Q3 2023 Empire Company Ltd Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Empire third quarter 2023 conference call. At this time all lines are in a listen only mode.
Following the presentation, we will conduct a question and answer session.
At any time during this call you need assistance. Please press star zero for the operator.
Call is being recorded on Thursday March 16, 2023, I would now like to turn the conference over to Katie by VP of Investor Relations. Please go ahead.
Thank you Joanna good afternoon, and thank you all for joining us for our third quarter conference call. Today, We will provide summary comments on our results and then open the call for questions. This call is being recorded and the audio recording will be available on the company's website at Empire kosher dossier.
There is a short summary document outlining the points of our quarter available on our website joining.
Joining me on the call. This afternoon are Michael Medline, President and Chief Executive Officer, Matt Ryan Go Chief Financial Officer, Peter St Roth, Chief Operating Officer, and Doug Nathan said, Chief Development Officer, and General Counsel.
Today's discussion will include forward looking statements, we caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially I refer you to our news release and MD&A for more information on these assumptions and factors I will now turn the call over to Michael Medline.
Thanks, Katie and good afternoon, everyone I'm going to start by acknowledging that this is not a straightforward quarter due to both the high inflationary pressures, we continue to face as well as our efforts to recover and move on from the cyber security event in November which has significant impacts across our business this quarter as expected.
As high inflation persists, we're seeing how strong we've become as we're still putting up solid numbers and sustaining the fundamentals of our business effectively.
But we are looking forward to high inflation abating inflation is bad for Canadians and for Empire Company.
When it abates, we will see positive momentum and be well positioned to deliver stronger performance.
Empire Company is best positioned to prosper in a non high inflationary environment.
Today I'm going to focus on three topics key market trends on our Q3 results a brief update on our cyber security events and an update on some of our horizon initiatives, specifically for a lot and seen plus.
As I've said over and over for a long time. The continued high level of inflation is challenging for Canadians and for our business. This quarter. We saw food inflation remains stubbornly high and we saw customers continue to adopt their shopping behaviors due to this inflationary environment with many people shopping multiple stores trading down on products buying more on promotion.
And filling smaller baskets, our team remains highly focused on providing value to customers. During this time and over the next few weeks and months, we will continue to accelerate on this front with the planning of several additional initiatives to emphasize and expand our value proposition to our customers.
We received hundreds of new supplier cost increase requests this quarter at a comparable size and volume as we experienced in the fall of 2022. So we expect inflation to remain high for a few months.
Now we don't have a crystal ball. However, as we look forward, we believe that supplier partner requests for cost increases have peaked and we will also seem to be cycling high inflation numbers from last year. We're hopeful that food inflation will soon peak, then abate that and which will be very good news.
Our own brands portfolio.
It continues to provide significant value to customers and grew faster than the market for both the quarter and the fiscal year. We are focused on leveraging our own brands portfolio across all of our banners to provide value to customers and this month, we began the rollout of 230 non food owned brands products at long ago stores.
Our discount business showed excellent performance again this quarter with double digit same store sales growth and outpaced share growth versus peers.
Last month, we achieved our project horizon goal to open 31, new fresh from stores by the end of fiscal 'twenty three as of today, we have a total of 44 fresh go stores operating in Western Canada.
We are very pleased with the momentum and growth trajectory of this banner, taking fresh go to Western Canada was a key decision. We made in 2017 to turnaround. What was then a struggling region for us I'm sure glad we made that call.
We also continue to see benefits from implementing our same class loyalty program at fresh go with which exceeded all of our targets in Q3.
Overall, our sales this quarter increased by one 5% with same store sales a 0.1% in.
In addition to the impacts of high inflation. Our results were affected by lapping strong sales due to all micron last year as well as the impacts of the cyber security events across our business.
Our gross margin excluding fuel was essentially flat with last year, but our margin was also adversely impacted by the cyber security events.
We're very pleased with how we continue to improve the fundamentals of this business. This is a result of continuing to effectively execute our strategy with additional benefits from horizon initiatives.
