Q2 2022 Loblaw Companies Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the Loblaw companies Limited second quarter 2022 results conference call.
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This call is being recorded Wednesday July 27th 2022.
Like to turn the conference over to Roy Mcdonald. Please go ahead Sir.
Thank you very much Michelle and good morning, everybody.
Welcome to the Loblaw companies limited second quarter 2022 results conference call.
As always I'm joined here this morning by Galen Weston, our chairman and President and by Richard Ukraine, Our Chief Financial Officer.
And before we begin the call I want to remind you that today's discussion will include forward looking statements, which may include but are not limited to statements with respect to lob less anticipated future results.
And the impacts of the COVID-19 pandemic.
These statements are based on assumptions and reflect management's current expectations as such they are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations.
These results and uncertainties are discussed in the company's materials filed with the Canadian Securities regulators.
So any forward looking statements speak only.
As of the date, they're made and the company disclaims any intention or obligation to update or revise any forward looking statement, 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 regulator 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.
I'm pleased to report that our performance in the second quarter continued to build on our pop is a positive momentum.
Our business mix as is well positioned for the current environment and our focus on retail excellence is delivering steady and consistent operational and financial performance.
During the quarter, we delivered solid top and bottom line performance, we continued to focus on delivering value to consumers and carefully managing our expenses all part of retail excellence.
On a consolidated basis revenue grew by two 9% adjusted EBITDA increased by nine 3% and adjusted earnings per share grew by 25, 2% to $1 69 a share.
Our GAAP earnings reflect a charge of $111 million associated with a recent tax court ruling relating to the deductibility of certain royalty related expenses over the last 13 years, we are planning to appeal the ruling.
In drug retail absolute sales increased 7%.
Same store sales were strong up five 6% lapping an increase of nine 6% last year.
Front store same store sales grew by five 2%, we continue to see an acceleration in sales growth in our higher margin categories led by OTC and cosmetics sales in beauty and cosmetics are essentially back to pre pandemic levels.
Pharmacy same store sales grew six 1%.
Although we are seeing an acceleration in both acute and chronic prescription volumes, we have not yet caught up to normal levels. Once again growth in our pharmacy services business was strong with all major categories showing double digit growth.
Pharmacy services now include our Lifelock business, which closed on may 10th contributing $40 million in sales.
And food retail absolute sales increased one 2% and same store sales grew 9% performance in our discount banners continued to strengthen reflecting an ongoing shift in favor of discount.
As part of our store network optimization initiative, we now have five stores that have been converted from market to discount and have downsides. One market store. We are pleased to report that all such projects are performing ahead of plan on sales and therefore are contributing to earnings.
Our market banners remained strong and continued to perform well.
Right in store offers enhanced by optimized promotion using our data have led to positive traffic trends and solid sales.
Online sales in the quarter decreased by 17, 5%. However, our online business continued to operate at penetration levels well above pre COVID-19 rates, we are seeing consistent stable operational performance and pick up in growth in delivery.
We are delighted with our launch of PC Express rapid delivery through a collaboration with door Dash. The service was launched will launch in Q3 and will not represent a headwind to earnings.
Retail gross margin in Q2 was 31, 4% up 50 basis points compared to last year, driven by our drug retail business higher.
Your margin front store categories, particularly color cosmetics grew substantially as customers return to offices in social settings.
Margins also benefited from growth in pharmacy services with Covid related services remaining strong.
Gross margin performance in food retail was stable our unique data, that's our merchant set more strategic pricing and promotional levels.
With grocery inflation as it is this is an important balancing act.
As our results to date and for the last quarter show our businesses are doing well and remain profitable. They also show that this improved performance as a resulted from the return of customers to our higher margin beauty and drug businesses and the fact that increased pandemic costs are slowly going away.
Retail SG&A as a percentage of sales was 19, 9% an improvement of 30 basis points compared to last year, we lap higher COVID-19 costs in the prior year and continued to benefit from sales leverage.
Two drug sales mix and operating efficiencies. This was partially offset by higher labor costs across the network.
Adjusted retail EBITDA increased by $129 million or nine 8% in the quarter, yielding a margin of 11, 4%.
