Q3 2021 Loblaw Companies Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the Loblaw companies limited third quarter.
2021 earnings conference call.
And I'm all lines are in listen only mode and following the presentation, we will conduct a question and answer yourself.
Any time during this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on November 17th 2000.
'twenty, one and I would now like to turn the conference call over to Mr. Roy Mcdonald. Please go ahead Sir.
Great. Thank you very much Kelsey and good morning, everybody welcome to the Loblaw companies Limited third quarter 2021 results Conference call I'm joined this morning as usual by Galen Weston.
Our chairman and President and Richard Dufresne, Our Chief Financial Officer, and before we begin I want to remind you that today's discussion will include forward looking statements, which may include but are not limited to statements with respect to <unk> anticipated future results and the impact of the ongoing COVID-19.
Yes.
These statements are based on assumptions and reflect management's current expectations and as such 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 in the company's materials.
<unk>.
With the Canadian.
Securities regulators.
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.
File than what's required by law.
Also 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 of each of these measures to the most directly comparable GAAP financial measure.
And with that I will turn the call over to Richard.
Thank you Roy and good morning, everyone.
The performance of our third quarter continued the trends.
The last quarter characterized by a steady improvement across our businesses.
Year over year comparable numbers do not tell the entire story given.
The volatility caused by the pandemic.
For that reason using some two year average data points helped provide further insight into our operating performance.
On a consolidated basis revenue for the third quarter grew by two 4% to over $16 billion.
EBITDA increased by 10 three.
3% to $1 $67 billion in earnings per share grew by 24% to $1 59 a share.
On a two year basis, we saw average annualized growth in revenue of four 7% adjusted EBITDA growth of six 2% and adjusted earnings per share growth of 14, 1%.
These results exceeded our financial framework, despite the more moderate sales growth.
Our drug retail business delivered most of our sales growth in the quarter absolute sales increased four 7%, reflecting strong Rx and growth in all major front store categories led by cosmetics and OTC.
Same store sales in drug retail increased by four 4% in the third quarter lapping strong third quarter growth of six 1% last year.
Front store same store sales were better by four 1%, while pharmacy same store sales grew four 8% benefiting from a 270% growth in pharmacy.
Services, which includes Covid vaccines testing and medication reviews.
On a two year average drive same store sales have grown five 3%, which front store at three 3% and Rx at seven 6%.
In food retail same store sales improve as the quarter progressed up 2%.
<unk> lapping a strong quarter same store sales benefited from continuing eat at home trends.
Our pricing position remained strong and we are pleased with our market share performance.
Eat at home trends remain elevated despite the easing of restrictions compared to last year's results that were driven by extended lockdowns.
Few social events our celebration this year saw strong sales in the back to school season and for Thanksgiving.
Halloween was also strong.
More generally entertaining at home is helping drive sales in food retail.
On a two year average food same store sales reflected average growth of three.
And 6% <unk>.
Traffic continued to improve in Q3 and is showing signs of beginning to normalize to pre pandemic levels.
We are paying a lot of attention to cost inflation and mid summer inflation materializing, both fresh and grocery.
And produce prices have remained more or less flat to down.
Three points as we've been sourcing locally and in the U S meat.
<unk> prices have gone up but have stabilized recently.
Grocery remains the area with the most activity.
The number and size of cost increases requested by vendors has been elevated since this summer.
Our team uses a thorough process.
Down pricing requests.
We work hard to negotiate those increases down so that we offer our customers the best value.
Our internal measures of inflation are trending slightly higher than CPI.
Our online business continued to operate at penetration levels, well above pre COVID-19 rates, albeit.
And the peak of last spring.
In Q3 online sales were flat to last year, but we know that last year was up 175% compared to 2019.
Online grocery sales in the quarter were down slightly to last year online pharmacy continued to grow nicely and covered a slight.
Loeb generated by food.
Within grocery we have a strong and loyal base of online customers, but as lockdowns ease some customers shifted back to in store shopping.
Online is here to stay although penetration in grocery as he's since that peak is driven by lockdowns customers expect us to offer.
<unk> gas experience, whether in store or online.
We are confident that online will play an important part in the future of our business.
Speed and convenience are the way to win and I'm confident that over time, we'll be able to improve the profitability gap is technology and new way of doing things will reduce the cost structure of this.
This channel.
Retail gross margin in Q3 was 37% up 140 basis points compared to last year.
Improved merchandising initiatives and traction using our data are key drivers of our margin improvement in food retail.
Drug retail margins benefited.
From improved mix higher pharmacy services, and a slow return of acute prescription volumes.
<unk> service growth is driving both margin and SG&A.
This category as a high labor component that increases SG&A, but its contribution is in line with the overall EBITDA.
Pharmacy margins.
