Q4 2021 Loblaw Companies Ltd Earnings Call
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Are in listen only mode and following the presentation, we will conduct a question answer session.
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Call is being recorded on Thursday February 24 2022.
I would now like to turn the call over.
Mr. Roy Mcdonald. Please go ahead.
Great. Thank you very much Scott and good morning, everybody welcome to the Loblaw companies limited fourth quarter and full year 2021 results conference call.
As usual I'm joined here. This morning by again, the Weston, our chairman President and by Richard <unk>, Our Chief Financial Officer.
Before we begin the call today I want to remind you that today's.
Today's discussion will include forward looking statements, which may include but are not limited to statements with respect to a lot less anticipated future results and the impact of the COVID-19 pandemic.
These statements are based on assumptions and reflect management's current expectations.
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 filed with the Canadian Securities regulators.
And any forward looking statements speak only as of the date. They are made the company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise other than what's required by 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 measures and with that I will turn the call over to Richard.
Thank you Roy and good morning, everyone.
Our Q4 results continue on the path of consistency, we had been working towards in 2021.
Stability in our gross margin coupled with solid sales performance focus on market share and careful management of our expenses our daily focus.
Our strong food and drug retail platforms, coupled with our main strategic initiatives, namely loyalty and E Commerce.
Adding to our financial performance.
The pandemic continues to impact our year over year comparisons as such we will continue to share. Some two year average data points to help provide further insight into our operating performance.
I also want to remind everyone that Q4 last year included an extra week versus this year.
To make a more meaningful comparison to last year's performance financial highlights will be presented on a comparable 12 week basis.
Our reported results include a onetime gain of some $300 million related to the result of resolution of that in your own bank matter I have.
I like this fact, as we will recover some $300 million in cash over the coming months.
The strong performance of our fourth quarter built on the momentum we saw in the previous two quarters. We began Q4 with restrictions loosening in customers preparing to celebrate the holidays with family and friends. We ended the quarter with another round of Lockdowns.
Across our mix of assets, our stores and our supply chain network rose to the challenge and our business has performed very well on a consolidated basis revenue for the fourth quarter grew by two 8% to $12 $8 billion adjusted EBITDA increased by six 3% to $1 $32 billion and adjusted earnings per share.
<unk> grew by 35, 7% to $1 52.
On a two year basis, we saw average annualized growth in revenue of four 9% adjusted EBITDA growth of nine 1% and adjusted earnings per share growth of 31%.
Again this quarter our results outperformed our financial framework.
Drug retail delivered another strong quarter absolute sales increased six 8% with same store sales increased by seven 9% in the fourth quarter lapping a softer quarter a growth of three 7% last year.
We saw strong performance across both front store and Rx.
Front store same store sales were better by six 1% led by double digit growth in cosmetics and OTC benefiting from lighter social restriction throughout most of the quarter.
Pharmacy same store sales grew 10, 2% benefiting from the strength of pharmacy services, which grew by over 100% in the quarter as we supported the government COVID-19 vaccine and testing programs.
On a two year average drug same stores held up growing five 8% with front store at four 5% in Rx at seven 6%.
In food retail same store sales saw growth of one 1% lapping a strong quarter of eight 6% last year.
Although we saw eat at home trends coming off last year's level. We continued to experience strong demand our market banners continue to outperform and post share gains discounts began to benefit from the return of price sensitive customers gaining momentum towards the end of the quarter.
Traffic momentum continued improving again in Q4 and is showing signs of beginning to normalize to pre pandemic levels.
On a two year average food same store sales reflected average growth of four 9%.
Performance in the quarter was against the backdrop of rising cost inflation and ongoing supply chain disruptions supply chains are facing unprecedented challenges around the world. This is leading to higher inflation and Henry and every industry and it continues to be volatile.
We are monitoring the supply chain situation very closely with the largest distribution network in the in the country our scale and experience has allowed us to Nick to navigate these challenging these challenges relatively well our teams are doing a great job prioritizing and adapting to these situations as they unfold.
Our shelf price is the tail end of a chain of cost shipping containers fuel farming ingredients labor whether to name a few we watch this very carefully and focus on ensuring that our retail prices are competitive during.
During the quarter, we saw high rates of input inflation across the board.
Our job every day is to ensure that any proposed cost increases are appropriate.
Items on the shelf and delivered the best value to our customers.
Leading the way with our discount banners leveraging the price investments that we made last year and driving loyalty offers that really matter personally we work to deliver value.
In 2021, our online business generated more than $3 $1 billion in sale and increase of 14% over last year.
In Q4 online sales decreased by eight 4% lapping last years, 158% growth rate growth rate.
Our digital platform is now deployed and available throughout Canada.