We were pleased with PC financials performance in the quarter revenue was up $25 million driven by higher interchange in interest income with a broad based increase in customer spending contribution to adjusted EBITDA from the bank was flat as we lapped last year's gain related to reversal and expected credit losses reserves and saw higher points cost.
Due to higher PC points Prudential.
On a consolidated basis adjusted EBITDA margin was 11, 7% in the quarter up 70 basis points compared to last year.
In Q2, we repurchased $607 million worth of common shares representing five 4 million shares.
Brings year to date purchases to 700 $755 million.
Looking ahead, the macro factors continue to make forecasting challenging.
We are seeing signs that inflation as our will soon peak as such we expect inflation to moderate in the second half of the year as we begin to lap higher levels from last year.
<unk> price or coming off their high some freight costs are coming down and supply chain issues are normalizing other than fuel costs, which remained high but down from their peaks of last March finally, central banks are taking aggressive actions to tame inflation.
Today, we announced an increase in our full year outlook based on our year to date operating and financial performance and momentum exiting the second quarter. We now expect full year adjusted earnings per share growth in the mid to high teens.
We have just cycled the first quarter of our 2021 strategic reset.
Delivering growth of 25% and EPS this quarter on top of 88% in the same quarter last year is beginning to demonstrate that our plan is working.
Our focus on retail excellence is delivering strong and consistent financial results, while the environment remains volatile loblaw is well positioned for what is expected going forward.
Now I'll turn the call over to Galen.
Richard and good morning, I am pleased with our performance in the quarter. During this period of global financial uncertainty prolonged pandemic caution and global inflation.
Richard noted our retail revenue performance was strong and consistent with earnings growth linked principally to our drugstore business shoppers drug Mart had an excellent quarter generating high margin sales in beauty and cough and cold, while expanding pharmacy services credit for Canadian patients. These services and the pharmacist, who deliver them are becoming increasingly.
Part of our country's primary care delivery network by providing expanded access to basic medical assistance at low cost.
As a matter of interest as part of this evolution of our health care delivery strategy last month, we opened Canada's first walk in clinic stopped exclusively by pharmacists and in a neighborhood with a critical physician shortage. This has been met with an enthusiastic local response.
Our food business also performed well in the quarter with good sales and stable gross margins are conventional market stores are competing well consistently outperforming peers. This is in part driven by a strong relative price position and outstanding performance of several enhanced merchandising programs. The consumer shift to discount also continues and is.
Actually benefiting our hard discount formats, where we see new customers coming through the doors every day.
As you know inflation remains a significant external force shaping business performance. However, as Richard mentioned, we are seeing some signs of stabilization commodity costs are substantially off their highs and transport and freight rates are improving.
Having said that supplier costs are still high putting sustained pressure on retail prices.
<unk> to work hard to reduce their effect for our customers. This includes operating two of the lowest priced formats in the country with no frills and maxi investing in our famous low priced private label brand no name the second largest consumer brand in the country and seeing historic growth not to mention the over $1 billion of savings our customers will.
This year through our PC optimum program.
In fact, we just completed a piece of work, which showed that customers who engage in the full benefits of the PC optimum program are consistently saving as much as 10% on their grocery bill.
Touching on one more retail trend digital sales continued their retreat off pandemic highs and we expect to return to ecommerce growth. Once we fully cycled the last of that Covid demand and continue to improve and expand our offer.
Delivery is growing as part of our channel mix and in Q2, we announced our partnership with door dash to serve as our primary last mile delivery solution. This relationship includes an exclusive presence on their marketplace and the introduction of a 30 minute rapid delivery service, we remain bullish on what's to come.
<unk> purpose is to help Canadians live life, well as the country's largest private employer, we endeavor to do that every day through innovative products at great prices convenient access to high quality health care services, the country's best credit card and high quality apparel.
But it is often the smaller activities of our teams that can make the biggest difference and I wanted to close my remarks with a particular example that stood out.
At the start of the invasion of the Ukraine, a small group of colleagues stepped forward interested in how we can contribute to the humanitarian response.
As a company that Marshall has nearly $100 million a year to give back to local communities. This group of colleagues started with the question how can we better support those who are building a new life in Canada. They observed that the diversity of our business put us in a uniquely compelling position to do so.
In the months since our team has partnered with government Ngos and our customers contributing in raising millions in support to provide the building blocks for families who have lost likes most basic ingredients, including jobs food wellness clothing and financial products, a near perfect manifests.