Gross margin in our front of store business also improved with a steady recovery in higher margin categories, such as beauty and OTC that were negatively affected by Covid lockdowns.
Anchoring to 2019, we have recovered from the challenges of last year.
Gross margins have improved by 80 basis points similar improvements in both our food and drug business.
This is an improvement over Q2, where our drug business.
Dragged down our gross margin versus in Q3, where it lifted it.
We remain confident.
About our gross margin performance going forward.
Retail SG&A as a percentage of sales was 25% with the rate higher by 70 basis points compared to last year.
The increase was primarily primarily due to a return to normal levels of spend.
After much lower level last year because of Covid.
For example, returning pharmacies to their pre pandemic operating hours and supporting the growth in our services.
Corporate costs came in at $19 million in the quarter in line with our expectations.
Anchoring to 2019, our Q3 retail SG&A rate increased by 60 basis points driven.
By higher labor costs to support the growth in Rx services E Commerce e-commerce fulfillment labor associated with higher digital penetration and Covid costs.
Retail EBITDA improved by $149 million in the quarter.
At PC financial revenue was up $19 million in the quarter driven by higher interchange.
Change income as we are benefiting from increased spending on PC Mastercard.
EBITDA at the bank increased $7 million year over year, primarily driven by favorability in interchange income and lower credit losses, partially offset by higher points costs for redemption and increased marketing spend compare to low spend in the prior.
Prior year.
On a consolidated basis adjusted EBITDA margin was 10, 4% in the quarter up 70 basis points compared to last year.
In the quarter <unk> net earnings available to common shareholders were $500 million of.
Of 17, 6% and fully diluted earnings per share were $1 50.
Yeah.
Consolidated free cash flow was $455 million in the quarter, but retail free cash flow was $498 million in the quarter.
In Q3, we repurchased $300 million worth of common shares for a total of $1 billion year to date.
So far we have repurchased $13 6 million common.
And shares today, we've announced some details regarding our store network optimization optimization initiative.
We have reviewed our network our network of stores and a finalized plans to address approximately 20 of our most unprofitable stores.
In almost all cases this involves reformatting the store to better serve the local market.
Most of these stores will convert to our discount banners some will be downsized, but only three will be closed.
We expect to record a charge of 25% to 35 million.
Most of which in Q4.
These projects should substantially be completed by the end of next year.
We expect to realize a proxy.
Approximately $25 million in annualized.
<unk> EBITDA run rate once these projects are completed.
We are pleased with our financial performance in the third quarter and year to date.
As we approach year end, we have updated our outlook for 2021.
We expect EPS for the full year to be up in the low to.
Mid 30% range, excluding the impact of the 50 <unk> week of 2020 and charges associated with our new network optimization initiatives.
Finally in the first four weeks of the fourth quarter Covid related costs are estimated at $4 million.
Q3 demonstrated steady consistent performance.
As we continue our focus on retail execution and maintained our attention on a fewer number of strategic initiatives, we feel our business is well positioned for the long term.
I will now turn the call over to Galen, Thanks, Richard and good morning.
I'm also pleased with <unk> performance in the third quarter sales remained strong while we delivered continued gross margin.
Improvement in both our food and drug businesses and.
And as we look through the volatility of Covid, we consider our results on a two year basis, the company exceeded its financial framework with.
Each of our key metrics pointing in the right direction, it's clear that the underlying health of the business combined with our focus on retail excellence.
It's positioned us well with the country.
From the pandemic.
This steady return to a new normal is showing up in many ways shoppers drug Mart at shoppers drug Mart, both acute and chronic prescription volumes are returning to our pharmacies as Canadians increasingly access to primary care, which they had deferred during the pandemic.
At the same time we're.
And mercury and larger settings, and beginning to return to the workplace driving helpful tailwind in beauty and cough and cold.
This was accompanied by pent up enthusiasm for celebrating the holidays, such as Thanksgiving with customers shifting back towards larger turkeys and other entertaining staples.
I did so our market division.
Division focused on retaining the large number of new customers that have detracted over the last 18 months by continuing to offer exceptional products and service at.
At the same time, our discount business welcomed many of its loyal value seeking customers back through its doors, a trend, which we expect to continue as inflation is increasingly.
Showing up in many aspects of our lives.
As these shifts signal a return to many of our customers pre pandemic shopping habits other areas such as online suggest a more sustained change in behavior.
As Richard mentioned E Commerce revenue remained flat in the quarter over last year as we held onto the.
Significant gains from 2020.
Today customers are looking for a seamless experience when they shop and PC Express is meeting that expectation by tapping into the best of multiple fulfillment options.
We continue to improve the efficiency and accuracy of our in store processes and are also adding new manual microwave.
<unk> centers, where it makes sense.