Q4, 2021 was a quarter with less COVID-19 restriction than in 2020.
We are pleased with our omni channel performance as it continues to operate at penetration levels, well above pre COVID-19 rates.
Omni channel is a key pillar of our service offering we continue to enhance our customers' shopping experience through our digital platform, while offsetting its cost to optimizing operational efficiencies deploying new technology refining our delivery offering and seeking out promotional and advertising opportunity.
Retail gross margin in Q4 was 39% up 150 basis points compared to last year, we continued to see traction leveraging our unique data to deliver effective food pricing and promotional strategies.
Both our food and drug retail businesses benefited from a continued rebound of higher margin categories consistent with performance from the previous quarter.
Pharmacy services were a key contributor to gross margin growth as Covid vaccines and testing peaked during the holiday season.
Comparing to 2019, we have recovered from the challenges of 2020 gross margin have improved by 80 basis points with similar improvements in both our food and drug businesses.
Focus on stability of our gross margin, while driving our sales performance is a priority we remain confident regarding our gross margin performance going forward.
Retail SG&A as a percentage of sales was 29% with the rate higher by 120 basis point compared to last year.
The increase was driven by corporate onetime items lapping austerity measures such as lower store hours and shoppers and increased labor costs associated with growth and Rx services.
Corporate items included a $19 million charge related to the optimization of our store network that we discussed on our last call, which was not considered an adjusting item.
Also note that corporate costs came in at $8 million in the quarter in line with our expectation.
When we include when we exclude sorry, our onetime costs, we are pleased with our performance in the quarter.
Compared to 2019, our Q4 retail SG&A rate increased by 20 basis points, driven by higher labor costs to support growth in Rx services and some COVID-19 costs.
Adjusted retail EBITDA increased by $60 million of five 1% in the quarter.
At PC financial revenue was up $40 million driven by higher interchange income as we are benefiting from increased spending on PC Mastercard.
Adjusted EBITDA at the bank increased $18 million year over year, primarily driven by favorability in winter and interchange income and lower credit losses and included a $27 $27 million gain related to the reversal of prior year commodity tax remittance.
This was partially offset by higher points costs for redemptions more normal marketing spend compared to last year and an ECL provision release of $11 million last year.
On a consolidated basis adjusted EBITDA margin was 10, 4% in the quarter up 40 basis points compared to last year.
In the quarter <unk> net earnings available to common shareholders was $744 million up $434 million and fully diluted earnings per share were $2 20. This.
This include the $301 million recovery related to the <unk> Bank income tax return.
Retail free cash flow was at $460 million in the quarter for the full year, we increased retail free cash flow by over $400 million.
Our cash flow generation is strong our cash balance is high and increasing.
In Q4, we repurchased $200 million of common shares, finishing the year at $1 $2 billion, representing $15 6 million shares.
Looking ahead to 2022 volatility will remain we expect inflationary pressures to continue and supply chain supply chain to remain challenging depending.
The pandemic will continue to impact sales trends and year over year comparison.
That said, we are very pleased with the mix and positioning of our businesses and our focus on retail excellence will continue to generate positive operational and financial performance.
So for full year 2022, we expect our retail business to grow earnings faster than sales.
Earnings per share growth in the low double digits with higher growth in the first half of the year.
We plan to invest approximately $1 $4 billion in capital expenditures net of proceeds from property disposals, reflecting incremental store and distribution network investments and.
To continue to return capital to shareholders by allocating a significant portion of our free cash flow to share repurchases.
In the fourth quarter, we again demonstrated steady consistent performance as we continue our focus on retail excellence and on a few key strategic initiatives, our unique set of assets positions us very well for the future.
I'll now turn over the call to gallons. Thank you Richard and good morning, I am pleased with Loblaw performance in the fourth quarter as we entered the year in a position of strength. Our results were driven by retail excellence with a focus on the fundamentals topline growth margin expansion and cost control.
This took place amid complex circumstances as the communities, we serve move through various lockdowns and reopening and the country felt the impact of repeated supply chain disruptions, including several remarkable weather events.
Our ability to respond to those extraordinary conditions was enabled by scaling up several of our strategic growth areas. Our ecommerce platform stretch beyond the $3 billion Mark as we kept our customers fed and well we did so while providing uniquely personalized offers to PC optimum members. Our loyalty program has become an increasingly effect.
<unk> merchandising tool for driving sales.
The most recent illustration thats been our point stays event, which provided Canadians with exceptional value across our supermarkets drugstores digital businesses and partners such as that so gas stations are remarkably powerful campaign drove results for the entire enterprise.
This is a testament to the level of engagement in the program, which was recognized by Ipsos as one of the country's top 10, most influential brands the highest ranked Canadian brand on the list.
