Q4 2022 Loblaw Companies Ltd Earnings Call
[music].
Okay.
Good morning, ladies and gentlemen, and welcome to the Loblaw companies Limited fourth quarter 2022 results conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star.
Followed by zero for the operator, this call's being recorded on Thursday February 23rd 2023, I would now like to turn the conference over to Roy Mcdonald. Please go ahead.
Great. Thanks, very much and good morning, everybody welcome to the Loblaw companies limited fourth quarter and full year 2022 results conference call.
This morning, as usual I'm joined by Galen Weston, our chairman President and by Richard Dufresne, 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 loblaw its anticipated future results.
These statements are based on assumptions and reflect management's current expectation.
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.
Any forward looking statements speak only as of the day they are made.
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.
And what's required by law also certain non-GAAP financial measures may be discussed or referred to today. Please refer to our annual report and other materials filed with the Canadian Securities regulators for a reconciliation of each of these measures to the most directly comparable GAAP financial measure and with that I will turn.
The call over to Richard.
Thank you Roy and good morning, everyone.
We're pleased to end the year with another quarter of consistent operational and financial results.
Our focus on retail excellence and careful management of expenses continued to deliver strong earnings growth.
Unique assets value offerings and promotional effectiveness continues to be reflected in the strong sales across our businesses.
On a consolidated basis revenue grew by 99, 8% EBITDA increased by 12, 8% our highest quarterly growth in 2022 and earnings per share grew by 15, 8% to $1 76 a share.
On a GAAP basis, our earnings per share reflected a 26, 4% decline in the quarter as we lapped a one time gain last year.
In drug retail absolute sales increased 11, 6% and same store sales grew eight 7% lapping an increase of seven 9% last year.
Front store same store sales grew by 11, 5%.
Cold and flu season, and elevated demand for beauty products continued to drive growth and margin accretive categories like cosmetics and OTC.
Pharmacy same store sales grew five 4%.
<unk> and chronic prescription performance levels are back on track.
A slowdown in demand for Covid vaccines and testing was expected.
We're pleased to see strong growth in other core pharmacy services like med reviews, and flu shots trending above III.
Good levels and positioning us well for the future.
Pharmacy services now represent a significant business for loblaw, and we expect them to continue growing going forward.
And food retail absolute sales increased eight 8% and same store sales grew eight 4% improvement.
Improvements in our market share and strong traffic reinforced the belief that our offer is resonating with customers.
In Q4, our internal food inflation was generally in line with CPI.
Our discount banners continued to perform well with strong traffic and items count growth and are hard discount banners we.
We strengthened our discount position, adding converted four additional stores in the quarter for a total of 11 last year all with strong initial results.
Going forward in 2023, we plan to convert over 20 market stores discount and plan to open some 30, new food and drug stores.
So discount continues to outperform conventional grocery.
Market vendors are also delivering strong results.
The right customer offer in all of our stores remains a key focus.
In food retail our right hand side of a negative impact on same store sales of 110 basis points.
I will add that sales growth remained positive in apparel and home and entered to entertainment and we are comfortable with our inventory levels.
Online sales in the quarter increased eight 3% online penetration rates have been stable over the past few quarters trending at two times the pre pandemic rates.
Q4, retail gross margin was 36% down 30 basis points compared to last year.
This was driven by a decrease in food retail margin that was partially offset by growth in higher margin drug retail front store categories.
Our decrease in food retail gross margin tied directly to the combination of continued cost pressures and higher investments in propulsion, including our newly named price freeze initiatives.
Our food retail gross margins peaked in mid 2021 prior to the onset of accelerating inflation. Since then our food retail gross margin has not returned to those level. Our Q4 results are further evidence that retail prices are not growing faster than costs and the company is not taking advantage of inflation.
<unk> profit.
Our strong sales and market share performance. This quarter are a clear indication that our efforts resonate with customers.
On the topic of inflation, we continue to receive a large number of higher than normal cost requests, which leads us to believe inflation will remain elevated through the first half of 2023.
We expect our full year 2023 consolidated gross margin to be in line with our full year margin of 2022 at about 31%.
Retail SG&A as a percentage of sales was 22% an improvement of 70 basis points compared to last year, resulting from careful cost management and improved leverage related to higher sale.
Alright.