This flexible approach has allowed us to evolve with the customer continuing to serve the strong demand for click and collect while at the same time addressing the growing interest in delivery.
With online penetration now stabilizing higher than pre pandemic levels, it's clear that.
Commerce is here to stay we remain absolutely committed to its success over the long term leveraging our existing reach and scale to improve its profitability as we deliver the convenience and flexibility that have proven to be key differentiators with customers.
Whether online or in store the market will continue.
He calls as we emerge from the pandemic with remote work, becoming more prevalent and hybrid models, gaining traction more meals will take place at home. This requires us to think carefully about how we serve Canadians as they spend more time juggling work and family life.
As we do so our conviction around offering choice convene.
<unk> and immediacy is as strong as ever.
Whether through in store pickup or delivery, we need to be there for each specific occasion.
We will do this for our customers, while thoughtfully managing through the current global supply chain pressure and the resulting inflation with minimal disruption to stores and customers.
<unk> in the fourth quarter.
It is this discipline and commitment to serving our customers that will continue to drive long term value for shareholders. Our strategy remains the right one and we are accelerating our progress against it thanks to the hard work of our colleagues.
And we will now welcome any questions.
Okay. Thanks, Kevin.
Kelsey if you don't mind could you introduce the Q&A process.
Yes.
Thank you.
Ladies and gentlemen, we will now begin the question answer session. Sue do you have a question. Please press the star followed by the one and you touched on phones.
Thank you your three pronged acknowledging your request and your questions will be pulled in New York.
Our receipts.
If you wish to decline from the polling process. Please press the star followed by the two.
And if you are using a speaker phone please lift the handset before pressing any keys one moment. Please for your first question.
Your first question does come from Michael Van <unk> from TD. Please go ahead.
Hi, good morning.
And I think I missed your comment on discount versus conventional so could you start off by.
Just.
Brian you bit more color as to what you saw during the quarter and discount versus conventional and then how it might be changing the price increase or the price inflation has been ramping up.
Yeah, absolutely so so of return of strength to the.
The discount business.
But we haven't returned all the way to the pre pandemic normal in terms of mix and as I mentioned in my remarks, our market Division has done a terrific job holding on to a substantial.
A portion of those sales gains that it picked up during COVID-19.
So what we expect is with the continued inflationary pressures with the continued kind of journey to that normal pre pandemic behavior, we expect the discount business to continue.
To build volume and.
And that mix between market and discount to improve in favor of discount.
So in the quarter discount did outperform conventional.
Not quite but it's getting close.
Okay.
But you are seeing that start I guess as inflation picks up by the sounds of it yes.
Basically a trend that's been continuing since the opening up of the <unk>.
The country really in the mid summer.
Okay now.
Are there any reason to believe that.
We might not go back fully to the pre pandemic waves of the pandemic mix of discount versus.
It's <unk>.
And if so does it make you.
<unk> priority of your optimization.
Burning 20 stores are up to 20 stores.
From conventional to discount.
Well I think there are two separate questions. So so first of all yes, I think there is.
<unk> believes that the return to that discount versus conventional mix might take.
Longer than we initially anticipated our market division invested in price.
During COVID-19 narrowing that price gap differentiation between discount end market.
We are.
Sure.
We're hoping to hang onto as much of that business as we can it's a good channel for us.
And so part of that and sort of question yes.
We will try and hold onto as much market business as we can.
The 20 stores that were converting our very specific market.
<unk> locations.
With very specific business cases that are completely.
Disconnected from that macro trend.
So no we will not rethink.
Conversion.
Okay and you also mentioned that you're pleased with your market share but.
Does that mean that it was flat.
They are down less or up.
It was good.
[laughter] Alright, so would you say that you're in your market share is similar to or where it was pre pandemic.
Yeah.
Okay.
All right.
And I'll leave it at that for now thank you.
Yes.
Thank you.
Next question comes from Irina Koffler from RBC capital markets. Please go ahead.
Thanks, and good morning, everyone.
I'm very happy to hear that good is good.
Uh huh.
So if we could just for a moment talk about inflation I think you mentioned in the remarks that you saw your internal inflation, a little bit higher than CPI.
Is that a reflection of mix or could you just expand on that a little bit and also the.
You say youre seeing now and what your anticipation is.
Good morning Irene.
Inflation is quite volatile right now as you probably noticed thing. So it's a it's very tough to to draw like very precise concerns about what is going on.
So.
The key point from our perspective is that we feel our pricing position is very strong and so that's what we're focused on and we're managing our business to maintain that pricing position. So that we can best serve our customers.
Yeah. That's helpful. Thank you and I think.
So one of the topics that we discussed is the degree to which consumers who a year ago were not shopping multiple banners were aware of just how strong your price position might be.
