Q2 2021 Loblaw Companies Ltd Earnings Call
Okay.
Right.
Good morning, ladies and gentlemen, and welcome to the Loblaw companies limited second quarter 2020.
21, the earnings call.
At this time all listen all the lines are in a listen only mode.
Following the presentation of we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press the star zero for the operator.
This call is being recorded.
The today Wednesday, the 28th of July of 2021, and I would now like to turn the conference over to Roy Mcdonald. Please go ahead.
Good morning, Thank you Michelle and welcome everybody to the Loblaw companies limited second quarter 2021 results.
Results Conference call.
I'm joined in the room. This morning by Galen Weston, our chairman and President and by Richard Dufresne, Our Chief Financial Officer, and before we begin the call I'd like to remind you that today's discussion will include forward looking statements, which may include but are not limited to statements.
Recorded back the loveless anticipated future results and the impact of the COVID-19 pandemic. These.
These statements are based on assumptions and reflect management's current expectations as such they are subject to a number of risks and opportunities that could cause actual results or events to differ materially.
With respect Spectation.
These risks and uncertainties are discussed in the companies materials filed with the Canadian Securities regulators any forward looking statements speak only as of the date, they're made the company disclaims any intention or obligation to update or revise any forward looking statements whether.
From ours, the result of new information future events or otherwise other than what's required by law.
Also of certain non-GAAP financial measures may be discussed or referred to today. So please refer to our annual report and other materials filed with the Canadian Securities regulators.
For a reconciliation.
Whether at each of these measures to the most of the heat direct most directly comparable GAAP financial metrics.
And with that I will turn the call over to Richard.
Thank you Roy good morning, everyone.
I am very excited to be back at the Loblaw and I'm pleased to share some details around what was a good second quarter.
<unk>.
The quarter reflected continued improvement in our businesses, while lapping tougher performance last year the environment.
<unk> remains dynamic and still difficult to forecast.
As we reported on a sick on our second year of the pandemic comparable numbers do not tell the entire story.
As such I will include commentary on 2 year data points to provide further context on our operating performance.
On a consolidated basis, our revenue for the second quarter grew by over $500 million EBITDA.
EBITDA increased 36% and earnings per share grew by 87, 5%.
On a 2 year basis, we saw average annualized growth in revenue of 5.9%.
The EBITDA of 8.1% and adjusted earnings per share growth of 15%.
These figures are well ahead of our financial framework.
Food retail same store sales were flat.
In the quarter.
Market declined slightly again same store sales growth of 19% last year, well discount same store sales were positive.
Our average article price was up 1.4% for the quarter declined from 3.9% in Q1.
The increase in.
Average article price compared to last year was mainly driven by sales mix.
Loblaw CPI comparable inflation rate was less than 1% in the first half of 2021.
Traffic improved in Q2 recording growth for the first time since the beginning of the pandemic.
On a 2 year rate.
Food same store sales reflected average growth of 5.6%.
Same store sales in drug retail increased by 9.6% from the second quarter trending positively compared to a decline of 1.1 percentage last year.
Front store same store sales were better by 3.6%.
Our pharmacy same store sales grew 17, 2%.
Front store sales saw some sales momentum from cosmetics and OTC categories as the restrictions loosen recording strong growth compared to last year.
Pharmacy performance was strong lapping volatility of day supply of restriction in the prior.
Why.
On the 2 year average rate drug same store sales have grown 5.7% with front store at 4.6% and Rx at 6.9%.
Our online business continued to operate at penetration levels, well above pre COVID-19 rates.
After a record growth of.
The year, 80% in Q2 last year sales declined <unk>, 5% versus Q2 of last year that said online sales increased in the mid single digits vs Q1.
We remain focused on driving customer metrics and delivered sequential improvements in both customer facing metrics.
<unk> and profitability.
Retail gross margin was 39% an improvement of 40 basis points compared to the second quarter of 2019.
While gross margin improved 130 basis point versus Q2 of 2020, we are hankering, our financial performance 2019.
This is our second consecutive.
Quarter of gross margin stability, and we feel comfortable about our gross margin performance going forward.
Improvement in mix versus second quarter of 2020 at a positive impact on margin.
Retail SG&A as a percentage of sales.
22% with the rate improving by 120 basis points compared to the first quarter of 2020 the.
The improvement was primarily due to lapping of high Covid costs in 2020 sales leverage from strong prescription growth and efficiencies achieved in our E Commerce labor model.
But what COVID-19 costs came in at $70 million in the quarter in line with our expectations.
Compared to Q2 of 2019, our retail SG&A improved by 30 basis points, despite COVID-19 costs and headwinds from our online growth.
Strong sales performance is definitely a factor in driving rate.
Adjusted retail EBITDA improved by $347 million in the quarter. This compared to last year. When we recorded a decline of $151 million driven by margin in COVID-19 costs related pressure.
PC financial revenue was up $39 million in the quarter driven by higher mobile shopper.
The new and interchange income as we lap a period of low sales volume from prior year.
Adjusted EBITDA of the bank increased $16 million year over year, primarily driven by changes in the expected credit loss provision and lower credit losses, offsetting the lower impact of lower interest income as.