<unk> of our purpose.
At Loblaw, we continue to execute our strategy in the midst of a challenging period, we remain confident in our short term outlook and our longer term opportunities. Thank you I will now open the call for questions.
Thank you Galen Michel could I ask you to remind the participants the protocol for asking a question.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
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Speakerphone, please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Mark Petrie.
CIBC. Please go ahead.
Yes, good morning.
Wanted to ask about the retail gross margin and I know generally you've been talking about sort of stable trading our stable gross margin, but mix is clearly a pretty favorable tailwind and you also have media as another tailwind as it becomes more material in the coming year. So can you give us a sense of the magnitude of the mixed impact.
Sort of your implied medium term outlook across channel and is there an overall number that kind of makes sense to shoot for just understanding that mix piece I mean, 32% would seem like a good target just sort of wondering how we should sort of think about a longer term kind of margin outlook.
Hey, good morning, Mark.
We don't have a specific target as to where where we want the gross margin to go we are just trying to manage our business. The best way we can.
But we do feel good about our gross margin position now and then going forward.
Okay, and perhaps you could just talk a little bit about some of the bigger picture opportunities for that margin.
I mean.
Media is one that's come up.
And I can't imagine youre going to give specific disclosure on that but directionally.
Anything would be helpful. And then also.
The puts and takes in the shoppers business because clearly the recovery in the front store is helpful. But the pharmacy services is presumably going to be somewhat of a headwind in the second half of the year. Just so just sort of curious how youre thinking about the margin opportunity at shoppers.
The key driver of gross margin going forward that will continue to be retail excellence and.
And running our retail business as best we can see talking about shopper, specifically like obviously mixes help we're going to see growth taper a bit because if you look at services. They were starting to grow at this time last year and accelerated in Q3 and Q4, so we're not going to see the same.
This year, but we do feel very good about our services business for the overall of the year and so therefore like like we should not see significant increase.
The increase in margin as we've seen so far that it's going to start to slow down.
Okay, and if I could just add one more and it was another good quarter in terms of Opex management, particularly in the cost of inflation.
But given the nature of your labor contracts and the longer duration of those contracts. How do you think about the outlook for SG&A over the medium term I mean should we be expecting above average inflation to be stickier in opex and potentially last longer than in other parts of your operations.
Yes, I think I think the organization has done a good job of managing SG&A, so far but it's important to point out that last year. At this time, we were still in lockdown. So a big improvement in SG&A. This quarter has to do with just just lapping those costs. So we're going to come into a more normal environment that going going forward, but we do feel good.
Our ability to manage SG&A going forward.
Okay. Thanks for the comments I'll pass the line all the Butler.
Thank you. The next question comes from.
Irene Mattel RBC capital markets. Please go ahead.
Thanks, and good morning, everyone.
I'd like to spend just a few minutes talking about the same store sales number because with inflation at nine 6% I think we were all expecting a slightly stronger same store sales number but of course, the offset yes channel shifts mix shifts. So can you. Please talk about what youre seeing.
How do you view same store sales, what consumer behavior is and how that all comes together.
So good question Irene I think it's important to reflect on what's been happening.
More last year than this year like first of all we're very pleased with our sales trajectory as it's going right now, but if we go back last year. At this time, we were in Q2, we weren't full lockdown and unit counts when.
When that when we were in Lockdown benefited.
When we get into July of next year, that's when essentially all restrictions get lifted so people essentially started to go out significantly and we saw a marked drop in our indoor unit count starting last last summer, which has continued throughout this year so as.
As we move into Q3, we're going to be cycling.
Unit count and you're going to see a marked shift in same store performance, which does not mean anything other than what happened last year, because we don't see.
Change in our sales trajectory going forward.
Does that help.
Yes that helps us so just to make sure that.
Clear, it's not so much that your revenue run rate is changing Q3, it's just been on a year over year basis.
Gross looks better or is that is that the way to think about it that's exactly the way to look at it because like in Q2 like we were essentially was the first quarter that we essentially have no lockdown restrictions at all okay, and we were comparing it to a quarter last year, where we will all stockholders.
So that's why you see like a same store sales figure that is lower as we get to Q3 youre going to start to see.