Adjusted retail EBITDA increased by $174 million or 14% in the quarter, yielding a margin of 10, 4% and up 40 basis points compared to last year.
Although earnings before tax of PC financial were down $20 million in the quarter due to the lapping of a one time gain last year, we were pleased with its core business performance.
<unk> was up $55 million driven by higher interest income from growth in credit card receivable and an increase in consumer spending.
On a consolidated basis adjusted EBIT adjusted EBITDA margin was 10, 7% in the quarter up 30 basis points compared to last year.
Our retail free cash flow was $408 million in Q4 and over two $2 billion on the year.
In Q4, we repurchased $175 million worth of common shares and $1 $4 billion on the year.
Our role is to meet the needs of the communities we operate in.
And the expectation of our customers.
This means refining the promotions mixed and presence of our supermarkets and drugstores.
If we're successful.
<unk> solid.
A good example, this year is in Quebec, where we are modifying our profile, adding discount stores refining market stores to suit local markets and increase our share.
We opened the province's first TMT store in Montreal, just before Christmas.
<unk> has been a roaring success, serving and eager customer base, we lined up for hours day. After day, breaking all Loblaw sales records for our new store.
Looking ahead to 2023, we have strong plans and feel well positioned to execute in our core businesses, while advancing our growth initiatives for full year 2023, we expect our retail business to grow earnings faster than sales and adjusted earnings per share growth in the low double digits.
We plan to increase our capital this year investing more in our store network and distribution centers.
We plan to invest approximately $2 1 billion in growth capital expenditures or $1 6 billion net of proceeds from property disposals.
The increased level of investments will largely be funded through the sale of approximately $500 million in real estate asset.
We currently have over one $8 billion in excess real estate and we plan to dispose at a more rapid pace over the next few years as we accelerate our investments in assets that drive our core business.
Finally, we will continue to return capital to shareholders by allocating a significant portion of our free cash flow to share repurchases.
We are pleased with our performance in the fourth quarter as we capped off another strong year underpinned by our focus on retail excellence, we continue to demonstrate steady consistent performance and have positioned ourselves well for 2023, I will now turn the call over to Galen.
Thank you Richard.
Q4 continued the momentum that we saw in previous quarters, helping the company finished the year with strong results shoppers drug Mart had an exceptional performance in the quarter and for the full year. This was due to both strong cough and cold season, but essentially lots at all year long.
And sustained strength in cosmetics and fragrance was also a great year for our pharmacies as they shifted from Covid testing and vaccinations to delivering important day to day health services patient feedback has been extremely positive and many provinces are now embracing pharmacists as a way to dramatically improve Canadians access to basic primary care.
As Richard described in our food business higher cost of goods, coupled with active investments in value put pressure on gross margins in the quarter.
The strong performance in our drugstore business provided some relief. However, overall gross profit still declined as the costs from our suppliers continued to increase faster than our prices.
The good news is the customers responded well to our efforts, helping deliver strong sales and market share growth. The no named price freeze was an important driver of that success as was the strength of our weekly promotional programs. This was true in both divisions.
One notable item in the quarter with the outstanding growth in our prepared meals categories as customers chose fresh prepared food at great value as an alternative to dining out.
Looking forward, we expect that managing the balance between cost and price inflation will remain difficult we.
We are seeing some cost stabilized and even begin to reverse and a few areas and we are actively lowering prices in key categories.
We still have over 1000 supplier requests on our desks for significant cost increases.
We continue to believe that these inflationary pressures are temporary and that they will ease with time, but predicting how long that will take us proving extremely challenging.
In that context, we recently reaffirmed our commitment to snow named prices being an average of 25% less the national brands, we are delivering the best available value and our 400, no frills and maxi hard discount stores and we will continue to push back on unjustified cost increases from suppliers.
Finally, we're stepping up our support for those most in need last year, we provided more than 5 million kilograms of food to Canadian food banks. This was in addition to over $120 million healthy snacks and meals through the President's choice children's charity on our way to feeding a million children a year.
In the upcoming year, we will invest over $2 billion to grow and improve our store network provide more health and wellness care to Canadians create jobs reduce waste and meet our carbon reduction commitments, we will do so while delivering consistently against our long term financial framework.
We're proud of our achievements in 2024 and of our over 200000 hardworking colleagues and believe we are well positioned for 2023.
I will now open the call for questions.
