Q4 2020 Loblaw Companies Ltd Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the Loblaw companies Limited Q4, 'twenty and 'twenty earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one.
On your telephone if you require any further assistance. Please press star zero and please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Brian Macdonald. Thank you. Please go ahead.
Thanks, very much and good morning, everybody welcome to the Loblaw companies limited fourth quarter and full year 2000, and 'twenty results Conference call.
And this morning as usual by Galen Weston, our executive Chairman, Sarah Davis, our President and Darren Myers, our Chief Financial Officer.
And before we begin the call I want to remind you that today's discussion will include forward looking statements, which may include but are not limited to statements made with respect to loblaw as anticipated future results and the impact of the COVID-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 to differ materially from our expectations.
These risks and uncertainties are discussed and the company's materials filed with the Canadian Securities regulators.
And any forward looking statements speak only as of the date. They are 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 the law also certain.
Non-GAAP financial measures may be discussed you referred to today. Please refer to our annual report and other materials filed with the Canadian Securities regulators for a reconciliation of each of these measures to the most directly comparable GAAP financial measure and with that I'll turn the call over to Darren.
Thank you Roy and good morning, everyone.
The fourth quarter represented a continued improvement and our results our fourth quarter included an extra week. This year. The 50 <unk> week came in a little stronger than expected contributing approximately <unk> <unk> to our fourth quarter earnings per share my remarks today will focus on the comparable 12 week period on that.
Adjusted consolidated basis, our reported revenue grew by seven 1% adjusted EBITDA was up 5% adjusted net earnings were up three 8% and adjusted earnings per share increased by six 4%.
Our same store sales and drug retail increased three 7%.
Store same store sales grew two 8% while pharmacy same store sales grew by 5%.
Front store sales mix was driven by strong performance and convenience categories food household products and have we continued to experience pressure to cosmetics and over the counter sales.
Food retail same store sales grew eight 6% and the quarter demand across our formats increased with market growth of 10, 6% and discount growth of seven 4%.
Food retail sales continue to benefit from strong demand for essential food categories.
Our food retail average article price was three 9% per quarter down from five 3% from the third quarter similar to the third quarter. The average article price increase is not reflective of inflation, but rather a change and our sales mix, including consumers buying larger format items.
Using CPI of one five percentage of referenced our comparable basket inflation would have been closer to CPI for the quarter.
Our food retail basket size remained elevated while traffic continued to show a year over year decline and the fourth quarter.
Total retail gross margin was 27%, excluding the consolidation of franchises decreasing 70 basis points compared to last year and food or rate of decline improved from the third quarter, but was negatively impacted by sales mix and continued focus on our relative pricing position and drug our margin continues to be on there.
Pressure from mix.
Retail SG&A as a percentage of sales was 17, 3%, excluding the benefit from franchise consolidation and improved by 30 basis points.
And the improvement reflects sales leverage and process efficiency gains, which were partially offset by COVID-19 related costs and incremental costs related to the growth and e-commerce.
During the quarter Covid related costs increased our spending by an estimated $42 million.
Retail EBITDA, excluding the benefit from franchise consolidation increased $40 million and EBITDA margin came in at nine 9% a decrease of 10 basis points compared to last year.
Moving to PC financial revenue was $320 million down $17 million from last year, driven primarily by lower credit card spending adjusted EBITDA contributions were $62 million.
Down $8 million from last year, primarily driven by lower credit card spending partially offset by lower credit losses, lower customer acquisition costs, and a reduction and the credit loss provisions.
Adjusted consolidated EBITDA margin was 10, 2% and the quarter normalized for the consolidation of franchises EBITDA margin declined 40 basis points compared to last year.
In the quarter on a 13 week basis <unk> net earnings available to common shareholders was $345 million and fully diluted earnings per share were <unk> 98.
On a comparable basis to last year. After excluding 10 from the 50 <unk> week fully diluted <unk> <unk> earnings per share were <unk> 88, and increase of approximately 25, 7% year over year.
Moving to cash flow the company generated $606 million and free cash flow and repurchased $5 5 million common shares during the fourth quarter.
Turning to the full year on a 52 week basis revenue grew seven 9%. We delivered same store sales of eight 6% and food and four 9% and drug our adjusted net earnings declined by one 6% and fully diluted earnings per share grew by one 2% net capital expenditures came in just under.
And 115 billion.
And free cash flow was $2 $25 billion, including 147 billion from our retail business and we repurchased just under $900 billion of common shares.
And 2020, Loblaw performance reflected higher costs and changes to consumer behavior, driven by the COVID-19 pandemic overall sales increase but profitability was negatively impacted by companywide sales mix growth and e-commerce elevated COVID-19 costs and the decision to keep prices low during the pandemic, we invested to meet the incredible.
Demand in the marketplace for digital services quickly scaling to meet consumers' needs and in the year with $2 $8 billion of E Commerce business the growth and E. Commerce represented a headwind of approximately $100 million or 20 cents of EPS in the year.
Looking ahead as we transition from year, one to year two of the COVID-19 pandemic. There continues to be a high degree of uncertainty about the duration and the impacts of the pandemic on the Canadian economy.
As a result, we expect continued volatility and our business is shopping shopping behaviors and demand for products and services continue to evolve.
However, we believe our businesses are strong and are well positioned to meet the changing consumer.
And 2021 on a full year comparative basis, we expect our retail business to grow earnings faster than sales and to grow year over year profitability and PC financial we expect earnings per share growth and the low double digits and to invest approximately $1 2 billion and capital expenditures and to return capital to shareholders by allocating a significant.
<unk> portion of free cash flow to share repurchases.
And the four weeks following the end of the quarter food retail same store sales growth remained elevated and drug retail same store sales growth slowed in front store, while remaining consistent and pharmacy for the balance of the first quarter, both food and drug same store sales will lap consumer stockpiling that began in the first quarter of.
2020.
Covid related costs are trending and the range of $40 million to $50 million for the quarter and.