Sales performance that reflects like people starting to go out so youre going to see a marked increase in cost performance, starting Q3, and we're in Q3 now where we're seeing it so.
What I think the street needs to appreciate.
That's helpful. Richard can you talk or gallon can you talk a little bit about what youre seeing in terms of.
Consumer response to inflation the magnitude of the channel shift how much trade down or are we seeing.
Just branded private label, but also just among categories and anything that you can provide would be very helpful.
Yes Irene.
I know you asked this question every quarter and I think I'd give largely the same answer the trends today are essentially the same as they were in Q1, which is that shift to discount.
<unk> at pace price sensitivity is it's growing promotional intensity is a little bit higher.
We are as I mentioned in my remarks, we're seeing control brand.
Growth across the board, both at President's choice and that no name.
Continuing to accelerate and and then we are seeing.
I would call kind of.
Volatility in how people are trading.
Protein depending on the price.
In any given period, so there's really not much more to say than that those are the those are the are the trends and it might be a little bit more.
Meaningful today than it was in Q1, but but the trends are largely are directionally all identical and then maybe I would add just one more.
Incremental bit of context.
We do through through our financial services business. So I have a pretty good indication of the health of the of our consumer and <unk>.
Payment rates remain.
At historic high levels, which suggests that at.
At least with with a large subset of our customers.
They are still in reasonably good financial shape and so.
That is a call it a buffering effect on.
Inflation.
That's helpful. Thank you and then just one final one sticking with consumer behavior, obviously market.
Walmart checkup the market earlier this week.
Around their commentary anything you can share with us on what Youre seeing in the right hand side with the <unk>.
Sure whether it whether it's <unk> or just the general merchandise more broadly defined.
Yes, I mean, a couple of highlights.
Joe Fresh business was positive in the quarter, although we.
We are starting to see a little bit of softening in that.
As we look forward.
And the right hand side outside of apparel was notably down.
And that was definitely had a had a drag on our on our overall comp sales results, but the key.
In this circumstances.
Is inventory and so the question is how do you feel about inventory and do you have aggressive markdowns that you need to put through to clear that inventory and the answer is we feel good about inventory.
And we don't see any meaningful margin risk associated with <unk>.
Clearing what's left.
That's great. Thank you.
Thank you.
The next question comes from Michael Van.
TD Securities. Please go ahead.
Alright, great. Thank you.
Just going back to irene's questions around trade down and shift with discounted.
Private label penetration, increasing how does those.
Those factors impact your same store sales is it.
When you calculate your inflation comment on your inflation is it on it just.
A unit by unit basis or do you.
Does that inflation taken to consideration that trade down in proteins and the shift of discounts and things like that.
My inflation captures everything Michael.
I think it's it's tough to answer your question, but lake.
Thanks.
Prevalent right toward our business, we're seeing a bit less in private label than in.
Other categories and on the commodity stuff it fluctuates like.
Like it is always done at all with it.
So simply put we use an internal proxy. So we look at CPI and then we look at our version of that basket.
To calculate our internal inflation so in that respect it wouldn't take into account the mix shift, but we also look at.
A series of what I'd call kind of supporting metrics.
Triangulate, the number which are much more inclusive and would capture.
A portion of the of the mixed shift for sure.
Does that help answer the question.
Well, so sorry, I understand and so it's clear the so the inflation is catching the actual unit price changes, but your trade down.
And proteins and private label, that's more being captured I guess within the de facto tonnage number that everybody calculates.
Yes, I mean think about looking at the average article price across the entire enterprise.
What's happening in terms of its change.
It's not specifically weighted for volume.
If you understand what we're saying.
Okay Alright.
Alright.
That's helpful and can you guys give us.
An indication of how much inflation is impacting the French store pharmacy.
Yeah.
Yeah.
Yes, it's about the same I mean, theres not as much inflation in health and beauty, but certainly we see the same inflationary pressures and all the consumable.
<unk> in the front shop of.
Shoppers drug Mart so that's.
A positive contributor for sure.
If <unk> starts five 2% total same store sales growth that you're getting tonnage growth or unit count growth.
What we are because we're seeing substantial growth in key categories.
Is that are all driven by units so think about.
Flu cold medications, we're seeing major unit growth in cosmetics substantial unit growth all things that we're essentially.