Shop revenue rates remain elevated.
On a consolidated basis adjusted EBITDA margin was 11% in the quarter up 260 basis points compared to last year.
In the quarter.
<unk> net earnings available to common shareholders was $464 million up 78, 5% and.
The PMI alluded net earnings per share were $1.35.
Free cash flow was $953 million in the quarter, but free cash flow in our retail business was $1 billion in the quarter.
In Q2, we repurchased $350 million to $350 million of common shares for a total of 700.
<unk> million dollars.
Year to date.
Today, we announced the <unk> or 9% increase in our quarterly dividend.
This marks our 10th consecutive increase of our dividend.
As we look ahead, a great deal of uncertainty remains as the course of the pandemic the reopening of the of the economy and the.
The resulting impact on costs on consumer behavior remains dynamic sales trajectory remains difficult to forecast.
We are pleased with the financial performance of our second quarter as such we have update on our outlook to include the expectation of EPS growth for the full year 2021 of the low to mid.
<unk>, excluding the impact of the 50 <unk> week of 2020.
In the first 4 weeks of the third quarter food same store sales declined by 1% compared to the same period last year over the same period COVID-19 costs are estimated at around $9 million.
As for inflation expectations.
While inflation was low in the first half proposed cost increases from vendors have been coming in the rapidly over the last while so it is reasonable to expect more inflation going forward having.
Having said that manageable level of inflation as the positive impacts on our business.
Before I hand over the call to Galen.
I'd like to reiterate my excitement in being back in the business together with Galen and Robert we look to the future with confidence as we reflect on the scale and strength of our food and drug retail businesses, our strong brands, our loyalty assets and our already sizable online business.
I'll now turn the call over to Galen.
Good morning, like Richard I'm, very pleased with the companies with results in Q2 the.
Of the ups and downs of Covid continue to distort the year over year numbers, but when you look through that this is the fifth consecutive quarter of improved performance on June <unk>.
Year basis, we've outperformed on every key measure from sales through to earnings.
Grocery divisions performed well on the first part of the quarter aided by Covid restrictions that kept the Canadians eating at home during the spring and early summer. This translated into strong market share demonstrating the underlying health of our business.
As communities across the country began opening up we were particularly pleased with the reemergence of value.
Arden shopping trips, which was good for our discount formats.
Our drug drug store business was also impacted by the pandemic.
Spring cough and cold season was virtually nonexistent due to the mask usage and social distancing on the other hand allergy season was particularly robust of people rushed outside at.
<unk> hint of spring.
And we're seeing customers returned to our beauty counters as communities open up.
Covid testing and vaccinations continued of the staple pace of our pharmacists did their part to protect the Canadians when it came to more traditional prescriptions or share growth accelerated as we finally lapped last year's supplier.
Fly restrictions on the start of what we expect will be of slow and steady recovery for acute medications.
As we look forward the good news of an increasingly vaccinated nation and are far less restricted life for Canadians will change our business, yet again and it is difficult to predict exactly.
The first magnitude of those impacts will be.
We expect our shoppers business to grow stronger of some of its most important categories like beauty and pharmacy returned to a more normal run rate, we expect our e-commerce business to shift from headwind to tailwind and we expect the return of value focused shopping to.
What the relative benefit for our discount formats.
However, we also know that our entire food business, our entire business will face top line pressure as we lap the elevated sales from Covid as Richard mentioned that year over year contraction was already evident in the first 4 weeks of Q3.
And while we are very well.
Well positioned relative to the industry, we will need to maintain of particularly sharp focus on gross margin and on costs.
Having now been back in the President's role for 3 months that attention to core fundamentals has been front and center.
It's been busy loblaw has a fantastic company.
The delivery with a real opportunity to create value.
We have amazing assets, great stores incredible brands, leading customer loyalty and very talented people.
Our strategy remains the right 1 and we have made some important adjustments to accelerate our progress against it.
The start.
Company, we've re prioritized our strategic initiatives doubling down on those with the most financial potential and the shortest journey to deliver it.
While also recognizing those that are simply too small or too difficult to deliver against and stopping them.
This has freed up capacity for the organization.
<unk> focus on retail excellence under the leadership of Chief operating Officer, Robert Sawyer.
This combination is bringing a renewed sense of clarity and urgency to everything we do.
There are some challenges ahead, especially over the next few quarters, but the team is crystal clear about where it needs to go.
To re energized than ever.
Thank you.
We will now welcome any questions that you might have.
Thanks, Kayla and Michele could you remind the audience what the protocol is for asking the question.
Thank you.
Ladies and gentlemen, we will now begin.
The question and answer session should you have a question. Please press the star of followed by the 1 on your Touchtone phone.
You will hear of 3 tone prompt acknowledging your request on your questions will be pulled in the order. They are received should you wish decline from the polling process. Please press the star followed by.
The 2.
If you are using a speaker phone please lift the handset before pressing any keys.
1 moment for your first question.
Your first question comes from Karen short of Barclays. Please go ahead.