As you do your surveys or as you look at consumer behavior. Now do you think that you're getting more credit for that strong.
We think position.
Yeah.
Yeah, So I think theres, two things going on and as we've as we've.
Talk about we made a series of.
Ambitious price investments through Covid.
But there will there are a whole lot of them, which were probably not well.
Not quite right.
Pray for investing let's say in certain areas, where we werent getting the credits.
Where perhaps it wasn't going to translate into.
Sales growth as we emerge from the pandemic, so that focused on retail excellence.
Has included looking with a lot of detail and precision into those.
Those investments and making adjustments where appropriate in other words.
Raising prices on certain items, where we felt were not getting credit and that's part of what's been going on.
When you look at our.
Performance relative to to CPI inflation.
It's partly that set of adjustments and Richard's point is it is a really critical one which is when we look at that on a macro basis. We're really pleased with our continued price position relative to our competitors and also very pleased with the market share performance that we've seen.
Really over the last six months.
Yeah.
That's really helpful. Thank you and just continuing on the subject of retail excellence you know certainly the gross margin gains impressive you're doing good job on the cost side.
We look at it from zero to 100 or earnings or however, you want to think about it.
Where do you think we are on this journey and how much more do you think is in the tank.
Oh, we're beginning again, we've just been back.
Three of them for six months or so we're working hard to do.
To get this going more on the <unk>.
They do.
Okay, and then just one final one if I may on shop squares, if we look at both Rx and front of store how.
How close are we to where we would have been pre pandemic.
And what are you seeing the trends look like in Q4, particularly early vaccination and.
And on the rest.
We're recovering but were not fully recovered yet.
I think we've got a ways to go and it's tough to predict.
Like we're seeing it happened the same time as you saw but we still are we still have ways to go but we like we'd like the trajectory we're on right now.
And obviously like all pharmacy services have grown significantly, especially since the summer and so that that's helping and we're awaiting what what else is going to come out over the coming months on that front also.
That's great. Thank you.
Thank you.
Your next question comes from Mark Petrie from CIBC capital markets. Please go ahead.
Yes. Good morning, just with regards to your renewed efforts on discipline and execution.
I appreciate that this cuts across most aspects of the operations be it sort of supply chain.
Procurement shrink et cetera, but can you just discuss where you think you've made the most progress so far and what areas present, the greatest opportunity for next year.
Yeah, So maybe start with with.
More disciplined approach to pricing.
Pricing and promotion so feeling.
<unk> pretty confident about that.
As Richard touched on.
We've done a full network review and.
In terms of the performance of our of our assets and we've made a series of decisive.
Choices around banner conversions and Youre seeing let me call it the first.
It's worth noting that in that entire review.
We're only closing three stores, which I think is.
The vote of confidence in the robustness of our network.
The procurement as always.
An important area of opportunity for us.
And.
Wave, we're going to continue to work hard on that especially in the context of it.
This inflationary pressure.
Trying to make sure that we are.
That we're taking the cost increases that are justified, but that we're not doing it if theyre unjustified or in a way that is detrimental.
We're to the customer experience.
And Mark I would add one more thing is like.
We're getting better at using data.
And it's starting to make a difference so it's translating in and more and more effective promotion promotional strategy that are driving both sales and margin. So that's probably something that we've noticed.
<unk>.
I've made a difference over the last six months.
Okay helpful and Galan, you mentioned or is this sort of phase one of network review what would further reviews potentially entail.
Mostly additional conversions or sort of adjusting footprint or what would that what.
What would that look like.
Yeah.
It's nothing.
Super Fancy, it's the usual stuff, making sure that we have the right.
Format in the right location, making sure that we're understanding areas to add new square footage I think we mentioned in the last quarter that we are looking at opportunities.
Entities to put new stores in markets, where we have low penetration and they have strong population growth.
So it's that.
A lot more attention to be paid to the physical fleet.
As part of the way that we allocate capital across the business, but.
But think about it.
Enhancements and optimizations as opposed to.
A substantial shift.
In strategy.
Understood.
And when it comes to the earnings growth framework, obviously, you've outperformed material materially this year lapping a weaker 2020.
But even on a two year basis, it's still well above the sort of 8% to 10% range. You've discussed previously so I guess first question do you attribute that more to sort of your retail excellence efforts or to the higher consumer demand.
That's sort of stemmed from the pandemic and then and then second assuming that consumers.
Tumors continue to sort of slowly shift back to sort of pre pandemic levels of demand do you think you can exceed that range again in 2022, driven by your optimization efforts.
Yes, So let me start and then I'll ask Richard to comment on our outlook and I'm sure you know what.
He's got to he's going to say.
<unk> 'twenty so.
I think we've been.
Fairly transparent about what we felt was under performance.