We delivered an adjusted EPS of <unk> 64 cents. This quarter management estimate that there was an additional impact of at least six cents related to the cyber security events, which caused a temporary decline in sales and short term disruptions to our operational effectiveness.
Consistent with regulatory guidance, we cannot conclude the sales in our adjustments and Matt will share some more details on this shortly.
Moving to an update on the cyber security event I will start by saying that these cyber attacks are a nasty piece of business I wouldn't wish them on my worst enemy.
This event, our priority was to do the right thing for our customers our employees and our business. However, this event had several one time impact on our Q3 performance and results I am pleased to say that we're over it now and are fully return to business as usual in Q4.
Now for an update on our horizon initiatives, starting with boiler <unk>.
Our comps declined 14, 7% year over year, but this is not a particularly meaningful metric this quarter as for all our experienced significant growth last year as a result of the omicron outbreak, particularly in central Canada.
If you look at ball outperformance against Q2, which we believe is a more accurate measure this quarter. We continued to see strong sales momentum growing by nine 4% over the second quarter. Both CFC has had positive double digit growth and voila continued to outperform against the market looking ahead to Q4, we anticipate the omicron.
Impacts from last year to be much less significant and expect to see a return to positive year over year same store sales.
Now today. We are also pleased to announce that we will integrate grocery gateway into fall off starting in July .
We said from the start that at the appropriate time, we could drive efficiencies by integrating grocery gateway into rollout, but in addition to these efficiencies grocery gateway and while our customers will both benefit by gaining access to each other's assortment.
Both businesses are now at the right place to begin this integration.
Similar to the easy off net transition grocery gateway to customers will transition to <unk> over a six week period offering long goes as a significant a significant shop in shop, and therefore, all our platform.
We also remain on track for CFC three opened in Calgary and the first quarter of fiscal 'twenty four and are excited to be bringing our world class E. Commerce grocery business showed the Alberta market to serve our customers.
<unk> seen plus we continue to be very pleased with the evolution of our new seen class loyalty program and this quarter, we exceeded our targets on several key metrics, including new member sign ups active members and overall program awareness next week.
We will be launching <unk> plaza in Quebec, and in our Thrifty Foods banner in British Columbia, which is the fourth and final regional launch we have been working closely with our Quebec franchisees and thrifty store managers to prepare leveraging the learnings from our past rollouts.
Now before I hand, it over to Matt I want to have a shout out a congratulation and Mark <unk>, our former SVP real estate on his new position as Crombie, <unk>, new President and CEO , while it's always difficult to see such a strong leader leave our fold, we could not be happier that he will be leading a company with such strong ties and strategic <unk>.
Our in store business and with that over to Matt.
<unk>.
Thank you Michael Good afternoon, everyone I'll provide some.
Some additional color on our results and update on Horizon, and then we'll move on to your questions.
Let me spend some time to break down our results is the impact of the cybersecurity event combined with what we can and cannot include in our adjusted EPS metrics plus what we have in our results last year makes us quarterly results hardest to fall out of that now.
Our reported earnings per share was 49.
When you compare that to the 77, we delivered last year. There are three reconciling items that need to be considered.
So the cybersecurity event there is a significant timing difference in Q3 between the direct costs, we have incurred on the minimal amount of insurance recoveries that we have received.
The negative impact of these direct costs net of insurance recoveries was 15.
And as reflected in our adjusted EPS metric of 64 cents.
Secondly, consistent with regulatory guidance. We cannot include in our adjusted EPS metric the impacts from the temporary decline in sales and the impact of temporary disruptions to operational effectiveness such as the loss of planning promotion and fresh item management tools.
We estimate that the negative impact from there was at least six out.
Thirdly, our prior year earnings per share included <unk> 14 of them.
Usually high income from investments and other operations, including large lease termination rate lease termination income and property gains from Colombia.
When you do the math from these three reconciling items you can see why we are pleased with our Q3 performance even in the face of this harsh inflationary environment.
Now let me provide some additional color on the impact of the cybersecurity event.
In Q2, we estimated that the total impact on fiscal 'twenty, three net earnings would be $25 million.
This was a great comp last anticipated insurance recoveries.