Hi, Thanks, very much I just wanted to talk a little bit about your comments on inflation. Obviously, you gave us what we know what the <unk> average article price was and he gave us <unk> what are your thoughts on inflation for the remainder of the year and well I guess what are your expectations in terms of your ability to actually pass through.
That you are seeing from the vendors.
Yes. So so we did see low inflation as we mentioned in the first half and we do see signs of increased pressure on the second half Theres. No question about that obviously pressure on commodities, you see pressure on transportation and particularly underlying pressure from the labor challenges.
The inflation.
Our being experience specifically in the U S.
When it comes to our ability to pass things through.
We're going to look to pass through legitimate cost increases.
As appropriate.
All of the while keeping a very close.
Close eye on the relative value proposition, but at this point, we see there will be some opportunity to pass those increases through.
Okay and then.
I'm wondering if you could give a little color on the performance in discount versus conventional and how the how you see that playing out throughout the remainder of the year given.
Given where the state of the Canadian consumer is the in terms of their savings.
Yes, so as the economy started to open up here in Canada, we saw a pullback in the conventional businesses.
Was fairly significant in line with our expectations, but meaningful whereas on the discount side.
We saw continued positive performance.
On the.
The way to think about discount is that with the return of the value oriented shopper and the value oriented shopping trip, there's going to be a.
The reversion to.
The discount from a.
The market penetration perspective, however.
We do expect discount to run negative.
For the next few quarters as well as.
Our market business and that's why it's going to be so important in what is essentially a negative leverage situation to stay.
Laser focused on margin and we're really pleased with the results.
Of margin in the last 2 quarters as Richard said, we think we can sustain that.
Through the balance of the year and Additionally, we have to be laser focused on cost.
Okay, and then just last 1 from me.
You mentioned, the $9 million of Covid costs for the first.
For weeks of this quarter is that the right run rate to think about going forward.
We think of it can go down a bit more.
As we start to to reduce these clauses on the economy reopens.
Great. Thanks very much.
Okay.
Your next question comes from Michael Van <unk> of TD Securities. Please go ahead.
Thank you and just just to follow up on the discount versus conventional.
<unk>.
So youre seeing a recovery in the debt.
Discount versus conventional but.
Long term do you think you see of returning to where it was historically or do you think theres been some kind of a permanent shift.
Jim or behavior during the Covid.
It's.
Trying hard not to speculate too much on what the post Covid world is going to look like.
I.
Think anybody really knows yet I think there is reason to believe that the.
That the conventional stores will hang on to a few more customers perhaps than they have in the past, especially.
And our business, whereas you know we've made significant relative price investments.
That format. So we have.
Historically, some of the narrowest gaps to discount debt.
Debt that we've ever had and part of our thinking there is that we want to hang on to.
Those customers who shop on the bubble.
Really is too early to tell what we know for sure is that and we're seeing it now we sought.
During the opening in.
In the middle of last summer is that there are a set of value oriented shoppers who haven't been.
Shopping in the discount stores, who are going to start shopping in the.
Okay, and you mentioned that.
That GAAP.
Invention of versus discounting can you provide.
On some more color as the where.
You think you are relative to say I guess, Walmart, which is quite often are people are indexing to and then how do you think that GAAP has changed over the past 12 months.
Following on your price investments versus your peers.
Yeah, So I'm not going to give you the specifics around where we index versus Walmart, but.
We index better against the Wall Mart today than we did say at the end of 2019.
That's been part of a concerted effort on the.
Our market Division.
<unk> it.
It's been a strategic price investments looking to close gaps in particular categories as opposed to across the board and we've seen commensurate.
Response from consumers in those categories. So it's indicative of the <unk>.
Success of that strategy.
Well, it's all of it also I think worth pointing out is that the GAAP.
In some ways more importantly of the gap between us and our market competitors.
Is that on all time high.
Okay, and you don't want to give any kind of indication of how that's changed in the last year.
Oh, it's improved.
Okay.
Is it a few hundred like a 100 day.
Yeah.
Okay.
It's not insignificant.
It's noticeable it's we're not talking about 10.
The 10 basis points, we're talking about.
About a meaningful GAAP.
Okay, Great and then just finally the.
The comment on E. Commerce, you said it is shifting from a headwind to a tailwind.
I can understand.
In part but.
And you are lapping of cure.
280% growth comp of a year.
Year ago on in the second half of the year, you'll be lapping easy comps at the same time you showed sequential growth.
From Q1 to Q2, so if you just kind of hold your kind of levels of Q2 wont you be higher and your sales from e-commerce in the second half of the year and.
And how would that be.
Okay.
So on them.
The third for all of the way we look at it Michael is like a bulk of our infrastructure cost havent been been invested I guess and when we look at it last year at this time.
Our labor costs were 2 of the roof because like we're just.
Like chasing chasing chasing sales so we figured out how to be able to serve our customers. So we've been able to improve on our labor rates quite significantly and so that's how that's why we're seeing that business. While we will continue to invest in certain area like we feel that.
The big chunk of what we have to do is definitely behind us and going forward as we continue to tweak the model, it's no longer than it would be.
The significant.
Tailwind on our business headwind headwinds headwind on what sorry.