It's just one data point, which reaffirms the digitally enabled personalized connections to customers have significant runway as we look ahead.
At the same time as Richard mentioned the growth of Pharmacy services was an important part of how we serve patients and reaffirmed our conviction that the convenient connected and local delivery of care will be an increasingly important part of how we will grow.
That relentless focus on our core business paired with scaling up our strategic avenues for growth builds upon an enduring commitment to the communities that we serve.
That commitment also exists in our efforts to advance both social equity and sustainability.
In that spirit, we're proud to announce <unk> commitment to achieve net zero carbon emissions by 2040.
Having already surpassed our pledge to reduce our corporate footprint by 30% in 2030, we are squarely focused on this next challenge.
You will see us deploy electric trucks, better lighting, more efficient heating and cooling and other new and innovative measures.
The need for action is as clear as our ambition and reflects the long term view our company has held across generations.
We've remained focused on serving our customers every day through the highs and lows of the pandemic and look forward to building a better more resilient country and business together.
As we do so our purpose, helping Canadians live life well is the core of how we will create enduring value for shareholders.
I will now open the call for questions.
Thank you Taylor.
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One moment. Please for your first question.
And your first question does come from Michael Van <unk> from TD Securities. Please go ahead.
Thank you.
I just wanted to start off by asking you about it.
But the inflation rates that we're seeing right now.
Heading.
Yeah, Hi is released and that's it.
The last decade, or so and how are you seeing customers react or are you going to adjust to.
These higher prices.
Both I guess within your banners.
Categories.
Yes, Thanks, Michael.
No question at 5%.
In the quarter inflation is significant.
And there continues to be significant pressure.
As we as we look forward.
Especially over the next couple of months.
And this is a result of as Richard said, a very real cost pressure all the way through the value chain. So when it comes to the customer.
At the moment, we're not seeing a ceiling.
You know that's being reached by consumers in terms of.
Prices at retail however, they are becoming increasingly price sensitive theres no question about that and we see it most notably in the accelerating performance of our discount business.
That's been particularly notable in in the last couple of months.
And then of course, the strength of our control brand you probably would've seen.
Specialty in January a strong emphasis around our no named control brand in our stores and we've seen very significant uptake on that front.
And then probably less.
Significant but still notable has been the increase in engagement in our loyalty program where of course, there is substantial value available to customers who engage in the program proactively.
In terms of categories, what categories are customers trading in and out of nothing really notable amidst the usual things people will trade down from.
From beef into pork or chicken.
But but.
That stuff, we would expect to continue and not yet at any form of extreme level, how does that kind of give you a flavor of it yes.
Yes. It does thank you and.
And I guess that inflation being higher in the first part of the year as part of the reason why you have.
Earnings growing.
In your guidance more than the first half.
Yes, Michael but also make our inflation started in the second half of last year. So we're going to be cycling that towards the second half. So so when we cycle that with the performance. We also had in the second half.
We think it's not going to be as high as it is going to be in our first half.
Okay and then the other question I had was.
With respect to Robert Sorry, your spot focus because he has been with you now for I think it's about a year I'm Austin.
Roughly in and I know he's been very extremely active I'm wondering after all the work he's done so far.
What does he narrowed is focused on to try and improve operations over the next year or two.
Yeah. So.
I think the general theme and we use the term retail excellence.
As what Robert has been focused on and what he will continue to focus on it and that is it's the fundamentals.
Our relentless focus and attention to detail you know on retail operations and merchandising.
And Robert worked very very closely with the divisional presidents and their merchandising and operations teams and so simply.
Simply put I think were tighter.
And and paying much closer attention.
So some of that stuff than perhaps we have in the past and I hate to use that.
Well worn Maxim that retail is detail, but that is the.
The case and that's what Robert brings and he will continue to bring.
Looking forward there are a few places that we've talked about before that he is particularly focused on when it comes to driving incremental performance network optimization.
One of them.
We're spending more money on new stores and renovations in 2022 than we have in the last couple of years.
<unk> really strong indications.
Of the contribution that those are going to make.
Also very focused on making sure that we have the best cost.
And our relationships with our vendors while that continues to be collaborative. It is another important area of focus for him.
And is there anything on the private label that you could point out.
The penetration of profitability that you might be working on.
Well always focused on looking for avenues to improve customer engagement and to improve profitability.
Yes.
Do we see disproportionate amount of opportunity in control brand. If that's the question I don't think so not yet but it is certainly an area that Robert spending considerable time, yes, Michael with this inflation that we're seeing like I think.
We've been trying to showcase our private brand more in our stores, so that our consumers see the value and we're seeing some traction with that.