In conclusion, our performance in 2020 reflected higher costs and changes to consumer behavior driven by the pandemic.
Following the challenges of Q2, we have delivered steady improvements and performance and profitability. We are pleased with our positioning as we enter 2021.
As a matter of housekeeping starting the first quarter of 2021, we have made changes to our non-GAAP financial measures policy to simplify and improve peer consistency of our adjusting entries refer to the financials for details and a restatement of our 2020 adjusting entries to align with the new policy and I will now turn the call over to Sarah.
Thank you Darren and good morning, everyone 2020 with complicated with many shifting dynamics, but we ended the year, having made steady and sequential improvements and entered 2021 with confidence and our core business is healthy we are managing COVID-19 cost operating well under modified conditions and adapting to <unk>.
And related pressures on our mix and most importantly, we are holding on to conventional drug and beauty market share gains earned open and lots of last year and improving our trajectory and discount.
The fourth quarter was an illustration of our sequential improvement demand for food and drug held our revenue growth high our retail GP rate declined, but the trend and food improved from the prior quarter and operating expense rates improved year over year and same store sales increased eight 6% market.
Stores were up 10, 6% holding strong against conventional competitors discount stores increased seven 4% closing the gap with conventional players and improving our trajectory. It is important to note that our food divisional results were more balanced and Q4 than they have been since the beginning of the pandemic. This adjusted.
Discount customers are returning to discount stores following a sharp pandemic hiatus, and our drug segment revenue increased three 7% up 5% and our acts and two 8% and front store. We continue to see some unusual sales results tied to pandemic conditions for example, we've largely.
Skip the flu season, and beauty continues to be affected by Lockdowns and these are not long term concerns and further suffers is seeing strong results and convenience and food and expanding its role as a health and wellness destination.
Our pharmacy services business increased by over 30% and 2020.
Specific to COVID-19, we are supporting everything from public health education campaigns to regional school reopening to contact tracing we are proud to contribute and our pharmacies are ready to play a key role and the nationwide vaccination effort or 1300 pharmacies are within 10 minutes of most Canadians and our supply chain can deliver vaccines.
The day, we receive them and we can administer 1 million shots per week.
Loblaw digital continued to operate at higher than normal levels with Q4 revenue up 160% for the year, we had $2 8 billion and online sales compared to the $1 billion, we celebrate at a year ago online grocery and let our digital growth more than tripling to $2 billion, which was rounded out by strong farm.
Front store, GM, and Joe Fresh and E Commerce sales and the rise of digital retail has been dramatic no matter, where it settles and we are well positioned with a scalable national E. Commerce platform. We know this is where retail is headed but it creates a challenge online grocery is a higher cost channel. So we are taking steps to manage and <unk>.
Arjun impact over the medium term, while maintaining our leadership position.
Our payments and rewards strategy is propelling forward, our new banking product. The PC money account enjoyed rapid uptake exceeding expectations and PC optimum was just named among Canada's 10, most influential brands on the strength of our member engagement advanced personalization and loyalty labels.
And finally in a year, where health and wellness with front of mind, our long term connected health care network strategy really took root centered on omni channel health tools, we've been connecting Canadians to resources like physicians, and our health clinics and mental health resources, and our new PC health App, making care more convenient the App was launched is up.
Pilot and September and will be rolled out nationally this year as a virtual front door to health products and services.
As we put 2020 and the but it's clear that our company and our team did a great job, reflecting our purpose, helping Canadians live life well early in the pandemic, we made a commitment to keep prices low and drive access for customers, we expanded and advanced strategic services to keep Canadians pad and well we reacted quickly.
And to public health guidance and invested hundreds of millions and colleague safety and support and we invested and the long term health of our relationships with our colleagues and our customers, it's telling that both our customer satisfaction and our colleague engagement scores have never been higher those metrics have never meant more.
We didn't get everything perfect, but we have all the pieces and place the consumer value position is very strong across our banners and our core business and financial momentum, we're improving gross margins, but not at the expense of customers or market share we pushed our strategic growth ventures forward dramatically and we have never been more confident and our ability to serve our customer.
And today and Tomorrow I will now turn the call over to gallon. Thank you Sarah and good morning, as we closed 2020. There are many areas that deserve reflection first is the success of our teams across Loblaw network, who kept Canadians fed and well throw out a challenging year I would once again like to express my heartfelt thanks for their efforts.
And the last two quarters, we've established positive financial momentum and strengthened our customer relationships by delivering consistent value and service combined these will drive strong core performance and 2021 that is our focus.
We can also reflect on the acceleration of our growth strategy as each of our pillars scaled up and 2020.
Our digital retail businesses evolved and grew nearly threefold, our PC money account enrollment and loyalty engagement exceeded expectations and millions of Canadians chose us for physical and mental and primary health services in person and online this validates our strategies and the strength of the growing number of ways that we are.
Serving Canadians every day.
Looking forward our outlook is solid and the near term, we will provide the essentials vaccinations and support our customers' need whatever COVID-19 may bring longer term as we emerge from this pandemic loblaw will be well positioned with stronger consumer relationships conviction, and our core business and momentum and growth areas that match the lives of can.
Thank you I'll now turn the call over for questions.
And you again.
Sheryl could I ask you to please introduce the Q&A process.
Certainly.
Ask a question. Please press star one on your telephone keypad. Your first question is from Karen short of Barclays. Please go ahead. Your line is open.
Hi, Thanks, very much I just wanted to clarify one clarification and then I had one or two questions on there.
Earnings base with respect to your low double digit earnings growth guidance I'm, assuming these four O eight as the base, meaning for 18 and backing out the 10 cents for the extra week. So just to get that yes, that's right Karen.
And then I guess I wanted to talk a little bit about.
So what youre, saying with respect to the discount versus the market stores as you Sarah pointed out that GAAP is definitely narrowed and.