Alright, great. Thank you very much.
Okay.
Your next question comes from Irene in the town of RBC capital markets. Please go ahead.
Thanks, and good morning, everyone I, just want to come back to some of your closing remarks, Dale and in which you said I think I think you said that you were laser.
So just on retail excellence.
Can you sort of walk us through what that looks like and sort of how you think about how you define retail excellence, what it looks like and what the key of factors are that will get you to where you want to be.
Folks.
Yes.
I think it begins with as I described as the sort of mentioned in my script that we prioritize the re prioritization.
1 of our strategic initiatives to identify those that are truly compelling enterprise level of initiatives that we need to accelerate.
And then.
Stopping essentially those other ones.
Pushing them in the into the direct accountability of of the division of himself the whole objective is to create space.
For our retail teams.
The focus on retail fundamentals on the.
The way to think about that.
It's an old adage, but retail is detail and if your teams are spending all of their.
Focused on supporting strategic initiatives then it comes at the expense of time that they would otherwise be spending.
On the of merchandising programs or on store conditions, and so on and so forth.
So the big step to change that orientation is the reintroduction of the chief operating officer role.
Which is something we've had here for many years, but not in the last 2 or 3.
And the and bringing Robert in as many of you know he really is if not the best certainly.
Certainly on very very close to being the best in a retail operator.
Canadian history.
And he is coming back to bring his instincts his attention to detail and focus.
On to the business.
Good example.
Of how to think tangibly about changes in the trajectory.
On.
That focus can make is he and Richard of of just completed of really intensive look at our retail network and have identified.
Opportunities to optimize that retail network and think about.
A list of stores.
Of that are generating.
Negative earnings today or negative EBIT today, but it could be converted 2 of different format.
On a very effective cost and very quickly both drive top line sales through that format conversion and improved profitability.
There are a number of areas that Richard Robert.
We're focused on in terms of improving just that fundamental retail asset.
Which has perhaps not received as much focus over the last few years.
It should have.
That's great. So then if we're sitting here looking at from the outside of the tailwind we should see that in the fourth.
Bedroom and more consistent top line performance and profitability of is that what it will look like to us.
Yeah.
It's absolutely the objective and I think.
Somebody asked me the other day, what would you see as the biggest opportunity in the call it the <unk>.
Short to medium term in the business.
What would Robert C is the biggest opportunity.
Are those 2 things aligned and the answer is improving the retail fundamentals.
The day to day trading day in and day out and improving that retail network, we've identified significant potential.
In those 2 areas to drive the financial performance top and Bottomline for successful.
That's great. Thank you and if I could just ask 1 more sort of more near term question just thinking about the gross margin evolution.
<unk> in the back half of the year presumably.
Presumably if we see recovery of chalk or should that not just on a straight mix basis.
Drive improving gross margins as we move through the year.
Definitely it will help like we feel good about all of the level of growth.
<unk>, which is a mix of both food and drug.
Right.
As the shoppers business opens up.
This business at a higher gross margin than our food side. So we should benefit and that should help us deliver on on our outlook.
Yes.
<unk> great. Thank you.
Your next question comes from Mark Petrie of CIBC.
Please go ahead.
Yes.
Yes. Good morning, Thanks for all of the comments just a couple of actually just a follow up on specifically first on the gross margin.
Could you just give us a sense of in the quarter the relative performance in the food and drug segment. I know you don't give give detail, but any sort of directional commentary about the materiality of the improvements in each of the segments would be helpful.
Let me give you a sense of.
All.
The areas that we saw improvements in mix.
That drove gross margin.
The first was the positive mix shift in food and that was largely driven by.
The strength in the service counters and other high touch categories, and so customers are coming back to those counters.
All of the and we're seeing really significant lift and if you'll remember Sarah's comments from.
About this time last year that was 1 of the places.
<unk> business was particularly impacted by the Covid restrictions on that had a dilutive effect on our margin the second.
Has been strength in.
<unk> non food categories. So apparel has been strong from a margin perspective on Rx also has a positive contributed to margin and OTC.
Which came back strongly as I mentioned in the allergy season is also over the profitable category and quite big in.
In the pharmacy.
Keith and then if you would kind of think.
As Irene mentioned on on overall basis.
Strong sales performance on in the drug channel, which is of naturally more higher gross margin business just lift the margin mix from the.
The total of integration as well.
<unk>.
Okay. That's helpful. Thank you.
And.
Okay.
And then I guess with regards to the work on process and efficiency. Thanks for all of the color.
The in terms of a refocus on strategic priorities.
With the Covid costs now sort of seemingly stabilized from.
A little bit of of.
The reduction possible.
What would be a reasonable expectation for SG&A growth relative to sales growth.
For the second half of the year, but probably even more importantly, as we think about next year.
Yeah, so right because it's very difficult to predict.
Maybe for the second half as food sales turned negative so it's going to put pressure on rate also.
The pharmacy business gets going the SG&A rate in that business is higher so that will also affect rates. So it's very tough to try to manage the business looking at the rates of unique to be focused.
<unk> $1. So right now our energies are all focused on dollars and.
That's how we're managing the business to be able to deliver our outlook for the second half of the year.