Okay. Thank you very much.
Thank you.
Your next question comes from Irene <unk> from RBC. Please go ahead.
Thanks, and good morning, just following up on the inflation discussion.
We just got off to make leaf call and they were talking about a.
Price increases that are coming through late March early April can you talk about what you're expecting.
And I guess, the magnitude of the inflation that that year being faced with and the kinds of discussions youre, having with suppliers at this point.
And then I guess you saw in our press release Irene that.
Nation, we experienced in the quarter was around 5% and so that's what we're experiencing now.
The number and volume of increase is definitely higher than we've seen historically and right now our job is to sift through it.
As efficiently as we can.
I understand.
And have you seen.
Sure if you mentioned the trend from sorry.
The growth in discounts on are you see are you seeing it accelerate and same thing with the trade down to private I'm not afraid that the move to private label and are you also seeing the other typical behaviors frozen versus fresh and that kind of thing.
So so Irene it's <unk>.
It's an interesting dynamic here because we are now kind of in the 5%.
Inflationary range. This is usually the place where you start to see meaningful.
Behavior change, but we're also coming in and out of Covid.
Of course, there was a shift away from discount as you know that was a result of the Covid dynamic.
And.
We're not seeing yet the kinds of.
Behavior changes that would be typical of this type of inflation rate.
So it's hard to pin down.
It's not as extreme as you might expect it to be but it's there and it's manifesting itself most explicitly in the growth of discount and as I said that has been particularly notable in the last kind of couple of months six weeks or so where we've really seen not that Serge.
We also talked about the price sensitivity algorithms that we use with DNA those are getting more potent which is another indication that price sensitivity is more important to customers today than it was this time last year, but the noise here is that is that COVID-19 shift.
Versus the inflationary pressure.
Both of them are.
Shaping the consumer behavior I would say.
That's very helpful. Thank you and if I could just switch gears for a moment to shoppers that shows a big chunk I think it's about 40% of your EBIT.
Where do you think shoppers is today in terms of Rx, putting aside the pharmacy services.
Rx volumes and tariff.
Pre COVID-19 levels of finest store demand, particularly in those high margin categories like cosmetics.
Yes, so again, because we've been in and out of Lockdowns.
Quite.
No.
Quite a volatile way over the last two years.
It's hard to tell.
To say explicitly but.
When we are out of lockdown, the shoppers drug Mart.
Front store categories, Serge and when we go back into Lockdown.
Front store categories come off quite considerably.
And we were surging.
In in the fourth quarter, and we're seeing some headwinds at the <unk>.
At the end of the quarter and through this latest phase of the lockdown.
And yet again in some of the provinces, where we see things opening up again, we see the shoppers drug Mart front shop business come right back the other place that we see a little bit of volatility, it's maybe more sustained.
Performance is around.
Our base script volume.
Which is doctors, perhaps not writing the same number of scripts that they would typically.
Doctors are not yet back working as GPS at their full capacity.
So we expect that also to lineup pretty directly or to correlate pretty directly to increased openings.
That's great. Thank you.
Thank you and your next question comes from Mark Petrie from CIBC. Please go ahead.
Okay.
Yes. Good morning, just wanted to ask mostly on the retail gross margin performance.
Clearly all the work on retail excellence is paying off but could you just.
Give a sense of the magnitude of the biggest contributors be it procurement or private label mix and are you able to quantify or at least roughly the impact of pharmacy services in Q4.
Yes, so if I start on the food side essentially the performance in gross margin on the food side is just driven by better efficient merchandising and promotion activities I think that that would be sort of the bulk of our.
The benefit that we've seen so far.
On on Rx services, the gross margin is higher than the average shoppers business, but the SG&A aspect of it is also higher that shoppers. This journey right. So net net it's accretive to shoppers this business, but like it creates a bit of volatility in both.
And both of those are both of those figures.
Okay helpful.
And how does loblaw media fit into the retail margin performance today.
And how important is that to your margin outlook for 2022.
So the media business is still quite small but growing rapidly.
It's a business, where we feel that.
He is going to have significant strategic advantage in financial advantage going forward to our business, it's definitely going to help in 'twenty two but it's more after that that we're probably going to see the significance of that business.
And that business from a margin and sales perspective, it's at a significant premium to the to our retail business so to be able to replicate the same dollar of margins in that business that would require like significant dollars on grocery or drug sales.
Yeah understood, Okay and in that.
That sort of dovetails into my my last question, which is and the outlook and in your commentary you sort of highlighted the opportunity for margin expansion. This year I think the longer term framework typically is more about stable margins.
So I understand retail excellence work is the driver here and obviously loblaw media as well, but do you think theres an opportunity to see margin expansion over the medium term so call. It three years.