Thank you Caylin Cullen would you mind, introducing the Q&A process. Please.
Certainly ladies and gentlemen, we will now conduct the question and answer session.
You'd like to ask a question. Please press star followed by one on your telephone keypad, if you'd like to withdraw. Your question. Please press star followed by two and if you are using a speaker phone. Please lift the handset before pressing any keys one moment for your first question.
Your first question comes from Irene <unk> from RBC capital markets. Irene. Please go ahead.
Thanks, and good morning, everyone. Obviously, a great quarter can you talk to us about what youre seeing in terms of consumer behavior, where we are now in terms of private label penetration.
Broader more broadly speaking trade down and what youre seeing in the competitive environment.
Yes, absolutely so.
It Hasnt changed a lot since Q3.
There is still that sustained shift to discount it hasnt slowed down and it Hasnt speeded up control brand continues to be very very strong, particularly at the lower end with with no name. Although you can imagine that was supported significantly by the price freeze in the quarter and there is a shift happening in proteins.
As you would normally expect away from <unk>.
Higher priced proteins like beef towards lower priced proteins like like chicken or pork.
And then from a competitive perspective, yes, it remains an intensely competitive environment.
Still not all the way back to promotional penetration levels that we had pre COVID-19, which is an interesting thing to watch but.
It certainly continues to ramp up and we're seeing customer price sensitivity really across the board.
Promotional we sell in the market stores, and then both promotional and on <unk> basis in the discount Division.
That's great. Thank you and just looking ahead to the 2023 guidance. If gross margin is going to be stable and presumably you see significant ongoing opportunities.
On the Opex efficiency side, and I guess sort of what you guys are approaching this retail excellent. So can you give us some more information. Please on what those are.
Big buckets are.
Whether youre going to get all the way all the way to bright in 2023 or whether we should continue to see some improvements in 2024.
So big picture Irene for 2023.
We're sort of getting back to that normal market conditions, we are anchoring ourselves on our financial framework and windows when we built our plans.
It provides us with the outlook like we just talked about so we think we're going to be just slightly a bit ahead of our financial framework and the business is going to be more a more stable and what we have seen over the last few years and we feel we feel good about that about 23.
As to the big initiatives.
I don't want to get into too much detail, but like I said theres a number of those that are underway that are becoming I guess somewhat more important from a financial perspective, but they're nowhere near maturity.
That's great. Thank you.
Your next question comes from Ken Rick tie from ATB capital markets. Please go ahead.
Thank you and good morning.
It can be strong front store performance.
Especially if we look at it against a prior year comp of six 1% at 11, five really does stand out.
Called out the big flu season, which I think we had expected but could you provide a little more insight with respect to beauty.
High priced high margin category and whats you appear to still be delivering very strong results have you seen a shift in terms of promotional attachment and does the success in front store represent very effective promotions in beauty in a higher attachment of promotional activity or how should we think about that beauty performance.
Kendrick the wave.
The way really to think about what's happening in the front of store is that it's it's demand driven in those two key categories.
Those are disproportionately.
Driving the results beauty is not a particularly promotional intensive category to begin with there's promotions.
That run through the PC optimum program, which are very potent.
Attractive, but this is really underlying demand I think you know as you visit our stores that it's hard for us to stay in stock.
In OTC product and cold and flu medication.
And that's and that's what's driving it as far as the.
Everyday commodity products that we would typically sell and shoppers drug Mart.
We've seen that not as strong as perhaps.
In typical years, but thats, largely driven again by the promotional intensity in.
In the big box stores and the food stores.
Thank you and then just one further one shlomi just with respect to the non named price freeze can you speak to how strategically and perhaps from a share perspective that initiatives played out versus your own expectations. I mean, certainly there were headlines around the initiative would be useful to understand just how effective that was relative to your own internal.
Expectation.
Yes.
It was very successful.
Lots of public awareness around the program the Elo packaging stands out in a particularly impactful way on the shelf and I think which contributed to its success.
From a most important thing is we save customers a lot of money.
And as we move forward, we are committed to maintaining that 25% price gap as I mentioned.
And then no name sales performance continues to be very strong it lifted during the price freeze from what was already a pretty high rate of growth and it is.
Continued posts.
January and so we continue to see it as a really important part.
<unk> of the way, we deliver value to Canadians and help save them money.
Thank you congrats I'll get back in the queue.