In the particularly in the earnings range in the business in 2020.
So what are we doing in 2021.
Bringing.
That performance level back into balance.
And with sales growth rates, well above normal we should expect a retail grocery business to deliver earnings results that are well above normal.
I think a reflection of what youre seeing in the two year numbers I think.
Our indicative of us starting to perform at a level that's commensurate with what is appropriate for the business.
In terms of the long term trajectory for business performance, we have affirmed our.
Our commitment to our financial framework and that I think is the right way to think about it.
Rich I don't know if you want to comment on 2023, no no im not going to comment on 2022 will give you. Some perspective on that next time next time, we meet but we gave you an update on Q4 and so we feel good about that outlook.
Okay I appreciate all the comments and all the best.
Thank you. Your next question comes from Patricia Baker from Scotiabank. Please go ahead.
Thank you very much and good morning, everyone I have a couple of questions first of all Richard Galen what have you been seeing in terms of any supply chain disruption.
Issues with availability.
Certain categories.
Yeah. So so let me speak to that in two parts Patricia I mean first there are there's the domestic north American supply. So think about it is that the bulk of the center of store.
The key items on the perimeter in fresh.
There is meaningful commodity price pressures.
You are reading about you've heard about.
From us and others and then there is labor supply pressure.
Two things are making it.
Creating substantial challenges for our manufacturing base.
Our vendors that is putting pressure on availability.
Particularly around what we would call the peripheral skus, so kind of secondary sizes secondary flavors.
And what you see is the manufacturers consolidating their production into their highest volume skus and putting those secondary skus on allocation.
And so what what customer.
<unk> this is an industry wide thing.
What customers will be frustrated to see is some things in stock.
And then it's out of stock for four or five weeks and it comes in stock again, and then it goes out that is really the consequence of this allocation approach that.
That is being undertaken by many of the vendor.
We need to work hard to make sure that we're getting our share of the allocation and we think that we arms, we expect to see that.
Level of call. It in stability continue for a few more quarters.
And then we'll have to see the second.
Is the global.
Supply chain pressure.
And for US think about that is disproportionately impacting our.
Our general merchandise business, our apparel and any.
Food products that we might be importing from offshore theirs.
An impact that we are.
Managing very very carefully there it's not easy.
But the teams have been managing through it extremely well and.
It's important to distinguish that between the northwestern ports.
In North America versus the southwestern ports was northwestern ports have over the last number.
A month's been performing substantially better than the southwestern ports and so the Canadian.
Offshore supply chain is has not been as disrupted as a result of that as as it has perhaps in the in the U S.
We'll have to see given what's happened in British Columbia with weather over the last.
Of days, whether that has any kind of incremental disruption, we suspect it will but but only for a limited a limited time.
So the net net of it is as we head into Christmas when it comes to all of our seasonal programs, we feel very well positioned we feel the stores are.
Coupled with our in terrific shape and ready for the fourth quarter surge.
Okay, that's great to hear and then secondly, I'd like to ask Richard about the gross margin. So thank you for giving US I think you gave four five drivers.
Drivers of the year on year 140 basis points strong improvements in the gross margin and you noticed.
The store margin was up 80 basis points versus 2019, just two things there.
The same factors driving.
Driving that 80 basis point improvement in could you rank order them.
But the way to think about it Patricia.
It's essentially.
The shoppers business.
That's a good improvement in this quarter because.
The higher growing categories are higher margin categories of sold more like OTC and pharmacy. So therefore gross margin is of shoppers as improve and that's why our overall gross margin.
So that was the biggest driver okay excellent and then.
Mike.
Margin question is on the network optimization that you've.
And perhaps this is more color than you choose to share, but the 20 stores that are subject to a dispersed offers basically optimization is there any banner or regional concentration with respect to the stores that have been subject to the.
Okay.
No. It's all it's all across the country Patricia.
And my final and last question and I.
I guess, just a question and it's a comment.
So you indicated that your basket inflation was slightly ahead of CPI and you know some quarters you'll lap.
Sure tease us with a number and some quarters you won't so just curious why we're back to the.
Gilead nuanced burbidge as opposed to actually giving us the inflation number.
No I think when we were looking at all these the inflation metrics, we track like it was very hard to draw.
Anything from it because it's been so volatile so we thought it would be.
More accurate description of what's going on to just talked with.
Okay, Okay, which CPI number you're talking about them that you're talking about CPI food at home or are you talking about the CPI number yeah, we look at CPI food and but we.
We have our own internal metrics, we look at Nielsen, we look at a bunch of metrics and so so so those are the ones we focus on.
Okay. Thank you.
Yeah.
Thank you. Your next question comes from Ken <unk> from <unk> capital markets. Please go ahead.
Thank you and good morning.