Its tough its tough to predict what's going to happen to the future. What I can tell you our focus is and thats been stability of gross margin. If we can maintain our gross margin stable. If we can manage our SG&A rate well, we should be able to deliver decent performance to the business here in Europe and that is our day.
Early focus not forgetting sales, we need we need the sales performance to align with that but that's sort of the metrics, where we're focused on and I would remiss to not include market share like to me. Those are the four things we're focused on and that's what we focus on a daily basis.
Okay I understood. Thank you for the comments all of us.
Thank you <unk>.
Next question comes from.
Sure.
Bank. Please go ahead.
Hi, Thanks for taking my questions.
Loblaw.
Continuing to perform.
All of these significant challenges that you're seeing coming out shoes from us from a variety of angles wondering how management feels about the in stock positions and store and is that something thats getting tougher through time or has it stabilized now and if it hasnt stabilized should.
Should we anticipate that in the near term.
Yes, we're feeling a lot better about our in stock position today than we were say.
Say, three or four weeks ago, where it was particularly difficult.
And that's a combination of both the structural challenges related to the supply chain.
The ability for for us to destock product to receive product at the ports.
And then transport that product across the country that has been challenged and disrupted over the last number.
A month and then that was compounded by.
Some particular weather events.
Affected our distribution channels.
I don't know if a disproportionate way, but certainly a way that resulted in an unsatisfactory conditions in stores. So we were in much better shape now.
And see ourselves staying in that shape moving forward, but it isn't like it was pre COVID-19 and those supply chain challenges are still working there and so we would expect.
To be slightly behind our best standard.
For for a little while longer.
Okay.
A different flavor of a question that's already been asked but looking looking forward through 2022, and that's gonna highlighted a variety of initiatives.
To deliver continued growth comment.
Comments on strategic buying lubricant customer loyalty and promo effectiveness.
Solid results throughout 2021 management is looking for another solid results through 2022. So I was hoping in those buckets. If you can help us understand which ones are the major buckets driving that driving that growth.
I think it's all of the buckets like it's it's.
As a whole like.
Retail is detail as Galen mentioned and so so we need to perform on all of these metrics and it's our ability to perform well on all of those that will allow us to continue to deliver consistent performance, we're very focused on consistency.
It's hard to do but that's our area of focus and that's what we want to be continuing to deliver going forward.
And Vishal maybe.
If.
If I was to pick one.
Where we where we are feeling particularly optimistic.
We're not even feeling.
It.
It is on the use of our data.
To enhance the decision, making really across the board and I know, we've been talking about that and its potential for some time.
But we are really beginning to see that impact showing up in our sales results each week and the way to think about that as we built a set of tools. Those tools were suboptimal during COVID-19 because there was less price sensitivity. There is now more price sensitivity those tools are.
As a result, much more effective and so and now we are scaling up the use of those tools and in my remarks, I touched on the PC optimum points day event as a as a big picture example of that.
Just to kind of repeat the concept. That's a single event that's organized at an enterprise level designed to drive sales at the item level like a bag of cookies.
Also at the category level, let's say, perhaps across an entire fresh department.
And at the program level, which would be call it new businesses.
Or or adjacent businesses.
It's e-commerce , whether it's financial services.
Or even something like Joe fresh.
And we just came off our most recent and probably best executed.
Went from a total enterprise integration point of view and.
And it drove meaningful topline results.
Very efficient.
Manner from an investment perspective, so that's happening at the micro level and day to day decisions in the merchandising desks and we're learning how to mobilize it at the macro level to move the needle.
Particular weeks and months quite significantly.
Are you able to measure that.
Benefit delivered from those programs on gross margin versus base case, yes.
Yes.
And maybe just one more question.
Obviously, a lot of media discussion related to some of your discussions.
I'll give you a chatter relate to some of your discussions with vendors.
And.
Difficult conversations regarding pricing.
I Wonder if management can provide context on if some of these discussions youre having with vendors.
It's part of a broader way to think about the space allocated to certain sectors and the positioning of our private label, whereas that said we are discussing more of the isolated events with one on one discussions with Sears.
Yes.
Okay. So we don't want to comment on the specific discussions about our relationship with our vendors.
Our partners and we really value our relationship with all of them, but it has to how we manage the user cost increase request coming from them. We have a team of experts in what they do is the deconstruct the cost of each SKU into its components such as the raw ingredient the packaging the labor and transport and look at what's been happening.
<unk> to the cost of all of these components and using their analysis, where now we're down well position to assess the request that are sent our way also we deal with a large number of vendors and this also provides us with a very strong perspective on whats happening on cost increase so that's that's how we're dealing with with this.