Okay.
Your next question comes from Mark <unk> from CIBC capital markets Mark. Please go ahead.
Yes, good morning.
I think Q4 was the first time, we saw a basket size flat in 2022 do you attribute that mostly to inflation continuing to flow through or was there a normalization or a shift in consumer behavior or.
Is that a pay off from.
From work specifically targeted at that.
Youre, saying gross you were talking about.
Gross margin grocery grocery grocery basket size yet.
Oh, yes, yes.
Yeah.
It's just like that's where I think we are in the cycle I think I think.
We've seen traffic go up right.
We've seen inflation affecting FIFA how people.
<unk>, yes.
So.
It's tough to see what's going to happen over the next few months, but I think we're sort of.
We finished the shift to discount that we're still we're still leaning towards discounting more and more.
Okay.
And specific to the shoppers gross margin, hoping you could help us understand some of the puts and takes there specifically as it relates to the impact of the mix the mix shift to higher margin products.
But also the actual product margins the performance of private label and then also the impact of pharmacy services.
The bulk of it is mix.
Essentially.
That's the story.
Gross profit for shoppers area.
So it is private label penetration rising within shoppers or I mean, I know, it's more happening more in food, but is it happening at shoppers are not growing.
To be honest I don't have the answer.
Private label activity has been very much on the fifth floor.
In the quarter and the story on shoppers is front of store and Thats, what Thats why are the activity has been on pharmacy.
We've mentioned is that.
Covid services peaked last year in Q3, Q4, so we were expecting them to go down but despite that we've seen great great pickup in <unk>.
And flu shots in med reviews, which which allowed us to give a very decent growth, albeit not at the same rate as we did in Q4 of last year.
Maybe I'll just add that no name doesn't have quite the same presence in those small front shop shoppers drug Mart stores, but.
President's choice actually has higher penetration and shoppers drug Mart than it does in the rest of the of the food stores.
How strong it performs.
And it continues to do so.
Okay. Thanks, and then just one last one more of a housekeeping, but is the real estate, that's going to be disposed of.
In 2023 is that occupied by Loblaw, so will it bring incremental rent into the system or is that.
Great.
It's occupied by law.
It's not material level.
Okay. Thanks.
Sure.
Your next question comes from George <unk> from.
Osha Bank GBM George Please go ahead.
Yes. Thanks, good morning, good quarter on the outlook for the double digit growth in EPS can you maybe tell us a little bit what you are baking in in terms of food inflation and from a cadence standpoint is it going to be a stronger first half versus a weaker second half maybe any color you can provide there.
Our plan contemplates to relatively stable performance by quarter.
Okay and in terms of the food inflation can you maybe give us a little bit of a sense of what you guys are baking into that guidance for the year. So the exit.
As we said, we expect inflation to be to remain elevated in the first half Youre guess is as good as mine for the second half.
Thanks.
Just more broadly on can you talk a little bit about the automation opportunity.
Where we are today in terms of maybe the Dcs and perhaps how long will take to get from where you are in guidance. How should we think of the returns to the margins there.
So we.
We have already.
<unk> is currently being built.
The building should be completed by the end of this year.
Nation will start to be installed at the beginning of next year and should take about a year or two.
To get to get finished so we expect.
Are you a new automated center to.
To begin operation.
And the 25 early 2006 and the way the way you need to look at that.
This investment has an opportunity cost.
So the.
The automation is a way more productive so it allows us.
To significantly increase the throughput and so that's how we derive our returns from such project.
Okay.
And then maybe just worth mentioning we we have already fully operational automated warehouse in Cornwall that serves ambient food and we've been operating automated warehouses to support the drug and beauty business.
In the country for some time.
Thanks, guys.
Your next question comes from Michael Van <unk> from TB TD Securities. Michael. Please go ahead.
Hi, there I'll start off with any of you want to play at the NCI be purchased I think three 3% of your shares last year.
Do you expect that to.
Increase given the rise in the free cash flow.
Right now we're.
Sure.
Yes, it does.
Okay. So should we expect steady in terms of share count steady in terms of dollar amount.
Our percentage of free cash flow, how do you how do we model that we look at both what we are really more of dollars.
Okay.
Alright, and the e-commerce.
Second quarter in a row that we've seen it starting to grow again.
A 3% and up 8% this quarter.