For 2022, you need to break the year and to make the <unk>.
First half is going to be lapping. This first half, which was very high sales performance. So again looking at dollars the more than rate is going to be key and as we lap. These 2 quarters, we should be starting to get back more to normal. So I know im not helping you with my answer but that.
Exactly how we're looking at it right now.
Okay I appreciate that and I guess, just a follow up also on the topic of E. Commerce. I mean, you mentioned sort of how youre thinking about it at a high level, but I'm. Just wondering if you can give any sort of specific examples with how the efficiency.
Has improved.
And then any commentary with in terms of the actual net impact of that on the consolidated results would be would be helpful.
Yeah, So I'll start with.
A couple of good examples so if you imagine.
The world, where demand is dramatically outstripping supply and.
Investing in order to try and meet that demand.
Well as you can which was the the decision that we took last year and it results in a huge amount of labor inefficiency youre basically throwing labor everything you, possibly can youre not spending a ton of time on the on the pick path of efficiency.
On Europe.
On on organizing of how your teams are actually functioning youre investing and building additional capacity as you know we opened a number of.
Dedicated manual fulfillment picking centers I'm on.
All of that increases cost.
As the as the volume normally.
<unk> then your ability to schedule.
The orders improves dramatically and then you can start optimizing.
The labor so how do you optimize labor will you move from.
From.
Sure.
Basket picking so youre of 1 person picking entire.
Tier order on to batch picking.
Do you have pictures working on produce grocery.
And on meat and so on all of these types of of opportunities improve labor efficiency, we've introduced.
On.
Of digital check in desk.
Through.
The app.
<unk> improves the speed of of <unk>.
Fulfillment when people are trying to pick up their groceries and also improves the the way that you allocate allocate labor.
During those pickup model. So it's really just attention to detail and making sure that you don't have inefficient wasted.
Just in labor throughout the organization. The second thing to think about is the amount of investment in infrastructure that we've made.
As is we're not doing it anymore. So we're not adding the.
Capital cost and we're starting to see the depreciation come off of that.
Part of the P&L.
<unk> as well so.
Net net it just improves the overall economic proposition there is still a lot of distance to travel to make our ecommerce business profitable.
And we will talk about that on all the time.
Alright, I appreciate the comments best of luck.
Yes.
Oh.
Your next question comes from Patricia Baker of Scotiabank. Please go ahead.
Yes, good morning, everyone and thank you Ben Thank you for taking my question can 1 of my first question is for you in your opening remarks, you said that you you are convinced that the strategy of the right 1 of them that you have re prioritize.
Our strategic initiatives can you just.
Very quickly review with us what the strategy is and what the what the change of had been.
Yes so.
We have recently undertaken a strategic review process of about call. It.
Around 17.
The strategic initiatives that have been prioritized by the organization of the.
The last couple of years.
A big part of that is how do we drive our.
Digital.
Relationship with customers and as positively as possible.
We've really zeroed in on the ones.
That.
We think our have the greatest potential and as I mentioned in my script potential both in terms of size of the price and also proximity to deliver positive results.
Clearly I don't want to surprise you the biggest and most important 1 right now is e-commerce.
Commerce.
<unk> invested substantially in it over the last number of years, we've now achieved significant scale with sales over 3.
$3 billion.
Our focus now is to improve the efficiency.
Of that business and then to substantially improve the <unk>.
Proposition and we've made excellent progress on improving the efficiency is a couple of people have asked I'm turning e-commerce from a headwind to a tailwind which is pretty meaningful I think.
Certainly not the case.
In many grocery retailers in this country on around the world and that's because we.
We got the way in front of it in terms of the investment cycle and now we can actually focus on optimization.
And the second thing is to improve the customer value proposition Sarah talked about at the end of last quarter that we'd seen significant improvements on the 3 metrics that were most important to us most important the customers.
The ability to find what you're looking for so shop ability of the website.
Availability getting what you ordered when you do your grocery shop, and then third the wait times for pickup on the availability of slots for delivery, we've seen of 15%.
<unk> increase in NPS.
And driven by improvements on all of the 3 metrics that I mentioned still lots of.
Of opportunity for improvement and every week, we're seeing.
The implementation of new solutions and improvements on all 3 of those fronts, so feeling pretty confident about the journey that we're.
On there.
There are other.
The significant strategic initiatives at the enterprise level, which we'll talk about the again sometime in the future, but a good example of what would be next would be media and that is a big opportunity generating positive contribution to EBIT today.
Day with significant upside.
And then to give you. An example of something that we looked at and said gosh, we've got to stop investing in this because of the distance to travel for it to be highly impactful on the overall.
The business pictures, just too far and the cost to get there is too high and.
And that would be.
Our PC chef meal delivery service, so great service customers loved it, but it's going to cost tens of millions of dollars of investment over the next 4 of 5 years to get even to the beginning of meaningful scale and so our view is that we need to take that Neil expertise.
<unk> and deploy it against our stores and deploy it against our existing very successful E Commerce channel and take all of that operating cost and the future investment cost out of the P&L.
To help drive the financial performance.