And for Q relative to the other quarters, so a little color on what Youre seeing on the behavior from the Canadian consumer and then the last question I had is just what you're seeing from vendors in terms of cost increases and how you look at that in terms of your ability to pass on cost increases so cost inflation.
And as retail inflation going into 'twenty one.
Okay. So on the first question.
Net discount versus conventional so certainly in Q2 when the pandemic started we saw a flight to conventional.
Which had a significant impact on our discount business as well as a significant positive impact on our conventional business and what we've been doing through the year is trying to because our business is predominantly discount about 60% discount versus 40% conventional and our food businesses. We have been working day when that market share back and what we.
Saw and Q4, it's just a closing of the GAAP.
So a little bit more high growth and the discount business over 7% average as the 10 over 10 per cent that we saw on conventional so what we are seeing is a little bit of change and consumer pattern patterns, maybe not just the one shop like through parts of the pandemic people were guided to only go shopping once per week one man.
<unk> per family they chose conventional aware it with a more complete shop that they could do now it's opened up a little bit we're seeing a few more shoppers and doing more than one shop and a week, perhaps shopping and a few different banners as well. So that's really what we're seeing so far in Q1, we're seeing a similar trend.
And but these things are super hard to predict but that's that's what we're predicting for at the beginning of 'twenty and 'twenty, one as well and then on your second question about what do we expect in terms of inflation.
We always are we.
And we never really give our predictions so hard to predict but I think what we are expecting is that it's going to be low.
Low like one we were always in this out of the 1% to 3%.
Range of inflation is what we're expecting to see in 'twenty and 'twenty, one that would be our best guess, Okay. And then just very last question. How are you thinking about the competitive environment.
With respect to the fact that most of you will probably see comps from negative are you preparing for much more promotional environment.
Kind of as the food away from home pie begins to contract and food and.
Alright, food at home Pike, and begins to contract and food away from home and hopefully starts to Reaccelerate and Canada.
Yes, it's true so I would say in Q1, we do start to lap. So we have a few weeks and Q1, where we lap the absolute <unk>.
The height of the panic buying and then Q2, how we would have obviously the high heightened as well from our position, we feel very well positioned from a price perspective across all of our banners and.
Across both our conventional business and our discount business and so.
So we feel like we're actually on a very good to this and to meet the changes and consumer demand as we go threat.
Great. Thank you.
Your next question is from Mark Petrie of CIBC. Please go ahead. Your line is open.
Yeah. Good morning, Thanks for the disclosure on the online earnings impact.
And I know you've taken steps to improve profitability, but could you just summarize some of those key steps and how should how should we think about that guy and you shouldn't evolving.
In 2021.
Okay, So and I think Darrin and I might both have something to say on this one so I'll start and maybe he can add in a little debt. So yes, we had some because we had such rapid increase tripling net sales specifically on our grocery business in 'twenty and 'twenty, we did see a large financial impact of that <unk> and 'twenty and 'twenty one.
We're not expecting to have the same kind of increase we're not exactly sure where it's going to land, but we don't expect it to triple again. This year. So we are not expecting the same type of financial pressure and yes to your point, we are looking at ways to improve the profitability.
I would say 'twenty and 'twenty, one is going to be very much about improving execution, so very much about improving the customer.
Service associated with digital and focused on two key areas, one being substitution and the other being wait times. In addition, we're going to focus on improving our cost of therapy. So that will involve some forms of automation and different methods as well as improving just the pick.
And store pick a process that we have as well, it's a different ways to improve profitability. There and then over the longer term I would say, we're looking at ways to margin up and improve our adding.
Adding extra items to the basket and in order to improve margins as well I don't know Darren if there's anything you want to add and maybe mark and just the way to think about I mean, clearly, it's a higher cost to serve model our channel and so we tried to give a little more color. This year. So you could understand that impact and as you think forward. There's the improvements we're making and then it's going to dip.
And on the penetration of the penetration rates go up it will be dilutive.
And still and if it stays kind of where it is today then with improvements making that we're making it would be relatively neutral year over year and from everything we see or how we think people will react Sarah just said I don't think we will see a lot of growth there may be some growth, but actually don't think it will be a major financial headwind going into <unk>.
<unk> 2021.
Okay. Thanks, and then just to dig a little deeper I guess on the food gross margin could you just help us understand some of the moving parts there.
Leading to the pressure that youre talking about I mean, you know.
Improved trajectory as you said from Q3, but.
And Theres a lot of there's a lot of tailwind on on your food gross margin be it you know.
Mix between channels.
On line, which as I understand it is generally a higher gross margin.
Is it really just sort of price investments, that's sort of offsetting that or maybe just help us understand that a little bit and then again sort of the outlook for 'twenty and 'twenty one.
Sure let me start with I mean, we I think the themes are consistent with what we've been talking book into the second quarter and what's been really.
And promising is that we are showing fundamental improvement each quarter and this quarter. We saw a nice a nice improvement over the third quarter, it's still down and I would say, it's primarily mix and our focus on getting those keeping our price position and a relatively.
The strong position, which helps us going into 'twenty and 'twenty. One we think we're in a really good position there, but the mix impact is areas like which we've talked about on previous calls apparel.
M R belly areas like that debt continue to still impact us and then you add to that the the pricing side of things, but all and all we're making improvement would be doing it in a measured way and we are pleased with the trajectory that we're on right now as we think of next year certainly our objective will be to continue to improve.
And our fruit gross margin are going through this year.
For this year I should say, yes.
Okay, and then I guess, maybe just lastly, just to sort of follow up on that with regards to the to the.
<unk> thousand and 'twenty one guidance.
In terms of in terms of EPS growth.
You know, obviously, you've got a lot of cost efficiency efforts.
And those have been substantial but there are a lot of moving parts on the SG&A. So just what type of SG&A dollar or margin change is sort of embedded in your and your EPS guidance.
Mark and I'm smiling, just forget that there was a nice try.
Listen I think we've tried to take a big step forward with given the kind of the.