No.
Declining categories last year.
Covid Covid COVID-19 brought so much volatility in front of store and pharmacy that it's tough to look at it like we look at it that food, but like these.
You are either coming back and and right now our cough and cold it's like we're in the middle of winter right. So so so this is sort of an unusual.
Dual phenomenon.
Okay, Great and just finally.
Finally on the network optimization I think you had 17 stores originally identified for either.
Banner changes are downsizing and mentioned five at the start of the quarter I can't remember what you might have had in Q1, but also what's left to do this year and based on your.
On your <unk>.
I guess, what you've been seeing.
The results.
Where do you see that number being in future years or even.
You have any plans to expand that shorter term.
Yes, Mike So it's probably like.
A little bit less than 10 for the rest of the year. So we're going at pace. Obviously it takes time to get all of these are these projects going but now theyre well on their way. So over the next few months, we're going to be real.
Reopening a few every every every month so so thats progressing that's progressing nicely.
Okay.
And then.
Yes, and then if you think about network optimization as a general strategic principle, just keep in mind.
Adding new stores, where there's high population growth and high potential for incremental sales it's about converting.
Banners to more optimal formats, and and it's about downsizing stores and productively, making use of the downsizing space.
Yes, so since Gila those expanding I'm, just going to add one more thing to it to make new stores takes a little bit more time to get going so so youre going to see you're going to see more new stores than typical more next year safer downsizing takes more work to get to agree to a downsizing like where are you going to do the downside I think who is going to come in and they get extra space, but.
<unk> are also getting momentum so in this year youre seeing way more conversions because those are easier to to effect and so that said that's the bulk of what you're going to see it till the end of this year.
Alright, thank you.
Yes.
Thank you.
The next question comes from Patricia Baker of Scotiabank. Please go ahead.
Yes, good morning, everyone.
To come back to the discussion on the retail gross margin, obviously shoppers mix had a very nice impact in the quarter.
You indicated that the retail margin was stable or flat year over year, and that's been a trend that we've been seeing over the last several quarters, which is quite nice because we've had.
So if you're talking about wanting to stabilize that margin. So when you think when we think about and you think about the food gross margin.
Do you think that the full gross margin is where you want it to be and that we should think about.
Not that it will just remain in a stable range.
Patricia will we feel very good about our gross margin in general in both our food and dry gas segment I don't want to comment more than that at this point.
And maybe I'll add just so.
We did a lot of work over the last 18 months to we've talked about this too.
Removed wasted investment in in our kind of margin structure. So thats been very helpful. As a driver of <unk>.
Growth in food margin.
And then.
And then going forward, it's about optimization and we talk a lot about about data.
We are still in that.
In call it the mid earning innings of that journey and so there is opportunity to continue to get more efficient, but it will be at the margin.
More so than.
What types of changes.
That makes perfect sense and then just in your discussion of the network optimization are you in a position Richard too.
Give us a sense of what square footage growth you'd be looking for next year, when you're opening new stores.
Not yet have a good sense of that like probably around Q4, Patricia but alright.
Our plans are sort of being put together as we speak.
Okay Fair enough and then just the last gentleman I was.
I am intrigued by.
By the walk in clinic staff concurrently by pharmacists with investors will be interesting idea. So I assume at this point that the pilot project, but you'd probably see opportunities.
Depending on how it performed well.
Rollout more of these at some point in time, and then can you just talk a little bit about what sorts of services. Both pharmacists are providing in that location.
Yes, so so.
Starting with the principle of.
Of increasing call it basic primary care delivery.
Pharmacists.
The biggest potential for that is within our pharmacies and the biggest potential for that is within <unk>.
<unk> drug Mart pharmacies.
What we're doing with what we're doing in this in this town with this dedicated clinic is we are taking over excess space inside a superstore.
And we are testing.
And expanded service experience. So we have four consultation rooms, we have four pharmacists and we are seeing patients on a on a very very frequent basis.
And so the way to think about the future is.
As.
The.
Provinces get more confident and expanding the scope of practice for pharmacists, we see an opportunity to have selective dedicated locations.
That can provide a.
Health clinic like service delivered by pharmacists in terms of the types of services that they are delivering its the same things.
That you have heard us talk about before so it's minor ailment prescribing.