Okay. Thank you very much of a that's very helpful.
I'm just on the on.
The optimization and you discussed the optimizing the network I think you said that youll be looking at converting maybe the the that Robert and the.
Richard have looked on identified stores that are not contributing as well as they should now and youll convert.
Them to a different format.
Are.
Mostly conventional stores it will convert the discount or.
Good morning, Patricia so it's a bit of really looks like we've just actually finish doing the work and so so we're going to go the opera operationalize it the overall over the coming weeks and months, but leg of the focus was.
Are those the stores that are losing money.
And figure out what is the best solution.
As Gale mentioned some are going to be converted.
You will be close.
And also do some will be downsized. So so so that's the piece of work that the.
We've just completed but also we're also.
To look kind of look at the new store opportunities like we see significant opportunities to build new stores in Canada. So that's also part of this exercise. So as you can imagine this is not something that you just do it 2 months ago, so, but we have laid out.
The foundations of that work and we're going to get the going quickly.
So going on we want to have stuff that hit.
<unk> hit our numbers in the in 'twenty, 2 and so those are probably going to be more of the conversions because that requires not much capital and you can quickly switch.
On the store was negative 2 to positive from an earnings perspective, and you get the lift in your numbers are right away.
Okay. Thank you that's that's true.
So just following up on Michael's questioning on the pricing GAAP.
On that you indicated that your the GAAP is the GAAP between yourself and the competitors.
Is it.
It's better than it has been in years have you seen no response from the competition to your price investments.
Because.
On.
Well it depends on the competitor.
And I think there have been different strategies undertaken through the through Covid.
Our strategy is I think we've repeated on a number of occasions to make sure that we were delivering the right level of value to our.
It was across both formats and and this was on opportunity that we identified on the market side before Covid happened and we made the decision to lean into it.
During COVID-19 at the time, where there was a good strong tailwind behind the market Division. So I can't comment on on on competitor.
Customers of strategies other than to say that we've seen a different approach.
From them over the last 12 months in the market segment.
And ultimately it's been working very well for us to date on the discount side, others, when you're a discounter.
<unk> opportunity.
<unk> for customers is to have great prices.
And there are no.
Pretty strong competitors, who are of similar philosophy to us on.
Like Walmart and others and we're staying staying very.
I'm very cognizant of how aggressive day.
We'll deal with it.
Number of months.
But if you think about the discount businesses, they're all going to do better over the next number of quarters.
And that's something we're looking forward to.
Okay. Thank you very much on if I may ask 1 last question. That's on the gross margin. So obviously mix is the big driver of the.
About 128 basis improvement wasn't where they're also benefits of the gross margin from specific things that you're doing operationally as well.
But the biggest the biggest increasing the rates on the Patricia was just when you compare to last year like last year of NP rates is much lower on the food side and so.
So that's been fixed like later in the last year and so that's why we're here.
Anchoring our performance on 2019 like for Us from my perspective.
We were there more or less in Q1. So we've just continued the same strategy from the gross margin perspective, and so when you compare it to last year that's why.
Created that GAAP. So so we're we're focused on the level of our gross margin now and that's.
That's what gives us confidence of going forward, we should be able to maintain it.
Okay. Thank you very much.
Yeah.
Okay.
Your next question.
It comes from Vishal <unk> of National Bank. Please go ahead.
It's the market.
Just 1.
Okay.
Robert.
You offered the summer until the couple of months.
Yeah.
Comments on I'm, just wondering how long we should expect on the integral and your views it and his teams of the longer term placement or more of the short sort of terminal.
Yes.
Yes. So he is committed to a couple of years on I think I've said that.
The publicly.
<unk>.
And.
Hopefully.
It will be longer but.
He is he has come out of retirement to do this job and he's committed fully to a couple of years and we're fully committed to him for 4 for that period and I think that's the way to think about it.
So what will the cielo will stay in place.
Couple of years expire.
Okay.
Never say never but yes.
It's a really important.
Part of the way that we run this business no level of the Big company that does a lot of things and to have someone.
Providing very experienced permanent overseas.
Oversight.
Over the retail operations I think is an essential.
Element of how we need to run this business.
Okay.
With respect to just.
Just the the market reaction I mean, the inflation starting to creep up sales, we're going to turn negative.
I have the goes it's really difficult comparison.
Yeah.
High level looking down that could be a fairly difficult situation to manage I know a lot of upside there focusing on the dollars just wondering how you're seeing your.
Petters react to this more difficult.
At the outlook are they are the reacting with price of an initial driver.
Or are you still seeing those buried strategies per se.
Yes.
I mean, it's very early right.
In terms of this and nobody really knows what.
It's going to look like I mean, Richard shared the first of all of them being so sort of post Q3, which are giving.
That's a strong indication okay I think the message from our perspective is in the same way that our business was disadvantaged.
During the peak of Covid, it will be relatively advantaged as we come out of Covid and that's because of our strength in discount and it's because.
After the role of the shoppers drug Mart in our overall mix.
And the improvement in margin that we expect to come out of those categories that underperformed during COVID-19 and will come back during that normal period. So I think for US that's the most important thing.
And then that.
