong collaboration with them and that's how we want to be going forward.
And that's that's great answer and the only thing I would add here is that I think that the relatively relatively stronger Canadian dollar is helps as well in some of these matters as well to keep them the cost to Canadian consumers and to for us to.
Continue to put.
Pressure on ourselves and others to make sure that but the goods or or slug, it out at a competitive price.
In pros.
That's great. Thank you.
Thank you. The next question comes from Michael Van <unk> from TD Securities. Please go ahead.
Thank you covered a lot already just touch on a few things and the pass you've given us some some insight on the pharmacy performance and and how that impacted same store sales can you give us an idea how that's trended during a quarter and into Q2.
Sure we.
Because of some changes in ER and some of the regulations in terms of ER.
How we were able to do scripts and the the amount of.
You're not degree able to fill through the pandemic.
We did see.
Some negative impact on pharmacy sales in the script counts.
That that has normalized much more and our pharmacy business.
Yes has returned to I would say much more normalized levels and ER and we're comfortable when it comes very comfortable with outperformance and the first quarter.
Okay, great and.
I believe in the first quarter.
You guys were forced to focus a little bit more on sorry on the fourth part of your your core focus are forced to focus more on supply in your own stores rather than.
All yours wholesale business I'm wondering it does seem like the wholesale business and also volumes back to normal levels is that accurate in Q1.
Yeah, It's Michael and Oh, we always because it's important to the cavium consumer because we have good great relationships with our wholesale customers we were supplying them moves.
At least as well as we're supplying ourselves and and so as things returned to what Peter called I guess, new normal it a thing slowly get better and better.
It's still not the same food supply chain given the.
I've got a wise before called but given.
The trauma to this.
In terms of.
Factories, and and and processing plants, not being able to put people close together to each other and the fact that consumption in grocery stores is so much still elevated and we'll continue to be elevated so there's still pressure on the system, but we Ah we treat our wholesale customers or at least as.
Well as we treat ourselves.
Okay. Good question.
The E commerce.
Situation clearly gone up in <unk> and come back NBC, but are you willing to give us an idea roughly where that stands right now.
We did say we yeah, you want to sorry go ahead, Mike you're going to say something.
Hi short to mid.
Michael area.
Uh huh.
Our numbers through the peak period, you know are up existing ecommerce business were up seven to 10 times of his credit Crazy numbers.
And acetylene.
Roughly about three and a half times last years levels.
No and that kind of much in that 3% to 4% range in those markets.
Yeah, I I'm not sure I want to.
Try and give you a number with her researching it but certainly significantly higher than last year.
Okay.
All right and just finally, you you alluded to some increased competitive activity in discount I guess based on successes the rollout of French, though others that are unhappy about given up share. So how does that change during Q1 and into Q2 and and you are you.
I guess, how are you position yourself continues to ramp up.
No it it's Michael and I wish I might benefit on the phone because he could be board articulated on that's because he's on the ground fighting it.
You know, it's it's it's what we expected as Mike said I think earlier, we expect.
People to try to retain market share even if its stake marketshare, just because we closed the safe way [laughter] and then a if there's a few months before we reopened the fresh go we've been highly successful and using basically the same game, we usually do or in and in in fighting.
They're being competitive and telling our story and and and marketing correctly, we believe there's especially in the markets. We've chosen to put in fresco. There is a very I'm hungry competitor, who wants to come to our stores, we believe that the a.
Smaller box, if I may say, so discount chain has a value and appeal to customers and the west like we always thought and I think that we fulfill a need that we believe that weve, not where we fill in Ontario and that fresco could when we were planning. It. So you know it's it's no more competitive.
In fact, it's probably a little less competitive than it was when we first started opening these these stores, but we're not going away, we're going to keep open them and we're going to <unk>. Yeah. You got to play your own gave you can't get thrown off your game in the greatest complement that you could ever be paid its when people start putting your flyer up in there.
Doors on the bulletin boards or online and start saying, what Matt Summit I hope they continue to do that I love that kind of market. It I can't I, we don't have enough marketing to pay for all that so I love it might that loves it.
Perfect. Thank you.
Thank you on the last question comes from Chris Lee from day shutdown. Please go ahead.
Thanks, so much when squeezing me in I'm, just a first a quick one I'm Paula can you tell us how many scenes is this you have seen equal to fulfill currently.
Yeah don't have exact number at the moment, we've said when we did a.
Discount that we were at a well probably when we announced horizon, we thought I think were around.
We were around 15000, we continue that up.
Excuse as we speak and we just put on recently a page on there you can go on and we highlight some of the new products. Those are your customers and I know some of you are.
Because the told me that there we want to highlight because if you went on to your in fine.
Oh I was going to say the brand of the cheese, but then you know worth that cheese or whatever you want to find we <unk>, but when we added we put it on there. So you know its new due to the product. So because we had you know we hurried to get this out there for Canadians during the you know the end of the heat of the pandemic and now we're just adding skew after skew I'm on a daily basis.
Okay. That's helpful and Michael I, just I think I'm talking to probably just as a nice warning because I, probably not going to it I don't want our competitors know exactly the number skews. It I guess, they could go online and count them, but it would take long time, but it's probably not in <unk> I mean, we're gonna be.
Bigger than everyone else in terms of skew count and bigger than in any store.
So I just don't want everybody know every SKU, we have and here is nodding. So he agrees [laughter].
That's fair and then maybe just a high level question.
What are your thoughts generally on on subscription programs. As you know you know, they're gaining popularity quite a bit in the U.S., but not as much hidden camera yet you see them in Sobi since you at some point.
Yeah I think.
It's it's I mean, it's if instead of the customer it's good right now we're not contemplating at right now, but if we think it's a and advantage we can put online and a and it's good for the customer and good for US we'll do it.
Okay. My last question and that's good that's good for us.
Yeah. Thanks, and last question, just how far away all the Cessna goods successful acquisition I'm. Just wondering are there other regional ones in Canada, there like them out there that would complement.
Strategy in the future.
As we could buy more fun boys that are out there, but there doesn't seem to be any better quite like that so are you know I haven't seen and quite like bumbling <unk>.
Where it was Uh huh.
It's a great.
Great asset with great leaders great.
Great brand.
Okay, well, thanks, we anticipate that best of luck.
Thank you.
Thank you there no further questions I'll now turn it back over for closing comments.
Great. Thank you do Anna ladies and gentlemen, we appreciate your continued interest.
If there any unanswered question, please contact me by phone or.
We look forward to have you join up our second quarter fiscal 2021 conference call on December 10.
I've seen.
Ladies and gentlemen, this concludes the conference call for today, we thank you for participating and we ask that you. Please disconnect your lines enjoy the rest of today.