<unk>.
Is this just inflation or is it.
The users.
Number of users increasing again.
And what do you think is leading to the growth overall.
Yes so.
The way, we think about it now.
Stable.
Following the pre and post pandemic.
Periods, yes, there's a little bit of growth.
But we're not yet.
We don't yet have full visibility into what that normalized growth rate is going to be.
Inside the numbers, there's multiple parts to our e-commerce business Theres, a drug business, which is quite significant there's the front shop at shoppers drug Mart and then of course, there's the the large part through PC Express.
And and we see some strength on the drug side.
In particular, we see strength on the home delivery side growing materially faster than what we're seeing in pickup of the pickups holding pretty pretty steady.
And pickup and delivery is still very small for us but growing rapidly.
So it's going to take us I'm going to guess now.
Now through the balance of 2023 before we have.
A really clear sense of what this new run rate as is for e-commerce.
So based on the penetration that you are at now.
And in the level of disruption that we're seeing in the store can you comment on that level of disruption and the picking is it.
Is it being an issue or have you been able to kind of figure out a way to.
To keep it.
A little less noticeable and then how does it alter the way you decide to go to.
You are picking strategy I guess over the next few years.
Yes look there are some stores where the picking.
Penetration is so high that it is very visible.
It is.
And maybe on the edge of being disruptive to customers, but the number of stores where that.
Even the beginning of an issue is very small.
Having said that we are constantly looking at new ways to improve efficiency and productivity.
And we have multiple.
Projects going on with.
That Goldman mind, both improving the manner in fashion in which we pick in stores and we've also opened a pretty successful manual facility here.
In the West end of Toronto downtown Toronto.
That is picking.
In the dark.
Yes.
Warehouse for lack of a better word.
Four.
Pretty extended market all across Toronto, we're very happy with the way that that is that that is operating with.
Accuracy speed.
So we are increasingly confident that.
These <unk>.
Medium sized dark manual picking facilities will play a complementary role.
Two to store pick in and our network.
Okay, and then just finally on that side.
At the current level of penetration is media.
Revenue opportunity significant where do you stand in terms of ramping that up and do we need to see a lot more growth in E. Commerce for the media media revenues to start becoming more meaningful.
Yes media still it's still small but growing growing rapidly.
I think we reached a milestone in December when we.
Got it.
We launched our retail media platform, which will allow our customers.
Customers now.
Do self serve I E build their own campaigns on their own. So so we're excited with what's what's ahead in 2003, but it's still it's still a small business, albeit profitable.
Yes, and I wouldn't I wouldn't tie directly.
e-commerce growth to our ability to realize value in media. It's an important element of the model because of course online eyeballs are.
Our are easier to monetize but the loyalty program and what we can do there is also a source of media dollars.
Leveraging our existing store traffic.
Footprint.
And then there's also a third party.
Media channel that we are exploring and see opportunity into so it's an important part of the way we grow the media business, but it is not the determining factor limiting growth.
Great. That's helpful. Thank you.
Your next question comes from Peter Sklar from BMO capital markets. Peter. Please go ahead.
Hi, good morning, I'm willing toward Peter.
Just wanted to go back to gross margin, Mike, we understand that that pharmacy and front store gross margins have been offsetting the retail food gross margins and wet.
The front store sales so exceptionally strong this quarter at 11, 5% growth.
And really had a mix impact so we're really wondering on a sequential basis.
Maybe first is Q3 or maybe cadence UK Q4, how has does grocery gross margin trended.
Like how we entered the quarter and how yesterday.
So.
What we are what we're ready to disclose is that.
On gross margin in food retail was down and our gross margin in pharmacy was up.
And.
That's as far as we will go from that from a detail us too.
What's happening with the gross margin.
Okay.
Okay. Thank you.
So Alex switch gears to PC optimum.
<unk>.
Similar to <unk> question on gross margin, we're just wondering how has <unk>.
In PC optimum.
Trended in Q4 versus previous quarters.
Do you see more redemptions than more participation and if there was any insights on trends that you could glean from the data that you get from the program that would be helpful. Thanks.
Yes, so so two things are happening.
Positive trends in relation to the PC optimum program the.
The first is that our value proposition is viewed by customers to be.
An equivalent to cash so it's a really important part of the savings equation.