At the moment.
Thank you.
Yes.
Thank you.
And your next question comes from Ken Mackay from ETP capital markets. Please go ahead.
Thank you and good morning, guys.
And then I heard your comments earlier in the call with respect to beauty and sort of the ebbs and flows a follow up question. So that would be how do you think or do you think that how consumers shop for beauty and how consumers sort of what's sort of the preferences will evolve and beauty on the back of this pandemic as any in fact, you could share there.
Any changes you've seen in the consumer's approach to beauty beauty spend and the read through that could create for your for your beauty business.
Yes so.
The consumer behavior pattern when it comes to shopping pretty much every category is is evolving.
And there is no doubt that there's substantially more beauty sales for example online.
We just recently introduced a digital tool that allows you to see online what a particular color cosmetic might look like on your.
Your face without having to try it on in the store, but I would describe these as evolutionary as opposed to transformational.
And certainly in or in the shorter term call. It the next six to 12 months.
The much bigger forces around consumer behavior related very much to COVID-19 and the end of Covid or Lockdowns and the end of Lockdowns and what I was the point I was trying to make earlier is that it's almost like a light switch.
When the.
The market opens up customers come back to the stores and they purchase beauty items very much.
The same way and up and up and the impact on the on the sales volume is meaningful.
Thanks for that and then just with respect to the supply position you commented a lot happier with where you were but not back to where you'd like to be is is the sort of popular likely could be fairly lumpy, particularly in the context of the blockade that theyre all going to be some puts and takes between here and there with respect to your in stock position.
Certainly channel check wise.
It appears that.
But that could also just be a bit of a false read from a pretty limited sample set any further thoughts there.
Well, it's a it's a it's been a volatile year in that respect so I want to be careful not to.
Predict the future with too much.
Too much confidence, but as we look forward, we see most of that volatility now behind us.
And we're kind of back to more consistent.
Structural constraints.
As opposed to those one off disruptions.
Would result in not seeing big gaps or holes on the shelf in a particular week.
As we have seen in the last in the last month or two.
But the pressures are still real.
<unk> four <unk>.
Suppliers to source raw materials remains that constrained there are challenges around the on the labor front in terms of having people able to work in manufacturing facilities and we touched on this I think in Q3 or maybe even in Q2, one of the consequences of that is that vendors will focus.
Their production capacity on their highest volume skus that results in the smaller skus or the alternative flavors.
Not being as available and those are the places where you would expect as a consumer to see perhaps less assortment.
From a particular brand then you might be used to.
We work.
Very confidently and diligently to source other vendors.
And bring them into the stores to make sure that our customers have the breadth of assortment that they need but that's that's the way.
We're managing the business right now with the caveat that there might still be future shocks, but but.
Those disruptions from the last few months are behind us.
Yeah, and if I remind you that if I might add from a financial perspective.
I've not heard us talk about supply chain being a factor affecting our costs, there's been a slight impact, but it's been it's been immaterial.
Thank you I just had a quick final one for me and probably a long shot.
Additional color you could provide on that the composition of that $3 1 billion I mean, we know that typically what we do.
You know what the weighting was pre COVID-19 in terms of food grade versus drug retail, but any further in talking about what.
No we won't break it down for you I mean, I'll provide a little bit of of color on what's happening.
In E Commerce, So I mean first and foremost we're quite comfortable with where that performance sits.
And I think as Richard mentioned in his remarks, we are Q4 was lapping up.
Peak e-commerce sales, particularly on the food and grocery side.
And so we're seeing the consequence of lapping that we were fully locked down in the fourth quarter last year 2020, and we were almost fully open in 2021. So that's the largest driver of the discrepancy.
In the performance, but one thing I would add just for color we continue to see.
Robust strength on the delivery side.
Of our business and if you remember we launched with enthusiasm our direct <unk> home delivery channel in the GTA.
And in Montreal in a couple of other cities over the last few months.
I'm very pleased with the traction and performance that we're seeing from that value proposition.
Thank you and best of luck and I'll get back in queue.
Okay.
Thank you.
Your next question comes from Patricia Baker from Scotiabank.
Go ahead.
Yes, good morning, everyone. Thank you.
What's your given the outlook you indicated that the capex in F. 'twenty two would be $1 4 billion can you talk a little bit about where where you're spending and what projects you're going to be executing against them.
2020.
Yeah, essentially it fits real estate, so youre going to see us spend money in our store network, that's essentially <unk>.
Of the increase.
So renovating stores or.
Renovating stores.
Building new stores like the whole the whole thing.
Okay are you willing at this point to tell us how many new stores you expect to build in 2022.
Too early even Patricia sorry.
Okay Fair enough and then just on your very strong.