The earnings expectation with low double digits I think people should think about that and you know call. It.
10% to 15% range like it's a pretty big range, there's obviously lots of dynamics going on right now.
Spec to see some gross margin increases, but it's a little hard to predict the SG&A.
Now with all the moving parts and how long this pandemic last and what are the costs look like and just there's just too many factors there so trying to be as healthy and can be though.
Okay I appreciate all the comments and all of them.
Your next question is from Irene Mattel of RBC capital markets. Please go ahead. Your line is open.
Thanks, and good morning.
Follow ups and so on your discussion that we've had already so just.
$2 million and e-commerce, a headwind in 2020, presumably that included waving deteriorate during which they way you weight the fees, which youre not going to do again this year correct. That's.
Right.
Okay.
And it also would have included share of the cost to scale up quickly and so some of those are one time costs. So wondering where the incremental is coming from for 2021, if you will.
So I'm not sure we're mainly on the.
Misquoted before spoke but I don't think Ive said, we'd expect incremental in 2021, and all else being equal right.
Right.
But I mean, if you had some one time costs well share there arent going to recur. This year, just trying to kind of I guess square that circle or whenever it is around.
And can it be like.
Is it spending around the initiatives that he's going to keep it at that 100 million level.
Well the big chunk of that is just it's just the higher cost to serve like EBIT and those are great points that you that you raise debt or within the number but the lion's share of it is all of the labor cost and depreciation and all the costs that go into fulfilling and online order. So for the majority of it is all falls on that category. So.
And those continue and our job is to keep trying to reduce that debt dilution over time and as Sherry outlined as a number of areas. We're looking at looking at over the long term to do that okay.
Okay.
Sorry to keep certain harping on this one segment just trying to understand some of the simple what your assumptions are so youre, assuming that e-commerce is going to be sustained.
Current levels over the course of 2021.
We're not expecting a huge increase to be about we don't know exactly how it is going to land, but I think it's fair to say, we're not expecting the same increase we saw in 'twenty and 'twenty, so everything else being equal and your point about the $100 million would be that it would be it could be a little less because we don't have some of that.
One time cost, but at the same time the majority of that cost is the cost of the labor to pick on the source and that would come with the same penetration levels in 'twenty and 'twenty one.
Okay. That's great. Thank you and then just following up on the discussion around gross margin.
Trying to sort of.
Interpret what you're saying so.
What I heard was youre investing and gross margin by keeping price is.
And within a certain range in order to provide the best value for consumers.
And wondering whether.
And you think that's paying off in terms of your market share and market positioning and the way our consumers recognizing the degree to which you are investing and gross margin and is that driving better performance.
Yeah, I think maybe I'll start and Darren can add so I would say what happened for US is that we are because of our mix of businesses between discount and conventional.
We did lose share and our discount business.
And as we were in the height of the pandemic and so we did and back to win some of that back and we hate losing market share.
And so we did and bath to win some of that share back and we're seeing and an improved trajectory in that area and as a as we highlighted already and Cupar, we're starting to see the GAAP narrow between the two in terms of our conventional business. We did do some I think we have highlighted that we did a few investments and price there as well.
Just making sure that we had a very good competitive price position and our conventional business, we've seen market share gains and every quarter and every period and.
On our conventional business against the market as well as against other conventional players that we feel like it was absolutely.
Worth it and that business and and discount it was just a disadvantage as a result of the structure of our business that caused us to invest but in both cases, we actually feel entering 2021 or in a very good position in terms of our price position.
Okay. Thank you very helpful. And then just wanted to finally, if I may on the whole question and the vaccines.
And delighted to hear that you can that you can deliver vaccines at that level.
Has the government given an indication that.
It will turn to you to be delivering those vaccines and if so any idea of what the timeline is well that is a fantastic question.
And we would say that we have been given some ability so definitely and Alberta, we start next week offering and the vaccine and some stores and.
In Ontario, we have been told that we will be part of the vaccine process, but we are we don't know the exact timing.
Manitoba, Saskatchewan similar case, so I think each province is going to do it it's on way, we've been and conversations with every Gov.
Government every parts of the government, saying that we are would be happy to help and we feel like we've got we're well positioned to do it we've been doing flu vaccines for years and so we do think but we have not been given the rollout strategy across all the provinces or the timing yet.
Yeah.
Thank you.
Your next question is from Mckenrick peak of APB capital markets. Please go ahead. Your line is open.
Thank you and good morning.
Sarah you called out your e-commerce growth and in 2020 and out of 178% increase I think you also called out a total of 2.8 billion of which food was roughly $2 billion and yeah could you speak to in 2020, how much more concentrated and food growth was versus 2019 or perhaps even.
And clearly.
What's your share of food was all E. Commerce in 2019, and then also just how it evolved through the year and exited 2020, and then finally, if possible just any color on yesterday attribution and trajectory audio ecommerce sales.
Okay. Let me see if I got all of that you might have to repeat part of that okay. So in terms of.
So the data that you have on page, specifically, we went and we tripled to $2 billion.
In 2020 from 2019.
We are I think we mentioned that we had about 160.
Per cent growth in Q4.
The total number of the food, but the food would be slightly higher than that but it's in and around that.
So their highest growth I think we saw in Q2 at the height of the pandemic.
But other parts, where there sorry to ask you to repeat book.
Oh sure share the tricky one for us so.
There's no external Thor.
You get a very accurate share percentage on on grocery retail, but we feel we have a leading position.
And share based on.
Collaborate and putting a few numbers together.
In terms of that but we don't have a definite number but we feel we have a leading share. We're pleased with where we are nationally and seen the growth rate across the whole country.
And character.
Trajectory of sort of trajectory question, yes, just.
Sarasota trajectory was still strong and the fourth quarter, a suspect first quarter as well because of the pandemic buying or the real lockdown started towards the end of the quarter. So we're still going to have a period of time, where we're where we're seeing that growth and then we're going to start lapping.