As customers think about how best to save money. So as we headed into the fourth quarter and the end of the year, we saw no noticeable but not significant increase.
In the rate of redemption, so people essentially using their points to to reduce the.
The cost of their grocery bills.
But I wouldn't over rotate on that trend. It's notable.
But it's not it's not a massive shift off what would be typical.
And then the second thing that's been happening is the number of.
Actively engaged PC optimum users has been growing at a very.
Satisfactory rate.
And so for US two things happened the existing core optimum customers redeeming a few more points actively engaging in the program and responding to our personalized promotions and then secondly, we have materially more customers who are in that.
Field of active engaged and so they are also contributing to.
So the earn and burn points and also making a positive impact on our sales.
Yeah.
Thank you very much those are my questions.
Your next question comes from Brazil, <unk> from National Bank. Please go ahead.
Hi, Thanks, Thanks for taking my questions.
Just related to the step up in Capex I was wondering if this is a longer term capex cycle that we should see and do you have on these heightened investments or increased investments do you have line of sight on on the returns and if we can exceed the current thresholds that sure that the business is currently generating.
R J.
Objective on return has not changed it's just that.
Over the last few years, we're probably running a bit behind the industry in terms of square footage growth and so we're doing a bit a bit of catch up and so that's that's what that's what we're doing.
Sure. So in terms of in terms of the Capex.
At the current levels, how long should we model that has had a few years kind of thing and then it goes back down to that.
The historical rate or is that more of a long term run rate.
Yes for now what I would do is up probably do that for maybe two or three years.
We revisit we'll revisit that number after that.
Okay.
With respect to the general merchandize business.
Just wondering I know you gave some details in your in your preamble at the top but just wondering what you saw was that did that pressured the comp on the total comp and was that a pressure that you see a gradually improving.
The pressure we saw in Q4 was somewhat similar to the one we saw in Q3 for US the key was to make sure that we were managing our inventory as well.
That's what we were seeing with what's happening with other retailers globally, and so I think I think we've managed it well so far but we remain very focused on making sure we don't over purchase going forward so that.
We can protect our margins as much as possible.
Okay. So in terms of the same store, it's about call it one percentage or.
One percentage point of pressure in terms of same store.
Yes, and it was about the same in Q3.
Okay and.
On the strategic procurement activities, which was indicated.
Disclosure material I presume thats something thats that.
At Loblaw irregularly does so just wondering why it was called out as the magnitude of opportunities larger than you would otherwise see in prior years.
Although we started on that initiative last year.
Where we are.
Extracting as much.
As much value as possible from the from using using the scale of our enterprise and.
The initiative has been growing nicely in 'twenty, two and it is sort of gaining traction for 'twenty three so that's going to be one of the initiatives that will help.
Our gross margin in 'twenty three.
Okay, and lastly here.
Just on the Street Street tonnage math I know there is I know, it's not it's not perfect. So just wondering what Bob lost on specifically on tonnage.
In the quarter.
So I guess, the starting point very happy with the sales as you can see in the results.
Equally happy with the tonnage market share growth.
Which is the unimportant.
Unimportant measure and metric for us.
And then in terms of absolute tonnage growth, we're still moving through the.
The the cycling challenges of Av.
Covid.
But the underlying performance, we're very comfortable with and we saw we've seen improving trends on on tonnage really since the beginning of the year.
And the caveat that I would offer up is that in Q1, we're headed into another COVID-19 lapping distortion.
And so it's a relative performance from a sales and tonnage perspective is gone is going to look a little wonky, but the underlying trend, which is what's important for us.
We will continue to be where we need it to be.
Wanted to double click on that I think the same store sales performance. We delivered in Q4, you're not going to see the same thing in Q1. So it's very important that we were very locked down for the first six weeks of 2022. So so please make sure you.
Keep that in mind when you build your models.
Thank you we're focused on absolute sales levels not comp performance right now.
And so that's what that's how you should look at that on our business.
Thanks.
Your next question comes from Chris Li from data or debt capital markets. Chris. Please go ahead.
Hi, good morning, everyone.
Thank you Lynn you mentioned in your opening remarks that promotional intensity has not fully returned to the pre pandemic level I'm. Just curious why do you think that is and does your outlook for the year of kind of contemplate.
Intensification of.
Promotional environments.
We go through the year.
Yes, I mean look at it.
It's just as.
As a fact something that we observe.