Coal tar medications strep throat utis.
And travel vaccinations.
All the sort of the basic levels of care that pharmacists are trained to to administer and to deliver and the <unk>.
Single.
Regulatory barrier to that happen.
It happening on a provincial level is working with the government to expand the scope of practice for those pharmacists and as I think we've also mentioned we're expecting to see 12 new expanded.
Practices.
Coming to Ontario, this year and so there's there's we believe some runway ahead to help improve substantially access to care for Canadians by leveraging what pharmacists are already trained to do.
Okay. Thank you very much sounds really interesting.
Thank you.
Your next question comes from Vishal <unk> from National Bank. Please go ahead.
Sure.
I was hoping you could give us some perspective on the food.
<unk> market share between restaurants and grocery stores.
Do you anticipate the restaurant industry to take more share.
Take more share back or is that largely stabilized similar to the cosmetic trends that you called out it really from the quarter, well, maybe ill comment directionally as opposed to with specifics.
Because these things are all moving with multiple forces sort of putting pressure on them.
So without question when the World opened up.
Saw a a flood of customers going into into restaurants that has.
Natural dampening effect on retail grocery sales, but of course as prices go up prices are going up higher and restaurants hiring faster in restaurants than they are in grocery stores and so that has the opposite effect, which as it starts to push people back into the supermarkets, where they are looking.
For a value added equivalent to a restaurant meal in one of those merchandising programs that Richard and I touched on in relation to our market Division has been the sustained and accelerating success of our of our entire value added meal program. We've done a lot of work in that space and are really really pleased with.
The results and one of the things. We think is driving that is that you can get.
Our fresh prepared.
Salmon dinner that can serve four for 15 Bucks and you'll never get that at a restaurant.
And that is a big part of where we see opportunity for customers as food prices continue to go up.
Okay.
Just changing gears here as you look at your in stock positions and labor position and labor staffing in stores are they had adequate levels now.
Well, they should always be better.
But yes, they've improved substantially over the last three or four months.
We are always focused on in stock positions, but its no longer we would consider a critical issue for the enterprise, which is a good sign it's not back to pre COVID-19 levels and that's a function of the continued disruption in manufacturing that's out there, but the teams are managing pretty well.
When it comes to labor availability.
That is a material pressure, we've talked about it before it tends to be in pockets rather than.
System wide.
Certainly the summer it's been a challenge in our distribution centers in certain parts of the country and we're working hard to to backstop that.
But at the moment, we don't see labor availability as a material disruptor to our ability to do business.
Okay, and you commented on the conventional banners.
Is it fair to say that conventional banner performance was negative.
How how is that trending most recently and how does management feel its performance of conventional banners is versus peers. I know you indicated some color on them in your disclosure.
Well Theres no question that that volume is shifting out of the market segment, the conventional segment and into the discount segment that is impacting our business. So we look at our performance relative to peers as you asked and we're very comfortable in fact very pleased with the way that our market division is performing in that context.
And again, it's hard to comment on what.
Whether were positive or negative because as Richard mentioned, how you cycled through last year as volatility has a very meaningful impact on what your what your sales growth actually looks like so it's been both negative and positive.
It's the.
The latter, but as Richard said, the actual sales dollar rate has been pretty consistent.
Okay, and with respect to how the customers have gone back to discounts similar to pre pandemic levels do you anticipate that trend is going to be sticky or customers at that segment as one or do you anticipate there could be a return back to elevated levels of conventional.
Oh I think it moves.
Remember, we've got extraordinary forces.
Out there we've got unprecedented levels of inflation, we have all kinds of different.
Things going on in terms of the economic confidence in.
The money that people have in their pockets.
But the macro trend.
If you look back over the last 10 years is that the discount segment has been growing largely faster than the market Division and I would say that trend is likely to continue if you were to fast forward over the next 10 years.
Thank you for the color.
Thank you. The next question comes from Christopher <unk>.
Please go ahead.
Hello, Hi, good morning Gail.
Just maybe fall to the last question when you mentioned that conventional it's outperforming your peers. Just curious what data are you basing that on is that the Nielsen data and then secondly can you call out some of the initiatives that are helping you drive that outperformance is it mostly in your strong brand portfolio.
You'll know T program. Thank you.