Also had mentioned that there may be some timing differences between when we can recognize the cost and when we can recognize the insurance recoveries.
Since Q2, we have a more complete understanding of the impact of the cyber event and the process to make insurance plans.
Our estimate for Q2 was close but we've increased the amount by $7 million to reflect some additional direct costs and a little more strength than we had initially estimated.
We now expect that the total impact on net earnings will be approximately $32 million, which will be reflected across started fiscal 'twenty three on fiscal 'twenty four.
The vast majority of the costs will be incurred in fiscal 2003, but we now believe that our insurance claims may take longer to process and these recoveries will occur by fiscal 'twenty, three and fiscal 'twenty four.
Important to repeat that we only had minimal insurance recoveries in Q3.
To provide our stakeholders with more meaningful and comparable financial reporting we have decided to provide adjusted financial reports and metrics, which removes most of the noise from the one time impact of the cybersecurity event.
Say, most because as I mentioned earlier these metrics do not adjust for the estimated impact of the temporary decline in sales and the temporary disruption to operational effectiveness we.
We will continue to update you on the financial impact of the cybersecurity events in future quarters.
Now, let me move on to our results from a sales growth perspective, it was a challenging quarter.
While the cyber event had a temporary negative impact on our same store sales or sales growth was also impacted by the stubbornly high levels of inflation and the associated change in consumer purchasing behavior towards value and discount plus.
Plus the fact that we were lapping elevated omicron sales last year.
Having said that now five weeks into Q4, we are seeing sales momentum pick back up and expect stronger sales growth in our last quarter of fiscal 'twenty three.
It's important to note that we are not changing our strategy during this period and in place.
Business fundamentals are strong and we will be well positioned to deliver stronger results when inflation start to abate.
Moving onto gross margin our Mas.
And excluding fuel was flat to last year, but as Michael mentioned, our margin rate was negatively impacted by the cybersecurity event, mainly due to elevated shrink in our fresh departments.
The underlying margin rate continues to benefit from project horizon and initiatives and the solid execution of our strategy.
Shifting gears to SG&A.
G&A in Q3 was $80 million and 75 basis points higher than last year.
As I explained last quarter. The vast majority of the increase in SG&A is related to planned investments in current project horizon initiatives and future key initiatives.
While these initiatives require upfront SG&A investments, we've proven that these type of investments provide great returns to our shareholders.
Bear in mind that Q3, a large part of the increase in dollars was nonrecurring and due to the cybersecurity events, including direct costs, such as professional services and legal.
Our balance sheet remains strong our funded debt to adjusted EBITDA ratio remains at three one times, which is in line with Q2.
This provides ample liquidity for our capital allocation strategy.
We have invested $554 million in capital so far in fiscal 'twenty three.
This quarter, we renovate the 12 stores opened up 46 farm Boy and opened up 40 <unk> store in the west.
Subsequent to the quarter, we opened our 47th farm boys and with today's announcement and we have now confirmed 50 farm boy locations in Ontario.
With regard to share buybacks as of this week, we have repurchased approximately seven 4 million shares in fiscal 2003 for a total consideration of $276 million.
We remain on pace to reach our target of buying back $350 million and share in our fiscal 2003.
Finally, I wanted to give you an update on horizon.
We remain on track to achieve horizon target of delivering a $500 million increase in annualized EBITDA by the end of fiscal 'twenty three.
When we first announced horizon. This translated to a 15% earnings per share of Hagen and 100 basis points increase of EBITDA margin.
Based on our latest forecast, we're now projecting that this will translate into a 13% EPS CAGR and a 50 basis points increase in margin.
The difference is largely due to COVID-19 and the cybersecurity event, which slightly delayed some of our key initiatives, including C plus personalization and space productivity.
Also our depreciation expense is higher than we initially modeled as we were able to more quickly execute some of our more capital intensive products over the period.
Finally, the cost of fuel is higher than we had initially modeled.
All this being said despite having to navigate through a pandemic high inflation on a cybersecurity event. We are thrilled that we are on track to achieve the initial horizon objective of $500 million of annualized EBITDA by the end of fiscal 'twenty three.