There was a real retreat.
Promotional intensity through Covid as people.
At historically low levels of price sensitivity.
And it's just an interesting call out continues to grow our promotional intensity we continue to.
Two two.
To engage customers that way, we're trying to do it sensibly and as intelligently as possible.
So will it return to pre pandemic levels and when will that happen I don't know the answer to either of those questions.
But we are seeing we're.
We're seeing an increase in promotional intensity.
Customers at the moment.
But certainly not.
Not something that is that is radically different from where we were in Q4.
Okay and it sounds like it is a manageable risk that EBITDA. It's intensified it looks like you have other levers to kind of offset that is to allow you to achieve your earnings growth guidance is that is that fair to say.
Yes, I mean look this is a this is a normal part of how we trade in how we manage the business is trying to manage the balance between shelf prices promotional investments and then improvements in mix and.
And.
We will just continue to manage effectively as we have for the last number of quarters.
Okay. That's helpful. And then just in terms of your capital expenditure the.
The incremental Capex you are spending on new store growth does that essentially carryover retail square footage sort of around 1% I know it's been flattish over the last few years is 1% kind of the the number you should in Florida. This year.
About that.
Well I don't know it can be all the way there at the end of 2023, but that's that's the growth rate.
We think.
Keeps us in line with the rest of the market.
Should say one of the real learnings over the last.
24 months has been the identification of.
New store growth opportunities.
And material incremental sales.
<unk> as a result, and I think Richard called out.
Particularly outstanding one, but we put that TNT.
On old Longwall store that had been closed for I think 10 years, so dark clothes.
We added Thats added that store at 70000 feet really blowing the doors off in terms of its sales that's 100%.
Incremental business for us and.
As I say, that's at the top end of the available options, but.
There are quite a few others out there.
We are.
Intentionally pursuing.
That's great it looks forward to seeing that in a few weeks and maybe just on the Capex, which is I wanted to just confirm so.
So.
You are essentially right now expecting that the growth.
Capex for the next two to three years will be kind of above 2 billion same as this year, but you would be funding some of that through real estate divestitures. So from a net capex basis issue kind of $1 6 billion is still run rate that we should be expecting for the next two to three years is.
Is that correct yes.
Yes.
And then just want to confirm you said is it you still have $1 8 billion of excess real estate accurate when you sell the 500 million or $1 8 billion and that physical estate right now that's including the $500 million Thats, where we are in process of disposing right now.
Okay. That's helpful. And then just in terms of the outlook you.
You mentioned gross margin will be stable can you talk about your SG&A expense rate do you expect more improvement this year.
I wanted to give a sense on gross margin due to to sort of give you a perspective on how we feel about the business now we're going to keep working really hard on this journey.
To make it better every quarter as we progressed a year, but I'm not going to comment on the specifics of where.
Where are we going to be what SG&A.
Okay. That's great and then lastly, I know I always ask you guys, but any updates from the government with respect to changes in generic drug prices.
Later this year.
Okay.
Let us get back to you on that I don't want to give there has been a.
Moderate uptake it's not material.
To the business looking forward, but we can give you a few more details where I can give you a couple of more details on it if you'd like.
Okay fantastic. Thanks, Thanks, a lot.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.
And we have a follow up question from Irene <unk> from RBC capital markets. Irene. Please go ahead.
Thanks, just one point of clarification and then another question. So point of clarification. When you were talking about a revenue run rate.
If we go back and look relative to 2019 and kind of look at takers and trends that should be the way that we are looking at it or is there anything above and beyond basketball, which keep in mind in terms of quarterly cadence in 2023.
We look at our absolute sales number every week, that's what we're looking at.
Thanks.
I'm not we're not looking at the CAGR and Thats looking at same store sale and looking at how much sales are we delivering weekend recap.
That's what we're very focused on right now.
Understood. Okay, and then just one follow up one question on presence choice financial.
In your outlook for 2023 are you anticipating.
Any additions to PCL as any changes in allowance rate that kind of thing.
Nothing significant RPC PC bank on that on our results for 2003.
Thank you.
There are no further questions at this time I'll turn it back to Mr. Roy Macdonald for closing remarks.
Great. Thanks, everybody for your time this morning I'm around if you have follow up questions and please mark your calendars for Wednesday may 3rd when we will be releasing our Q1 results have a great day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.