Much higher e-commerce sales from from 'twenty and 'twenty.
Okay. Great. Thanks. Thank you both for that and then just just a quick follow up on Covid and COVID-19 related costs and <unk>.
Got it to $40 million to $50 million and quarter on a $42 million and the fourth quarter.
Just want to make sure we correctly thinking about the evolution of those costs through the year. I mean is the Seo and mine within that range something of a run rate given your sales based on the sales pace you are building on.
All things being equal with respect to vaccine and availability and utilization across Canada and should we think of this range is sort of as good as it gets with respect to COVID-19 costs or are there ways that you expect that will tail off early.
And the market lead through the course of the.
No it should come down I mean, I would tie it to what state of locked down the country is and and as the economies open up as people can move around as the vaccine as more people have the vaccine we wont need the same level of COVID-19 costs. So think about security at stores doing checking how many people are coming in and out.
And hopefully we're in a world where that those restrictions are easing as the year goes on and so certainly our COVID-19 costs should ease with that I wouldn't begin to try to predict how that how and when that happens, though but it should come down and the cost of PPE I think will come down the cost of sanitation and some of those may stay but.
I would say that I think we do expect the costs to come down as Darren mentioned.
Great. Thank you for that and then just a quick follow up just on the beauty and the promotional activity and that channel could you just speak to obviously some real headwinds from the pandemic, but could you just speak to just how effective your promotional activity was and what sort of backward provided.
Within beauty and then perhaps also just how your share on the back of that activity trended through the end of the year and yesterday.
Yeah, So beauty was definitely impacted by the lockdown.
And in 2020, but we're pleased with our performance because we one share.
And every quarter and.
Relate in beauty and so we feel that our I mean, partially because some of our competitors would have been closed during that period, but we're pleased with our.
Our performance there we think our promotional activity is at the right level.
For what we need in order to bring our beauty customers into our stores and we also saw quite a nice uptick online and beauty as well. So we have seen so we speak a lot about the food business online, but we had some nice growth across the various parts of our business and including beauty.
That's great. Thanks, very much I'll leave it there.
Okay.
Your next question is from Michael Van <unk> of TD Securities. Please go ahead. Your line is open.
Thank you so you've covered a lot of buzz.
And I just want some clarifications to help me understand certain things.
So on your price investments and discount versus conventional it sounds like they're a little more aggressive and discount.
And I'm wondering.
If you think that your prices one decreased more than your competitors.
If you were trying to gain back share.
And then two do you think that gap between conventional and discount expanded during 2020, just because there is the traffic was so strong and conventional stores.
Okay. So, yes, we were more aggressive and our price investments and our discount division and.
And.
We do think that the GAAP increased between the conventional players and the discount players during 2020 as a result of the.
The demand going to conventional and then there was another one and the middle what was the other piece and the middle and.
And do you think you lowered your prices and discounts.
Competitors, if you're trying to gain share.
Yeah, we would have we did we believe we did and.
And to gain back that share.
Okay. So you think you are comfortable with where your pricing is for the year and I guess it.
Assuming the.
Assuming traffic were to go back to normal levels or more.
Normal patterns between conventional and discounts.
And do you expect to see pricing go up and discount are down and conventional to close that gap at least on your network.
Oh, that's a tricky one I mean pricing and so dynamic I think that what we can say is we feel very comfortable with where we're entering 2021 from a price position. So we don't feel that we have to.
At this point in time, but it all depends on how our competitors behave as well.
So I think I would say comfortable with our position coming into 'twenty and 'twenty one difficult to no.
And I wouldn't necessarily expect incur.
Increases or decreases across the board and <unk>.
Mike we've been very.
Conscience and focused on the conventional GAAP within our company to discounts. So we think we're in a good position there.
Okay.
On the flu vaccines. Thanks.
Thanks for that color like we've seen in some markets like I think BC and get back and it doesn't seem to be any real announcements about getting pharmacists involved at least within the pharmacy as themselves and it sounds like they're asking them to asking pharmacist to cogent mass vaccination sites to help out as.
Am I, correct, and what I'm understanding yeah, that's correct and both BC and come back that would be.
And the way that it looks and it's and the other provinces, where we think we will have a bigger role and the pharmacy.
And we all do you think that this vaccine will be around for a long time. So there will be so it is it may at some point, even in Quebec, and B C and <unk>.
And the pharmacy over the long term as well.
Are you able to benefit or are you able to.
And those loblaw and shoppers as a <unk>.
Company.
See some benefit from pharmacists.
Doing it.
And doing the injections off site or is it.
Or is that just strictly and pharmacist on site.
I think it would just be I don't know what.
There's no talk about exactly how the financial model would work semi on so it's difficult to say, but I see it as being an advantage to the pharmacists.
Okay and then.
Was there any flu vaccine period.
I think I read and $2 1 million vaccinations and by shoppers and.
The fourth quarter somewhere is that the right number and.
And is that is that down from prior years.
No we had a very big flu vaccine season.
And this year and so it would definitely be up I think we'll have to get you. The exact number but I think $2 one sounds about right.
Well that will ask Roy to follow up and get you. The exact number on flu vaccine, but it was up it was a good flu vaccine season for us.
Alright, thanks, very much well actually one last question.
I don't know if I heard your REIT, but I.
I think you said you're you're.
<unk> services.
Sales same store sales were actually higher.
Higher than than what you were showing in terms of pharmacy same store sales is that accurate.
That's right.
And our pharmacy services is a much smaller base, but it was up.
Like 30%.
And starting to become meaningful so pharmacy services would be anything from net checks to vaccines to Covid test those would be the types of things that were included in that and that was up and that would explain why it is higher our same store sales are higher than what we're seeing in terms of the script.
Okay alright, thank you.
Your next question is from Peter Sklar of BMO capital markets. Please go ahead. Your line is open.
Thanks, sorry to ask another question on this.
Price investment and discount, but looking back kind of holistically.