Galan you touched on the trade down in response to inflation from from market to discount, which is typical and exited the first wave response by consumers, but could you speak to just in the context of your loyalty journey on.
The potential sort of substitution that second wave, but within date within stores and.
At each specific channel and how well positioned you are you think you are and it will be should the spike in inflation prove both protracted and that's pronounces looking.
To where you've been in the past.
Yeah, I mean it.
It is a tricky time and Richard.
<unk> on it.
Within well you've got two things happening you have this.
End of Covid, which is.
We're coming out of it let's just say more slowly than we anticipated a couple of quarters ago.
And that means that customers are spending more money in stores.
As they're returning to discount at a slightly slower pace than we have than we expected all of that.
We've tried to talk to.
Then you layer on this very recent.
Acceleration in inflation rates and the lack of predictability.
And what inflation is going to look like in the coming months and quarters and it gets very very difficult to.
Call it navigate or to identify any.
Sustained trends at this point, there's just too much.
All converging at the same time, having said that.
<unk>.
We are we have seen a return to promotional sensitivity of fare of significance. We are seeing a change in customers shopping more often and our discount businesses and when and we are seeing the one to one marketing tools promotional tools that are being.
<unk> deployed across the business performing much better today than they were in an environment. When there was very little price sensitivity. Okay. In other words COVID-19. So.
Our strategy would indicate that we are more able.
To deploy promotions against specific price sensitive customers with specific price sensitive items than we would have been the last time, we had this kind of inflation so it bodes well.
But we don't have any meaningful underlying.
<unk> data.
At this point that we can build that caisson.
Okay got it thanks, guys and just one more from me quickly.
On your beauty business, how much of that was a natural lift on a return to normal versus promotional driven in other words was it perhaps.
You know its margin that you had to invest in beauty is to drive that change and then any color insights you're willing to give with respect to.
Beauty is today versus where it was and if we cant get into anything there, perhaps even just some perspective on where your share in mass and prestige and I sort of art today.
Today versus where they were and how to think about the sort of continued potential evolution of ramp of that business.
Oh, sorry, yes, I think it's fairly simple. So this is a.
A natural return.
Beauty that is coming as.
Our.
Spend more time going out so.
The first thing second if you look at beauty it was contracted market during COVID-19, because people weren't going out and because many of the of our competitors in beauty were closed during lockdowns.
That accrued.
<unk> market share gain to us because we had the good fortune of being open but there was a lot less sales. So our objective is to try and hang on to as much of that share as we can as those retail competitors open and we've been very pleased I would say with the results.
<unk>, so far but it is early.
Thank you and I'll leave it there.
Thank you.
Next question comes from Karen short from Barclays Capital. Please go ahead.
Yeah.
Hi, Thank you very much.
A couple of questions on the competitive landscape.
So.
Bigger box competitor commented several times yesterday on strength.
Canada.
And I'm wondering.
What youre seeing in terms of the competitive landscape.
The context of their comments.
You know in conjunction with your comments on returning strength in discount.
And then the other thing I wanted to ask is just what your perspective is on the health of the Canadian consumer going into 'twenty, two as we lap right as they lap stimulus generally general benefit.
And then one other question.
Yeah.
So.
I think it.
The best way to answer the question about competitiveness, it's very competitive here.
As Richard mentioned, we feel good about our price position, we feel good about our market share performance and that was an issue for us last year and so when.
When we were giving you the numbers, but when we say we feel good about it it's because we feel good about it.
And but we have been.
I don't want to say.
Surprised.
I think we would've expected our discount business.
Probably the.
Drive stronger sales performance at this point in time then.
Perhaps it is but that's been offset by us expecting to have seen less strong performance in our market division over that period, and we've been very happy with that.
So we watch those other big box retailers, we read their results very carefully as well and are focused on them.
Going to make sure that.
Theres nothing that they are doing that would see them pull away from us in that sector. We lead the discount market in this country and it's our intent to.
To do so.
In terms of the health of the consumer.
Lots being written about that I think that can provide a tiny bit of color based on.
Our credit card. So we are seeing are.
A return to spending on the credit.
Continue that's nearing pre pandemic levels, what we're not seeing is a return to balances at anywhere near the same rate. So that I think suggests it's just one data point of many that you could pick up across the economy. The consumer balance sheet is.
Is in pretty good in a pretty good state.
Okay. That's helpful. And then just in terms of the Ontario minimum wage.
<unk>.
Obviously, the last time this happened it was a big problem for all retailers in Brazil.
Also didn't significant margin erosion, maybe just a little.
Little context on how you're viewing.
The most recent announcement on the minimum wage.
Yes, when we look at minimum wage for 'twenty two.
We think we're going to be able to absorb it with our within our budgets for next year.