No and I'll wrap up it's great to see the business operating as usual again after the cybersecurity event and also to see that we have regain sales momentum in the early weeks of Q4.
And with that Casey I'll hand, the call back to you for questions.
Thank you Matt Joanna you May open the line for questions at this time.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Should you have a question. Please press the star followed by the one on your Touchtone phone you will hear a sweet home farm technology you have a question.
If you would like to withdraw your question. Please press star followed by Tim.
And if you are using a speakerphone please lift the handset before pressing.
Our next question comes from Mark Petrie at CIBC. Please go ahead.
Yeah. Good afternoon. Thanks for the comments about both the sales momentum into Q4 I also wanted to ask about.
About gross margin trajectory and I guess, specifically you had been putting up some pretty healthy gross margin expansion over the last number of quarters I think driven in large part by part.
Private label penetration as well as merchandising efforts and promo effectiveness. So just curious.
That's true.
What's the trajectory of that is in Q4, so far in <unk> and how youre thinking about the runway of those of those efforts paying off.
Yes, thanks Mark.
Good question. So, yes, we are particularly proud of.
Record consistently quarter over quarter of being able to improve our gross margins.
And that continued in Q3 I know it was masked by the cyber security event, which basically ended up with us having a flat margin, but if you exclude the event we did grow our margin.
And as we go into Q4, we expect that trend to continue.
The impact on gross margin that happened during the event is behind us.
Planning and promotional tools are back up and running and firing on all cylinders.
So we expect that we will continue to increase our margin.
Again just to reiterate.
Growth and margin is based on our horizon initiatives.
Not because of inflation.
Yeah understood. Okay, and then I also wanted to ask about.
The impact of combining the grocery gateway infrastructure into law.
I guess can you give us a sense of what costs that will add to the existing <unk> infrastructure and when will the grocery gateway warehouse actually close.
Yeah, Okay, I'm snacking that Wow now on the cost side.
So basically what will happen is starting in July when that consumer transition happens.
And dressers gateway customers will start ordering through fall off the.
The biggest change in cost is some of the drivers of some of the logistics people I will need <unk> gateway into the integral off because that additional volume requires that additional variable labor piece, while we benefit from the synergy on the fixed cost side. So we will.
Have all of the long days assortment.
Into the bar high and we will benefit from the highly efficient operation of that function on that of course benefit from the white glove service.
We benefit from.
The efficiencies through the back office.
There will be some variable pieces of labor that move over to <unk>.
<unk>.
And I think then your second question was about the <unk>.
Existing warehouse.
So we're looking at the existing grocery gateway warehouse, while they also have in that facility is that commentary.
That commentary, we will continue to operate as a key part of the assortment of grocery gateway.
The commentary we will continue to operate those products will be sent over to the rollout building. So that we continue to operate.
Today's commentary products.
Over time, we will look at the rest of that facility, but it's part of our commentary strategy made before.
Okay. Thanks, and then just one more if I could on the topic of cyber security. Obviously, there's only so much you can do to reasonably protect yourself, but.
What do you do differently. After this incident and what are the cost implications for the business if any.
Yeah, Hi, it's Michael Hi, Mark how are you.
We're not pulling out March break or something today.
Yes.
There is obviously for obvious reasons im not going to give you details of what we do on cyber security.
At our company.
And that.
I think everybody out there is at risk and is strengthening everything they are doing.
We did have.
Robust of cyber security system in place that obviously had.
It was breached on November 4th in the days prior.
We have.
Made changes significant changes too.
All elements of our cyber security and we will bring forward from plans that we have the next few years, we'll spend a little bit more which will really improve our cyber security in the short and medium term. So it's really just accelerating our plan, but I don't think it will have.
Any sort of material difference in terms of our capex going forward.
Okay I appreciate all the comments cuts all of us.
Thanks, Bob.
Thank you next question comes from Ken Mackay at ATB Capital markets. Please go ahead.
And Mike Your line is open you May proceed.
Thank you sorry apologies.
Good afternoon, Michael I appreciate the color commentary with respect to the.
Improved momentum in this quarter, but I wonder if you could help us better understand perhaps even sort of month by month through the last quarter. The extent of the change in consumer behavior. I mean, we had all been expecting a trade down.