And quite nice to see gross margin performance.
Retail up a 150 basis points in the quarter.
And if we look back to the performance on the gross margin in the third quarter. It would be fair to say that it was more balanced in Q4 relative to Q3.
We expect both food retail and shoppers contribute it.
It's more or less the same Patricia like we had strong contribution in both Q3 and Q4 from both businesses.
Okay, and then you.
Emphasized that one of the things that you're very much focused on market share. So what can you tell us about.
2021 in Q4 with respect to market share.
Very happy with our progress.
And.
I think I've touched on this and you can imply.
Market share impact so the market division.
Especially since the close of Q4 is facing increasing headwinds.
As more and more customers start to shift their behavior towards discount, which is benefiting disproportionately we feel we're very happy with the way market is performing relative to its peers and that continues to be the case as we look forward.
<unk>.
So really encouraged especially over the last six or eight weeks.
Round, the accelerating performance of our discount business.
And so that's the context, maybe will help you think about market share yes.
No absolutely. Thank you for that game.
Thank you and your next question comes from Peter Sklar from BMO Capital markets. Please go ahead.
Thank you Richard question for you so.
On the guidance looks like your guidance is the first half of 'twenty, two is going to be stronger than the second half.
You said because we're at these high levels of inflation and you really don't in the first half Youre comping more moderate levels of inflation, but then by the second half Youre comping against strong levels.
That's basically the argument but.
It's going to be how this whole installation.
Argument wraps into it because youre getting more price through on the top line, but also like your.
Facing cost pressures like I can't recall, when you've ever seen cost pressures, you're facing like just not only cost of goods sales but.
Everything.
Distribution labor, it's everything so thanks to me how you are wrapping in this inflation argument then how that leads to a stronger first half than the second half.
So far we've been successful in.
And passing through inflation and and so if it stays at the levels. We're here now I think we should be able to continue to do to do it. So so and we have good visibility in our business for the next leg.
At least a few months and so so we definitely feel more confident about the first half compared to the second half.
And then after that it's stuff like that we're coming out of the pandemic, we saw a glimpse of being out last year, but like who knows it how is it going to be this year. So it becomes a little bit more fuzzy for the second half we do know, though that we're going to be cycling. This high inflation starting starting in July so that so thats that.
That's how we built we built our budget and determined our outlook for 2022.
Right and.
How would you how would you characterize.
Your strategy in loblaw as conventional and discount banners in terms of price leadership like do you feel you'll provide price leadership or.
Do you feel that other banners provide price leadership and you'd like to follow along how would you characterize your strategy in terms of where you want to be in terms of price leadership as we go through this really tough inflationary periods.
Well I think big picture, we want to be the best we want to be the best market Division store and we want to be the best.
Large box superstore, and we want to be the best.
Our discount business.
If youre in the hard discount space, you need to have very competitive pricing.
And we are as always committed to that.
It's not just about price, though it's the quality of your fresh proposition is the consistency of your store experience. It's your control brand program. It's the sophistication of your merchandising efforts.
Both from a promotional perspective, and an assortment point of view and so I'd say the way to think about this is.
We are watching our price position very very carefully we do it every week.
The merchandising teams are seeing opportunities.
Two.
More credit for less investment.
Then we were seeing last year end and that is what we're trying to.
Our optimized for right now and that's what you've seen the teams do over the last nine months and that's driven a big part of the margin expansion and it's precisely those same things that give us the confidence that we can sustain that.
At least through the first half of the year.
When would you say your merchandising teams are seeing this opportunities.
What exactly do you mean that that's where they're using data and understanding the demand elasticity better or.
They're just seeing gaps from your competitors aren't playing what do you mean by that.
I mean that.
So it's both it's a little bit.
You can go right down into the detail, which we which we shouldnt do today.
Way to think about it is there are opportunities that every element of our go to market strategy and the teams have been going through category by category promotional strategy by promotional strategy.
And that's what is contributing to the positive results okay.
Alright go ahead Richard.
We feel we have a good grip on our gross margin we feel we have a good grip on our sales performance and we feel we have a good grip on SG&A and so so that's that's how you run successfully a business like ours. So that's that's the feeling in the business right now.
And so that's why we have that confidence for <unk> for the first half.
Okay.
Okay, just changing topics and my last question is on E Commerce.
You'll remember in.
Kind of 2020, when e-commerce exploded and you're just throwing labor at the issue and you disclosed you'd lost $200 million.
Can you talk a little bit about.
Your profitability for E Commerce in 2021 can you.
Give us some indication of where that $200 million loss went to and what the outlook is for 2022.
So that's a tough one okay, because it's actually quite volatile Peter Blake.