What do you think.
Happened or what unfolded that kind of got you off track in terms of your.
Market share and positioning and discount.
Among the competitive subset as you know theres a lot more than price. So I'm just Sara as you look back and Retrospection can you just kind of summarize what what do you think happened there that went against you that required you to invest and price to get back where you needed to be.
Yeah, I would absolutely say that a lot of sales and discount had nothing to do with price. It was absolutely related to structural challenges related to the pandemic and it really was as simple as people going and doing one stop shop, and so going to a conventional store where the assortment is bigger.
And and not shopping around and so many of our customers no frills shoppers and it would be a fill and so they would do shop at conventional and I know for all and some of that went away I would say it was the capacity. So everything that makes our no frills banner successful and non pandemic times, which would be high vol.
Volume small assortment.
Quick transactions small footprint was not advantageous during the pandemic. It was hard to get the volume through so we would have seen a reduction and the number of transactions and a store if on average.
<unk> in like such as no frills had 4000 transactions and a day during the height of the pandemic had to be cut to like 200 1500.
And Justin able to have the right number of people and the store in order to meet with the count so that structurally what happened to us and some of our our discount businesses and then.
And we fought to get it back and that's what that's really how it went.
But those trends.
That would have impacted your competitive discount banners as well and I think you said earlier and during the course of the discussion that you were losing share share and discounts so why.
Why are these trends more impacting your discount banners versus your competitors.
That's a good question, so I would say that from an enterprise or our business is just more discount and then.
Conventional and that's different for our competitors, who are highly are more conventional.
And then they are discount so I would say that so as a structural and of our business being just being more discount we were impacted more and so we felt it more so where others would have seen the benefit of the conventional increases and share we and we're more swayed by that decreases on the discount side in terms of.
And discount to discount there was some pieces, where we did lose it dependent on the time period. Some parts we did.
Liz and others, we won back the dynamics, where I went back and forth through the year, but overall I would say that it was related to just the way that our business and structured between discount and conventional.
Okay. Thanks, I wanted to ask about the 2021 outlook.
Which is quite strong.
Looking for 10% to 15% EPS growth and.
I'm just wondering if you can talk a little bit about.
Some of your underlying thinking and why you're confident you can have that kind of growth rate like I see some of the positives you're on your share buyback share of less share count you've talked at length.
Today about you hope for gross margin improvement and as well as COVID-19 costs on the other hand, youre up against some very difficult comps and hopefully as were vaccinated people will be going back to restaurants, so consumer behavior, maybe working against you. So I'm just.
And if you could talk a little bit more about the puts and takes and la.
Like 10% to 15% is quite an aggressive growth rate and why you're confident about that.
Yes, Peter I think you just.
You've kind of highlighted the areas I mean.
And we're confident because we've got momentum because we see the ability to improve our margins part of it on the back of this year. We've had margin pressures. This year. We think is Sarah just went through some of thats being structural and.
And so as people are as we get the full shop back and in certain areas and we get the mix back do you think the margin is going to continue to increase.
And we do expect to have the COVID-19.
The COVID-19 costs could be significantly lower on the hard part to predict is how does the pandemic unfolds and how does the shopping behavior and fold.
Areas. Another area again as an example of strength you would expect beauty to come back and OTC to come back to see margin enhancement. There. So we've looked at it as a number of ways, we feel confident on on the guidance, but clearly it's all prefaced with it's going.
And we're going to it's going to depend how the pandemic unfolds this year, but it's the best.
The best knowledge that we have at this time.
Yes.
And that I would add is that some of the investments. We've made are starting to are not as strong or not as high in 'twenty and 'twenty, one as well. So when you think of digital and that we've talked about the pressure that we saw in 2020, we're not expecting to have the same pressure in 2021.
And so I think in that case, there's a few of those as well.
Okay and then just one other last question on the PC financial I noticed you reduced Europe allowance by $10 million.
And I believe that's quarter over quarter.
Was that because your balances your credit card balances are lower or are you seeing you anticipate better credit performance and what are your expectations for 2021, do you think you'd be able to take that allowance down even further.
Yes, Peter it's it is a function of payments I mean, what we've seen is really high payment rates.
We're still spending on the card, but it spending is down but but what's been.
A bit of a surprise is how high the payment rate is relative to history and so as a result of that there is more confidence against the critical loss provision that we previously took and were going to have to continue to watch that closely and if the can the consumer continues to be in good shape I would expect there will be some releases and that.
Going into next year.
This year, but.
It's going to time will tell but it's really a function of the forward looking and are just a little bit brighter outlook and I think you've seen other banks with sales were similar.
Similar.
Actions within their results right.
Right Okay.
Okay. Thank you that's all I have.
Sure.
Your next question is from Patricia Baker of Scotiabank. Please go ahead. Your line is open.
Thank you very much and good morning, everyone I wanted to start by echoing.
Mark Petrie sentiment about thank you for giving us the incremental disclosure because it was very helpful and one of the things that you did.
<unk> was the.
And the impact of the efficiency and productivity programs and I think you noted that you've achieved 1 billion and cost savings over the last three years and that you expect to.
See over 200 million further improvement in 2021 I'm just curious when we look at that those three years was what does that achievement skewed towards the latter year in other words was it why was there a meaningful impact on the on F. F. 'twenty because typically when you start with those programs. It takes time to ramp up and then.
Related to that can you talk a little bit about what are the things that we're going to see where we're going to see the improvement in.
In 2021.
And maybe I'll start with the first part of that.
I would say, it's pretty even patricia over the years I mean, it's been a nice run rate excuse from year to year.
2020 wasn't materially higher than the other years.
And then in terms of where we're focusing so we're focused on continuing to <unk>. The rollout of things that are working such as electronic shelf labels and our stores. That's been a nice Penny initiative for us self checkouts, which we've talked a lot about but we're getting I think COVID-19 helped with the penetration levels of self checkouts and 2020. So we'll continue.