So you would not raise prices to offset the cost increase.
Yeah.
Like it's definitely not a significant as what we felt a few years back. So therefore, we think we're going to be able to absorb it and be able to focus on delivering our financial framework.
Okay. Thank you.
Thank you.
Question comes from Peter.
Our score from BMO capital. Please go ahead.
Hey, good morning, guys a couple of questions about.
Online.
The first one is when you talk about your year over year improvement in your overall results you haven't mentioned online and as I recall.
During last year journey.
The Covid bubble.
You know when you know.
When the online demand was just skyrocketing, you really had to throw resources on it.
And a very inefficient way and I think you've articulated that online cost you 200 million last year. So I would've thought it would be quite a bit better this year as things moderated.
And you could take a you know a more.
The structured approach to it and not just drawing labor at the problem. So can you talk a little bit about.
The performance of your online this year versus last year from a financial perspective.
Yes.
From a starting point I think.
We both mentioned that e-commerce volume was essentially flat.
Or was flat really in the in the quarter versus last year.
There was a there has been a slight pullback on grocery e-commerce and.
Both that and the fact that we were lapping that significant.
In wrapping up and acceleration of cost.
As e-commerce call it being a positive contributor to our financial performance in the quarter.
A little bit of a of a tailwind as opposed to a meaningful headwind.
At this time last year.
<unk>.
<unk> the way to look at e-commerce and its impact on our P&L over the long term, we expect it to be a headwind as we return to normal growth rates in e-commerce, but of course, our objective is to offset those headwinds.
Within the E Commerce strategy.
<unk> itself and through other.
<unk>.
In the business. So you know what those are we don't need to improve pick efficiency.
Primarily and then we see opportunity to offset those cost of fulfillment through our the growth in our media.
Media business as well.
And Galen when you say it was a positive contributor this quarter year over year.
I assume that means less law. So it's not like the E. Commerce business is anywhere near approaching profitability is that the way to think about your comment.
Yes.
But I think the key point I would add to that Peter is essentially with the lower penetration rate the big driver.
Cost is labor and so the labor component of those sales has gone down because you don't need as many pictures as we had in the rest of the quarter so with that context.
That's what's happening.
Okay.
And then the other question I had on your ecommerce business.
As you know your home delivery is mostly focused around and the cart.
It's the card I think can be an expensive proposition for the consumer.
Is that going to be your long term.
And for home delivery or do you anticipate that.
Loblaw will develop its own.
In house proprietary home delivery option for consumers.
Yes, so we have our own.
PC Express delivery channel.
And it has full coverage and in the city.
A Toronto now and you should expect to see increased an increasing amount of coverage for what we call <unk>.
In the key urban centers across the country, where we see.
The largest opportunity for.
<unk> demand and delivery.
Okay.
Okay.
All I have thank you.
Thanks.
Thank you. Your next question comes from Vishal <unk> from National Bank. Please go ahead.
Hi, Thanks for taking my questions in light of your announcements on our.
Network optimization and commentary.
But you shouldn't network optimization I'm wondering if you could give us a perspective on real estate growth for the year ahead.
If that's going to trend if that's gonna go positive or should we expect a flashlight.
Whereas as we have.
So vishal essentially the way to think about this is we focused on our 2000.
Most unprofitable stores so as we.
Deal with those stores, we're going to deal with this upon profitability and actually turn it into a into a into a.
Profitable initiative and once it's all said and done we expect that $25 million EBITDA improvement to our business.
Sure.
Is there any way that we should think about real estate growth.
Your aspirations to two.
To expand your network growth stores, particularly in light of strong demand.
Yes, yes.
As we said last quarter opening new stores is going to be part of our strategy but to.
Build the pipeline of new stores think spine. So yes, that's probably you're probably going to see more I guess traction of that initiative, 18% to 24 months down the road.
Okay.
I just wanted to switch gears back to E. Commerce, if that's okay, obviously e-commerce and grocery.
Relatively nascent.
At this point I'm wondering if you can comment on customer satisfaction associated with ecommerce is it trending favorably and is it at a level of performance, which you deem to be appropriate.
So, yes, and yes so.
Our focus in 2021.
<unk> has been really improving the fundamental value proposition of our existing.
E Commerce offer and we've seen substantial improvements in the key areas that we've been targeting.
Over the last six months that includes reducing wait times that includes.
Accuracy pick efficiency, making sure that people are getting everything that they order all of which has been trending substantially in the right direction.
We're very happy with our NPS and customer sat scores for our E Commerce business at this moment.
But we always want it to be better.
No.
And we continue to see opportunities and we are continuing to deploy technology enhancements and solutions to drive NPS up.
Second focus on call it velocity.
A few months.
Last quarter and a half of the year has been on.
<unk>.