Yes, I think you've I think you've answered the questions. So we use Nielsen to measure our share.
Our relative share performance and we are the merchandising programs include what I mentioned, which is the value added food program.
Very very.
Effective active activation of PC, optimum and <unk> and our market stores and certainly we would say and I would say given my own exposure to our stores are operating conditions today are more consistent.
That may have been in the past, which is contributing very positively and then control Brad I mean, I don't know the last time you went into one of our stores, we have a big no named program running in the supermarkets the conventional business today.
And it's been a terrific success for us.
Yes, no that's helpful and another question maybe on shoppers.
And earlier that the sales of the higher margin transport categories, I'll now pretty much back to pre pandemic level is that also true for the gross margin level for the shoppers business. Overall has it also will return to pre pandemic level or is it still below.
Yes gross margin on front of store is back to normal pharmacy that we still have some work to do.
Okay and last question is maybe a longer term question as we look out to next year maybe.
Maybe a potential for some deflation when I look back at the last deflationary period in late 2016, and first half of 2017.
Lastly, I think managed to achieve a very solid earnings growth.
Supported by tonnage rules effective promotions and good expense control.
I know you don't have a crystal ball, but just wondering do you expect this to be the case again, this time, especially with some of the retail excellent initiatives.
In progress right now.
But for US like we're always thinking about building solid plans for the years coming and that's what we're working on right now and the team is all aligned so that we can deliver on our financial framework for 2023.
Yes, I think Chris we're pretty we have historically, we've had a good track record of performance and deflationary or low inflation periods I think that may be partly because we have such a big discount business and it's very good at managing SG&A and.
Leveraging volume.
But in terms of predicting what inflation is going to look like next year that is still hard for us to get a grip up but if it were deflationary.
We're not concerned about our ability to to deliver in that environment.
Okay. Thank you.
Thank you.
Your next question comes from Kendrick tight.
ETB capital markets. Please go ahead.
Thanks, Dan and good morning.
Question for a minute on the on the beauty business you called out the strength in that.
And the recovery in beauty and cosmetics can you just sort of speak to the supply chain and how how supply is actually responding given the pace of that recovery and that it is not a <unk>.
Recovery unique loblaw, but the broader market is there any risk there with respect to the beauty business.
Yes, you end up sitting in a position in the back half of this year with suppliers are simply unable to keep up with the pace of that recovery or are you comfortable with.
So the supply on recession, and beauty and cosmetics given time book now so that the margin profile and what it looks like you provided in the first half.
Yeah today.
We're not concerned about the look the availability of the product is not perfect.
<unk>.
Because the beauty vendors are struggling with a lot of the same gen.
General supply chain issues that the rest of the market is.
We don't see.
<unk>. That's the question you're asking materializing here. This is this is a return well its for the most part it's a return to normal as opposed to.
A major demand surge it just felt so far.
During the Covid period, the one place that just anecdotally we've been we've been mystified with is there is tremendous strength in fragrances and were kind of wondering what what people are doing with with all of those perfumes.
But that's the only place where it might be running a little ahead of.
That returned to normal.
Thank you bonus so short duration grocers and retailers are much better at managing our returns in all of them and airlines with higher data link.
Caught us off guard is what I'm Eric comment.
If I look at that we believe so.
Yes.
Fair enough and then just one more quick one for me.
Richard I heard you're calling out the high points redemption.
In quarter.
Material was that in terms of the underlying also a fundamental shift in behavior and how do you think about the not just the evolution of that through the back half, but but managing elevated points redemptions that through the back half.
The elevated redemptions starts with us issuing more points so like our.
<unk> team throughout the organization are.
Beginning to see more traction and more benefits of using loyalty. So they are using it more so so we saw a marked increase in the issuance and because of the current environment with iron slight inflation.
Also affecting redemption. So this is something that.
We're really happy about and we hope to see more of it going forward and we expect to be issuing even more points in 'twenty three than we and we have planned for 2002.
Great. Thank you I'll leave it there.
Yes.
Yes.
Yes.
Thank you.
Next question comes from Peter Sklar of.
BMO capital markets. Please go ahead.
Good morning, Becca back on the consumer so.
Your basket is down despite.
The basket inflating nine 5% Richard in your comments you seem to attribute that.