And with those but we've got some new ones tests or adding some automation. So we have a new automated Rx distribution center and Milton that was opened in February of 2020, it's now at 75% capacity. So we're expecting savings from that we've got a new automated partially automated DC and Cornwall, we already have it.
C and Cornwall. So it's just it's an increase to that the size of that and expansion.
And with some automation and not too it'll it'll it'll open later in 2021, so not a huge impact in 'twenty and 'twenty, one, but we'll start to see some savings there in 2022 will be closing, our Laval and and Ottawa D. CS, which we previously announced as a result of that we've got some neat technology in terms of that.
And our stores such as gatekeeper, so basically in that case, if a cart doesn't go through one of our checkout and get the wheels get locked at the door.
And so that's been rolled out and it's a.
A lot of apprehension pension of.
And that area and also a deterrent if if.
People know that our stores have that so lots of different technology, that's being for lots of technology, driven and certainly in the beginning I would've said that we were more doing it was more through cash.
Cost saving initiatives and now we've had the time to implement more technology and and that's what we're starting to see come through in 2021 and 2022. So a lot of work still to bell and it never ends and terms of finding savings.
Okay. That's that's an excellent overseen and I really appreciate it Sir I wanted to come back to the the nice closure of the GAAP between discounting and conventional and just ask about traffic and with that seven 4% same.
Same store sales increase and I'm, just curious whether or not you saw a sequential improvement and traffic from Q3 to Q4 and discount and whether or not the traffic trend and discount was better than the traffic trend in a conventional in in Q4, just try and trying to better understand what's going on there and the fact that you're probably getting discount shoppers back.
Yes, so we did see an increase and this and sequentially from Q3 into Q4 and discount in terms of traffic and I don't think we have the.
And I don't know the specifics between or maybe we don't want to disclose the specifics between the traffic of the two divisions that we have in terms of which ones having more traffic, but we did see the increase from and traffic from Q3 to Q4 and discount and it was a nice healthy growth and units and discount quarter over quarter as well. Okay. Thank you for that and just a fine.
A small question on pharma.
Pharma free and what what Youre seeing.
And that the stores the non essential parts of the stores were shut down for a period here in Quebec and reopened I think and beginning of February. So did you see and automatic so did pick up and return.
To those items once they reopened.
Yeah. So we would have had that in RFP and stores and Quebec, as well, where we werent allowed to sell right.
And as well, so I would say and we had that in Manitoba for a little bit as well.
And so different rules and different parts of the country that added different dynamic dynamic so absolutely we would and.
C and increased.
As soon as those.
Services were allowed to so you would see an uptick and those parts of the businesses as soon as debt with the opened again and then I would say it would take a little bit of a ramp the first time, it's open and allowed to shop, there and then it set up.
Flattens out state, yes stabilize yeah, okay. Thank you very much.
Your next question is from Vishal and Sri Dar of National Bank. Please go ahead. Your line is open.
Hi, Thanks for taking my question most of my questions have been asked but I'm just wondering within the.
Shoppers business is the pharmacy services segment is that higher or lower margin than b.
On traditional I guess, a blended Rx margin.
It would be higher because it's all based on the service. It's all based on the labor of the pharmacist. That's in the store. So it would be doing and med tech. So it really doesn't have any costs that comes with that other than the cost of the pharmacists Ora.
Or fleet flu shot or a COVID-19 tests. So it would obviously and the case of a Covid test do you have the cost of the test.
But it would still be for the med checks, which is the bulk of that it would be the it would be higher margin.
Okay. Thank you for that and with respect to the.
The price investment I know.
Sorry, Loblaw has been talking a lot about promotional.
And that's over the last several years and using loyalty loyalty data to better understand.
Consumer needs and I was wondering the price investments implemented and discount with those done on base prices or what they've done through the loyalty program with the with the offers predominantly is there is there a way it skewed.
Oh, that's a good question I would say that we would use all we would use we would've done it.
And the Flyer, we moved on it on in store and it would have been through loyalty as well and on shelf pricing it would've been and all in all areas as well.
And that.
Okay and over time should we anticipate more of this promotional activity will move towards the loyalty type offering is personalized.
Personalized for each customer.
We have moved and so I would.
I'd say that our we have been moving away from mass offers to personal first so yes, I would expect it to continue.
Okay and within at shoppers, obviously, and the key beauty segment traffic, maybe not where.
One might have liked.
Throughout 2020.
Should we anticipate higher promotional activity at that segment and reinvigorated or are you comfortable where you are standing.
I think we have to wait for demand to come back and so I think as things open up that demand will be there and then.
Vendors come out with new offers and get the other thing that happened and beauty is that many of our large vendors didn't come out with programs because there just wasn't a market for it. So we are expecting.
New launches.
As the pandemic cat sort of dissipates.
Dissipates and so we think that will be on excitement to beauty as well. So we're not necessarily expecting that we'll need to do a lot of promotional activity to get shoppers back, but it's hard to know, we're expecting beauty launches and justice and increase in demand as people start to go out again.
Okay, and maybe a last one here in the materials and EMEA on the other side.
And misread desperate and the materials I interest.
And to say that process and efficiency initiatives are expected to offset inflationary headwinds and then.
It also says that in 2021 process and efficiency initiatives will will help.
Reduce costs and in addition to book, where COVID-19 costs on a year over year basis. So I'm wondering if.
Is 2021 will be process and efficiency initiatives as one of the reasons why youll be able to actually it's an additive recent while you'll be able to deliver the earnings growth and then in future years, you just expect it to offset inflationary headwinds from more of a.
A one time kind of thing and 2021.
No I mean way to think about 'twenty and 'twenty, one or just the way. It is process efficiency is going to be and ongoing journey with data and.
We're targeting to offset you know call it $200 million of normal inflation every year 2021 being no different.
And the guidance that that's reflective of.
Our ability to keep operating the company with inflation and to deliver on our financial framework and that's reflected in the guidance for 'twenty and 'twenty one.