Standing up the delivery channel that parents very nicely.
With <unk>.
In store pickup and we've been really happy with the trajectory of that business to its let's call it running slightly behind.
From an NPS perspective.
But we're we're we're.
We're comfortable that we'll get that into the right place in short order as well.
And.
I think in.
The prepared remarks, I heard management comment that they are planning to open new menu manual pick fulfillment centers I was surprised at that at the auction.
For the manual pick so maybe you can provide some color on that why not why not and automated picks on the center given that labor is Cmos.
The highest cost and can you I presume one of the highest costs and can you also give us commentary on if you'd have to.
Your line of sight of technologies that.
We'll reduce costs in the future.
Yeah. So I think we have we have talked a little bit about this in previous quarters.
So absolutely pick.
Pick efficiency as one of the big drivers to improve economics, there are multiple ways to improve <unk> efficiency and.
We are pursuing them all.
One of them is standing up a dedicated call it call it dark store facilities.
That can get our pick efficiency items per hour.
Well up into the kind of the 200 level.
Manual facilities are much quicker to build.
Uh huh.
And so that's where we're focused at the moment.
We have an automated facility we're in partnership with a company called takeoff.
Still working learning to understand the best ways to optimize that facility, we don't yet think that.
Manual.
But automated fulfillment and micro fulfillment centers is quite ready for prime time, so you're not going to see us announce.
A wave of of robot facilities going out in the next.
Number of months, but we are certain that.
That technology will.
Come right at some point.
We are very very close to the to that technology and we'll deploy it when we're confident about its effectiveness.
Thanks for the color.
Okay.
Yeah.
Thank you.
Our next question comes from Chris Li from Cowen. Please go ahead.
Hi, Good morning, just first question is.
So the $3 billion of e-commerce sales that you're on track to achieve this year I'm. Just wondering if you can share with us sort of the breakdown between grocery and non grocery.
Yeah.
Well.
We will share that with you when we when we finished the year.
Okay. Okay, that's fair and another one just on E Commerce, maybe loblaw media just wondering how long would it take before it becomes a more meaningful contributor that will help you start offset some of the online.
Our fulfillment cost.
Yeah think about it as.
Moving forward.
On a very satisfactory trajectory.
And that means growing fast, but still not small I'm sorry growing.
But still small.
And and expectation that it'll be a big contributor and I'm not going to say exactly when but certainly over the next couple of years.
Okay. That's helpful and maybe just two quick ones on capital allocation.
First one do you expect the level of Capex for next year to be similar.
In fab two this year.
Yeah, right now yes.
Okay, and then in terms of share buybacks. I mean, you guys have been very consistent buying back I think roughly about $1 billion worth of shares every year in the last few years again do you expect a similar level for next year.
Yes.
And then just in terms of M&A.
Similar opportunities are there any attractive ones that might be appealing to you.
Nothing of scale, we're always looking at.
Opportunities.
They become available and so so but right now.
Nothing on the radar.
Okay and then this last one is I know.
<unk> is a publish in return on invested capital number every quarter.
Wondering I am sure you have a target internally.
Are you willing to kind of share with us what you.
Sort of a long term sustainable really targeted would be yes.
Yeah, we'll share that with you when we when we come back with our outlook for 2022, okay.
Okay, great all the best in the holiday.
Today season.
Thanks.
Thank you and your last question comes from Patricia Baker from Scotiabank. Please go ahead.
Oh, Thank you very much for letting me do a follow up so in your discussion of our operational excellence and retail excellence.
I noticed that you are getting.
You guys are using data and that's pretty obvious given the results that we've shown you see this quarter and last quarter I'm. Just curious what can you share with us what did you do to get better at using the data we have been hiring people with different processes, what was the secret sauce.
Yes, so I'd say two things.
Embarrassed and foremost focus.
Just a very short list of call it tools.
That have <unk>.
Very measurable targeted benefit and impact if deployed correctly. So instead of trying to make 10 tools work.
First across a $1 million of sales each we want to make two tools work across hundreds of millions of dollars of sales each and that's how you start to scale the impact of these.
This analytical capability.
Second thing.
Which we can take less credit.
In terms of the change is that these algorithms are designed.
To understand price sensitivity in the minds of individual customers and if you go through a period, where there is no price sensitivity, which is what coast.
Then those algorithms don't function all that.
Well and that's changing.
Okay.
That's very helpful Gayla.
Okay.
There are no further questions at this time you may please proceed.
Great. Thank you very much thanks, everybody for your time this.
Good morning, if you have any follow up questions drop me, an email or give me a call.
Circle your calendars for February 24th when we will be back online to talk about our Q4 and full year 'twenty one operating results, thanks and have a great day.
Ladies and gentlemen, this concludes your.
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