Our focus on maintaining the right margin structure and maintaining.
The right dollar level of SG&A.
Yes, Michelle what I would add linker.
We issued an outlook, where essentially we said we're going to EPS. This year between 20, and 25% zone, that's effectively what we said the implications.
Laser of that is that despite the fact that we're going to see negative sales in food, we are going to grow earnings in the second half so so.
So our financial framework is.
Is something that we want to be very focused on so we see a good a good path for the rest of the year end.
The framework will form the basis as to how we.
Put together our budget for 2022, so despite the negative sales environment.
Our plan is to deliver on that framework.
Thanks for the color.
The next question comes from Chris Li of Day Jordan. Please go ahead.
Good morning, just maybe another follow up question on gross margin I apologize because it's such a big beat compared to my estimate.
Is it fair to say that the underlying margin rate improvement.
Have been even stronger if it weren't for the Bang on.
On the central part of sales and on schedule during the quarter.
That's a good 1.
I'm just thinking about that for me for me was more relative to last year.
Because if you look at gross margin rate this quarter versus Q1, it's not that.
It's different so so so our strategy trying to maintain our gross margin level of there. So so as to what what changed versus last year.
You're comparing 2 very different I guess ore from the from a grocery perspective. So so I think it's all the more difficult too.
To do the comparison that way.
And I think it's probably also.
Worth remembering that you know that non essential product assortment for us is pretty small in the overall mix of our business so for it.
Cheerly Impac.
The business the change would have to be very very significant and as you know we only of call. It out on the basis of the big changes once in a while it.
It was the combination of.
Rx OTC and apparel, but contributed to the mix.
Part of that right hand side, which is the part that was constrained during much of the quarter.
Okay. That's helpful and maybe just related to that is just an at the driver I was thinking about was just the reinstatement of the click and collect fees, which will obviously continue in Q2 of last year was that meaningful as its not meaningful.
Not just books, where you guys sort of call it out now.
Non was marginal.
Positive positive but marginal.
And I know you don't have the crystal ball, but I mean.
The gross margin rate improvement in Q2 of good proxy for what you can expect for the second half.
You should not look at the gross margin improvement you should look at the gross margin.
Food left right.
Okay. So just to so the rate improvement in Q2 is a good proxy for what we can expect in the second half.
What I'm, saying is the gross margin rate in Q2 should be of growth. Good proxy of the gross margin rate in Q3, and hopefully Q4.
Yes.
The rate that's the Atlanta, Yeah, Okay got you, Okay, and maybe just another sort of need of boring numbers question.
If I remember correctly, the non controlling interest line in the income statement lots of reflects the portion of profits which are attributable to your franchisees.
It was a relatively high figure in.
I believe it was $56 million, which I think makes sense, given the business, improving and especially especially the this kind of division.
Yes My question is.
Do you expect the level of non controlling interest the number to remain relatively high in the second half as the discount from the division continues to improve.
That's a good question.
Q2 of the precision of that number it's tough for me to answer but Directionally you are right.
Because the discount business is better than it was last year. That's why the number is much higher than it was last year. So assuming we maintain similar level of profitability. It should remain in that zone.
As to the cash.
Okay. That's helpful and maybe my last question just on SG&A can you. If you force maybe what are some of the major puts and takes in the second half for example, like do you expect discretionary spending to start picking up again in the second half and then related debt the $20 million of incremental expenses related to connected health.
There have most of that been spent or are they still yet to come. Thank you.
Yes, I think thats net.
That has been spent.
As I said earlier for us the way we're looking at in the junior right now as we look we're looking at the dollars.
So so so we have we have a plan that we want to hit.
And so the way to hit it.
It is too.
Look the asset rate with Lake.
Because sales are turning negative.
You can't you can't manage your business on rate you need to manage it on cost.
Gotcha, so maybe.
Just 1 last 1 you mentioned on new store growth opportunities is that mostly for food or do.
Do you see opportunities like in the pharmacy space going forward as well.
We see opportunity for Newport, new stores in both on food and drug retail businesses.
Gotcha, Okay. Thanks, Thanks very much.
Yeah.
Your next question comes from.
The kanarek tie.
<unk> capital markets. Please go ahead.
Thank you and good morning, Ken.
Kevin I Wonder if I could just follow up with respect to the performance in beauty honestly from encouraging comments on the the recovery in quarter, but that's also on out on it.
Pretty weak year prior.
Can you just speak to sort of the the expected Pos in the evolution of your view of your beauty business. Yeah. I think last year, you had the benefit of a lot of the the health of the health and beauty.
Mitigating some of the pressures in cosmetics, which perhaps less of a tailwind through this year, but also to that end can you give us some indication as to how true all of this your share.
Stage of mass so even just usually more generally is trying to over the last year.
Yes.
So it's in a funny way, it's it's the reverse.
Story of what <unk>.
Happening in food. So if you imagine our beauty business, we were 1 of the very few on beauty retail.
And for sellers, who were open.
Through the bulk of of Covid. The department stores were all closed so on and so forth so our market share.
Skyrocketed.
But the amount of.
Money that people were spending on cosmetics.