Thanks for the color okay.
And.
Your next question is from Chris Li of days All day. Please.
Please go ahead your line is open.
Good morning, everyone and thanks for squeezing me and I'm sure I was wondering if you can give us an update on your e-commerce grocery and fulfillment initiatives I think your last update was do you have one automated MFC and for manual dark stores and the GTA. Just wondering what are your plans for this year.
Yeah. That's a great question. So yes, I would say in terms of what our plans and digital for 'twenty and 'twenty, one they're very much focused on execution.
So we really are looking at improving our customer service at the higher demand that we've got and then we're not expecting a huge increase and the penetration, but that may come and it's hard to know for sure and so very focused on sort of two areas of customer execution, which is very much about substitution and then wait times and.
But then also focused on cost to serve as I mentioned in terms of are we do believe that our future will win.
All involved automation and in terms of picking and then and so we do have three four.
And manual picks right now and only one and that's automated we are working with our partner to make sure that we have the best method, but going forward. So it will involve technology going forward, but you shouldnt expect us a large expansion of automated MFC and 2021.
Great. Okay. That's helpful. And then just another one on line for the tripling of course free digital grocery revenues.
Can you share with us just roughly the split between click and collect and home delivery.
The majority of it and click and collect for us no.
More than more than 50%.
Yeah.
Are there plans to perhaps accelerate your home delivery service beyond relying on third party providers or are you currently satisfied with your arrangement with them.
Well, we've been piloting a few things and a few areas right now we're quite pleased with our partnership that we have and that we're looking at different opportunities as well some of that we're doing it ourselves and some and some parts of the country.
Great and then my last question is loblaw.
You guys are.
Unique position of having built platforms for alternative revenue streams, like and media and healthcare and et cetera. I guess my first question is can you give us an update on where you are at Loblaw media and then secondly, just collectively speaking when do you expect these alternative revenues to start have a more meaningful contribution to profitability.
Yeah. That's a very good question, so I would say in terms of Loblaw media.
2020 wasn't a great year for media in terms of business in general for advertising, but for.
It was.
It was about EBIT neutral slightly positive in terms of so not a drag on us we're not building. We've now got the platform in place, we're now ready and to leverage that platform and so we do expect 2021 to be have positive earnings positive revenue and loblaw media, but I wouldn't say it big enough yet for us.
Ought to be talking about it a lot but that is definitely on a platform that has been built and is ready to be executed and we plan to deal with that in 2021, we have some nice partnerships with some of our vendors in order to be able to do that.
In terms of some of our other platforms. So when you think about <unk>, our money accounts RPC money account, it's a nice platform designed mostly to offset some of the funding of our credit card. So I think that was sort of the key piece behind it but what it also brings us a nice loyalty to our business. So when you think about our.
And credit card portfolio and.
And then having a debit like product as well and what we're seeing so it's still very early we're happy with the number of accounts that we have so far five months and but what we're really pleased with is the amount of out of our store spend.
And so in the 80% range is out of our stores, which is similar to our credit card and then of course, earning points to be spent in our stores. So we like what that brings that stickiness that it brings and bringing more customers into that with a new payment product as well in terms of PC health.
It was a good year for 2020, and moving a bunch of things forward and that one and settle and lots going on and not one but when you think of 2021. The key areas that you should that will that you should ask us about that that we're focused on are definitely on pharmacy services. So I mentioned that having a big increase in 2020, we expect to have another big increase in 'twenty and 'twenty one.
And then the second piece would be on that we launched PC health. Another platform that we launched in pilot and September and we plan to rollout.
Throughout 2021 nationally and I think the things to look for there is two.
And once again book on the focused on downloads and <unk>.
Usage of the App, the app as well as engagement. So it's another way to have a think of it as <unk>.
Customers coming to us first offer their health needs through the App and then being directed to per be provided with different health services, whether it's in our pharmacy business are being.
Brought into telemedicine and being partnered up with doctors and <unk>.
And as well so I would say, we're very much engaged and focused on having lots of traction and those two platforms <unk> as well as PC health and and we talked about digital as well and then media would be the other one good year for it to see some growth on that one as well.
Great. That's all very helpful and good luck.
Thanks.
Your next question is from Mark Petrie.
The IPC. Please go ahead your line is open.
Yes, I actually just wanted to follow up and.
And question exactly on time on credit just asked about it but I guess, specifically with regards to the comment that you expect to invest about $20 million and incremental opex.
With regards to the connected health.
Initiatives.
Can you just sort of put that into context of what was in there for 2020, and and then and I don't know if you can expand at all in terms of what the revenue model.
Looks like but you know that might be helpful. As we think about how this might play out over the next couple of years.
Sure Mark, Yes, and though it would be we're not disclosing this year, but it would be and in a similar range in 2020.
The reason, we frankly put this and there is based on feedback from analysts and Investor community worried that we're spending too much or how much are we spending. So it was just to frame. It it's not an overly material amount we're spending it.
It's still early days, it's still and long term opportunity, but having said that there's and there's a lot of confidence about by what we're seeing so far and the flywheel that we can create an ecosystem that we can create and here represents a massive opportunity. So we were trying to do it just to frame. It for you. We are not there is not perfect clarity yet on the revenue model and the economic <unk>.
Model, we have a number of different ideas that were pursuing and thinking about but generally it's around getting the engagement up and getting the usage up and getting more people into the ecosystem. So we feel pretty optimistic and just wanted to frame. It for you. So you can understand for your financial models.
Okay understood helpful. Thank you.
Yeah.
There are no further questions at this time I will now turn the call back over to Roy Macdonald for closing remarks.
Great. Thanks, everybody for your questions and for your extra time. This morning. We appreciate it if you have any follow up questions. Just give me a call or drop me an email.
And you can put a circle on your calendars for May 5th when we'll be back to talk about our Q1 results.
Thanks, a lot and have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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