Like when we are in Lockdowns and penetration rates shoots up puts more volume in the system and profitability shoots up so so.
That was actually an interesting data point from our perspective, because we see that as we push more volume into the system.
We definitely get improvements in efficiency, which translates into into profitability. So so it's helping us to find ways to become more efficient so but to be able to predict exactly where it's going to be it's very difficult because tell me where penetration is going to be three weeks from now and I'll be able to give you a.
So the business is not yet stabilized we feel we continue.
To progress in that business, it's probably going to be more like 23, where hopefully we're back to normal and we have a better sense of where that business will lap.
Yes.
And so what's what's the read through that that.
Richard you would hope the business could breakeven.
As you would like to measure it financially in 2023 is that kind of where you are.
I think it's too early to say that I mean, it depends entirely on the growth rate of penetration as Richard said post the.
Post this kind of Covid period.
And.
As long as there is growth.
We'll invest.
Maintain the appropriate level of market share and that has an impact.
On the overall profitability, but the message.
You should take away from Richard's comments I think is that we have seen.
A satisfactory economic outcome.
At certain levels of volume when we've been able to get the.
Lineups of costs with the sales in an efficient way and so we will continue to work to optimize.
As the business normalizes.
Okay I got that thank you for your comments.
Thank you.
And your last question comes from Chris Li from Deutsche Bank. Please go ahead.
Hey, Good morning, maybe just a quick question on digital and digital retail again can you maybe just elaborate a little bit on some of the specific opportunities that you see to optimize operational efficiencies as it relates to delivery and the cost of fulfillment. Thank you.
Well, so I'm not going to go through the list of initiatives.
So.
Start with just better picking algorithms.
As you move people through the store.
There is always opportunity to improve that a better more efficient.
<unk> from.
<unk>.
The order staging out to People's cars.
And then we've actually just opened.
Our first full assortment micro fulfillment center.
So we've talked before about the importance of.
Improving pick productivity.
By centralizing.
Our assortment in these micro fulfillment centers and so youll see us continue to make investments like that.
To improve the economics.
Okay. That's helpful and given I think on the last earnings call you mentioned that as part of the retail excellence initiatives. You guys have identified has raised prices on certain products.
Customers when we'll be keeping you the credit for just wondering where are you at on that journey, because it's largely been completed.
Sorry, Chris could you just repeat that.
Asking about <unk>.
<unk> that.
Price.
Oh, sorry, yes, I think on the last call you mentioned that as part of your retail excellence you guys were raising prices on certain products.
Yes.
Customers will not really giving you the credit for when you had the promotions.
So just wondering can you give me half finishes during those type of a pricing analysis.
So again I think to be clear.
Optimizing our.
Our R R value portfolio within a category.
And making sure that we are making investments in the products that customers care about most.
And that really goes into the bucket that we talked about earlier, which is the detailed approach.
Two merchandising strategies promotional strategies increasingly using the data available to us to make smarter.
Smarter decisions.
It's an ongoing thing as opposed to.
We're ever going to finish.
Let's say, we finish all the categories, which we haven't done yet, but if we finish all the category as soon as we're done we're going to start from.
One of the line again and do all the categories again so.
Think about it not as a as an initiative with a finite delivery date, but just an ongoing way of doing business that make sure we're optimizing our category structures.
All the time.
Okay. That's helpful. Maybe just a quick one on the PC optimum program and it's already the largest loyalty program in Canada, I think with the 80 million active members I guess my question is has that number grown.
Is there a room for their membership base to grow or is there real opportunity really just trying to enjoy increased engagement with your existing members.
The biggest opportunity by far is increasing the level of engagement.
Within that 18 million person list when we are constantly bringing new people into the program we have attrition but.
It's taking our active our active base, but are highly engaged base and increasing that week over week month over month in the last six months have been pretty encouraging on that front and one thing I didn't talk about when I mentioned, the PC points days event, although it wasn't intended.
To do this it had a secondary consequence, which was driving up overall engagements. So a number of people downloading the app number of people checking their offers in any given week. So it had a pretty synergistic effect on that front as well.
Perfect and maybe just a last quick one for Richard.
Corporate expense run rate of $8 million in the quarter is that a good run rate to pencil in for Phil.
For the year, yes.
Yes for the moment, yes, and we'll update you every quarter on that one Chris.
Perfect. Okay, Thanks, and best of luck.
Thank you.
Thank you.
No further questions at this time. Please proceed.
Great. Thanks, very much for your time everybody.
As a follow up question is can you show your growth in your mind.
Circle made for us on your calendar.
Using our Q1 results.
Yes.
Yes.
Ladies and gentlemen, this concludes your conference call for today, we thank you very much for participating please disconnect your line.