To the pantry loading that was going on last year when everyone was shut in but I'm. Just wondering if you could also comment on the <unk>.
The consumer that's being squeezed by high food and fuel prices and just general overall deflation has less really less in their wallet.
I mean would you attribute some of that weakness or the consumer if you could just elaborate there I'd appreciate it.
But the thing, we're clearly seeing as new customers, who visit and number of transactions are up and if you go to our stores like Youll talk to store managers theyre seeing clients that they've not seen in their stores for a long time. So I think that's what's what's happening.
The more prevalent factor that said thats driving those metrics.
So so.
Like if your basket is down trading nine 5% Youre item count must be down dramatically that's not true.
Calendar how's that.
Customers, Yes item count has been down since July of last year, Okay, and but there is there is a significant shift in item count and.
Quarter three begins because we're cycling what was like a locked down last year.
Right Okay.
We're not seeing significant change in trends on sales and tonnage going into sort of Q3 and in Q2.
But it's like to what you're comparing it with that sort of creates all of this noise.
Yes, So I think what you are saying you have now in Q3, you would have lapped the pantry loading so it's going to be more of a cleaner quarter yes.
Yes, and then in that towards the end of the quarter, we're going to start to cycle. The beginning of inflation. So so you're going to start to see that effect now we're starting to see the cycling of the unit count and a month or two from now we're going to be cycling. The beginning of inflation. So those have been reflected in our comp and we're going to have to explain what's happening specifically.
Quickly to understand what's going on but the major point is that we're pleased with the trajectory of our sales at this point.
Okay got it.
Just last question on E Commerce that was down 17, 5%.
Assuming that you captured most of that decline and converted them to in store shoppers that loblaw banners.
I assume that's a positive because you have less people running around picking and delivering to delivering to people's cars in the parking lots.
What would that have been with that had a noticeable positive impact.
On margins, our other operating parameters or is it just.
Small at the margin.
It's small at the margin, but your first assertion is true we actually track the customers, who will move from online to in store and like at.
Essentially the large majority of them are back in store, but you're right, it's not a significant impact on our margin.
Okay, great. Thank you.
Yes.
Yes.
Thank you.
Once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
Our next question comes from Irene <unk> of RBC capital markets. Please go ahead.
Thanks.
At the risk of like really beating this horse.
Coming back to the whole issue of items.
Item <unk> and item pricing I, just wanted to be very clear. So if we take peanut butter.
Trade down from let's say craft Chad.
Let's just say it.
It's a 10% lower unit costs now that unit costs may be higher year on year, but overall, it's a headwind to your same store sales is it not.
Yes.
But we look at.
Yes.
Yes.
Okay. Okay.
So do you think that that.
Well, obviously, but we're all trying to just triangulate the nine 6% in the 9% to really understand and I think we get that that comp.
It's tough for her in.
Q2, I think what everyone's just trying to understand is whether you are losing share or not.
Yes, the bottom line.
And I think Richard did a very nice job trying to bring it back to the to that sort of the fundamental premise, which is there's a ton of comp.
<unk> add that noise is impacting the read of the results and we see it even more acutely because the opposite is the case right now and the way that the business is performing and it's not a function in any meaningful change in the trend. It's just a function of noise on the comparable.
And so we'll all be happier when we get through all of this cycling and we'll be able to see.
<unk>.
The numbers cleanly, but the underlying performance from our perspective, we are very satisfied with and that's the that's the key message.
And we expect that outlook to remain through the balance of the year.
That's great and then just one final subject and one final question on that subject.
Again coming back to the Walmart commentary based on your numbers do you think you guys are losing market share to Walmart in Canada.
While on an overall market share basis.
We are very confident about the trajectory that we're on certainly.
Walmart, we're watching carefully they've had some very strong quarters in terms of sales performance in our discount business.
When we look at our discount business performance today Maxi and no frills are particular highlights.
In terms of their performance and so if I put it this way we're less concerned about that gap today than we were say two months ago.
That's great. Thank you.
Thank you.
No further questions at this time please continue.
Great Thanks, Michelle and thank.
You everybody for your time this morning.
We'll be around waiting for your calls this afternoon.
You can mark your calendars for November 15th when we will be releasing our Q3 results.
Thanks, again and have a great day.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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