Retail dramatically.
So net net it was a negative financial impact on.
On the shoppers drug Mart business.
What's going to happen, we believe with the sustained reopening is that all of the people start going out.
People will start seeing 1.
Drawn so cosmetics and all of those external sort of beauty categories will start to come on in a very significant way. It will also be on the back of all of shoppers drug Mart competitors reopening so the entire on water level is going to rise on our objective is going to be to hold onto as much market share.
Share in those categories as we possibly can and we feel well positioned to do so.
Certainly.
So hold on to a meaningful portion of it not all.
And we're working hard to to make sure that we do.
From a big picture perspective, the way to think about the role of Butte.
D is that it is a very high margin contributing category.
And it is going to grow as the market reopening reopens on that is going to have a.
Notable positive effect on the overall margin of the business.
Thank you Aaron and Thats, great color on just 1 quick.
Further question for me in discounts and onset of the migration back to the discount on on more normalized consumer behavior.
The increase in utility of how useful has youre locked on program proved or been proving and how.
On a small can you do the sort of 11 of those insights and expertise to make.
But on that transition back to the discount that you're capturing of every dollar in the midst of sufficient way possible.
Yeah. So.
Maybe the way to think about this is through Covid you had a substantial drop in the price sensitivity of.
Sure the Mers and the way that they made their shopping decisions and so our loyalty offers were less valuable in grocery shopping in particular than they would have been before COVID-19 because people werent looking to save a dollar here or a dollar of there.
Sure.
And the.
The algorithms that are designed to stimulate sales.
And loyalty as a result are less effective as.
Price sensitivity of returns.
To the marketplace those algorithms will become.
Of course effective and we are seeing that now so the.
Wave of algorithms that we built at the end of 2019.
That were relatively important.
The Covid are now starting to generate the kind of return on sales that they were originally designed to so yes, we think that.
Loyalty will become more potent especially.
When it comes to more efficient forms of promotion.
And that'll be part of the toolkit.
The particularly the 2 food divisions are expecting to leverage in the back half and then.
Looking for.
For some positive.
Acceleration in 2022.
Thanks, very much I'll leave it there.
Yeah.
Yeah.
Your next question comes from Peter Sklar of BMO capital markets. Please go ahead.
Thanks.
<unk>.
So I'm still looking for some clarity on.
On this gross margin improvement you've had you said like Richard you said, we should really anchor it to 2019 to remove the COVID-19 effect and when you look at that your gross margin is still up 100 basis points versus 2 years ago now.
Sure.
In your explanation you did say that you know the fresh counters are contributing to the gross margin.
But those high margin counters would've been open 2 years ago, so that the kind of leaves us.
With mix you did you did explain how you are getting some favorable mix. So is it all of this mix effect.
<unk>.
That is helping your margin versus 2 years ago and is that mix effect sustainable and <unk>.
Or are there structural changes that have happened. So I'm just kind of looking for more clarity on that kind of discussion if you don't mind.
Yes, there has not been any structural change is essentially mix mix in merchant.
<unk> debt, allowing us to deliver the margin so.
Nothing more on that so that's why that's why we're trying to anchor everybody there because thats, how we are looking at it so.
But that but thats it.
And don't.
Forget 1 thing Peter like 1 thing when things sometimes that the.
You forget the leg.
On the scale of each of our business.
If you look at if you look at the at our shoppers business.
It represents 40% of the EBITDA of the whole enterprise.
So that's something that has.
It's a bit of another lever.
But the gross margin of shoppers and significantly higher than the shoppers in the business in food. So it moves the needle when you.
When you compare both businesses and when you look at the gross margin range consolidated of Walmart.
I know, but what has changed in the mix Richard versus 2 years ago has there been a permanent change in the mix.
Is this just the temporary change in the mix like shoppers with 40% of the business 2 years ago as well.
No you're right like I think I think we devised the level of margin last year.
As the U S progressing debt, we felt comfortable with that allows us to continue to gain share in the world.
And we liked debt level. So we feel we can sustain it so that's why we're sort of.
The exhibiting the confidence we have with our with our rate right now and the difference in the the only thing I have in my head versus 2019 is mixed.
Not anything more than that we did structurally too to the right.
Yes.
And do you think that mix change of sustainable.
Well.
We think we think that that level of gross margin is sustainable.
Okay.
And then just lastly, then.
In terms of your outlook for that.
Price, 25% EPS growth Richard does that assume that the.
The buyback in the second half of the year is kind of at the same level of what you did in Q2.
But like we said to the market that we buy about $1.1 billion.
And Thats, our plan and we spent 7.
Hundreds of we theoretically of $400 million left so that's what we have in our outlook calculation.
Okay, great. Thank you.
Yeah.
Your next question comes from Michael Van <unk> of TD Securities. Please go ahead.
'twenty on my follow up has been answered thank you.
Okay.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the 1.
Mr. Mcdonald there are no further questions at this time. Please go ahead.
Thanks, very much Michelle and thanks, everybody for your time this morning.
Where to find me if you have follow up questions and Mark your calendars for November the 17th for our Q3 results call of a great day.
Yes.
Yeah.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.