<unk> was a definitely a sharper trade down in a more pronounced pronounced impact on the results of a lot of us might have expected can you just speak to what changed where and why in the quarter.
Quite how that severely have changed through the course of the quarter was this progressive with each passing month and you know credit card both coming in from Christmas or was this just that you saw it sort of step up as we head into the quarter and I just never came back.
Let's say that.
There are so many factors coming to bear that it's hard to isolate on one thing.
It's hard to believe but omicron was was.
It was a pretty wicked.
Last year in <unk> nine.
And so that has an effect as well as for cyber security.
As well, but I would say that starting in about <unk> seven when we saw when we really saw.
Inflation has been bad for a long time, but there were some real sticker shock with some of the grocery pricing starting in <unk> seven.
We saw.
And the impact.
But that's not really what threw us off the momentum we had it was more of a cyber security and <unk>.
I mean.
I am very transparent with you. This is our business does better not surprisingly and it turns out.
In times of.
Much lower inflation.
And so we share with all Canadians first of all because we.
But we want inflation to come down, but our business will do much better.
The inflation Abates later, this spring and into the summer.
But I'd say that also you've also got a theres also timing in seasons two.
January is normally as you point out.
Lower sales month for grocery as people are coming off the Christmas season, and especially in times of inflation for full service.
Grocer. So all these things came into play.
And as you remember we had a quarter before this we were running a three one comp overall.
We ran a 0.1 here.
It's early in this quarter, we're only five weeks in but we're seeing more normality towards what we're facing.
But I don't think were going to.
We'll do better than anyone would have expected given the circumstances, but we need inflation too.
Cool down.
Thank you Michael and just one more for me a follow up on the.
E Commerce integrate the grocery gateway integration to Paula.
How much of this was always part of the plan versus perhaps in response to market dynamics.
Just wanted to better understand the timing on that on that shift.
Given given where we are in terms of the market instead of the consumer.
Hey, it's Michael again, thanks for the question it had nothing to do with the market dynamics.
We may be partnership we Werent sure what the timing would be but we always knew that we had for laws incredible infrastructure.
Infrastructure that at the right time, if Lagos wanted it.
Then we would then partner and bring these two.
Great ecommerce solutions together to serve the customer the reason I say it didn't have anything to do with the market is you cant you don't suddenly make these decisions and be able to play in the marrow and get the assortment ready and make all the changes in a few months. This is.
Being worked on.
Sure.
How many months a long time.
The current market economics.
It is due at the same time I'm darn glad that we're doing it now given the current market economics.
Sure Thanks, Michael I'll get back in queue.
Thank you.
Thank you next question comes from George <unk> with Scotiabank. Please go ahead.
Yes, hi, good afternoon micro last quarter, you gave us.
Some qualitative information on the conventional stores that you mentioned transactions and same store sales can you, perhaps give us a little bit of color there.
On to Matt's point about kind of the five weeks into Q4 the pickup in comps is that just kind of noise wrong, I guess anniversarying omicron, it or is there maybe anything else in that pickup.
I'm going to toss it over to up here to begin because he is.
I think you'll have the best answer for you actually.
Okay into the quarter as we said.
So Barry then had an impact on our same store sales across the board for all banners, including discounted for service January it was mostly impacted by omicron innovative sales last year.
So right now we are seeing.
Like Matt said.
The same trend.
Or even better than we were before the cyber event.
So right now the thing we're seeing is our transaction count remain extremely healthy and our full service manner. So people are not leaving our banners. They are trading down they're shopping more stores and where they are trading more down is mostly in fresh and we are highly developed and fresh so.
It's just a matter of time that.
Customer with.
Will increase their basket size when they will have less pressure on their budgets, but we feel very confident that customer continued to come in our store that as I've said transaction count in foodservice banner, very LT and when we measure our.
Performance versus peers, I mean discount to discount for service to a full service we're extremely pleased to performance on both sites.
Okay. Thanks for that and maybe just looking at it.
The weeks in the quarter.
Is there should we expect any direct or indirect.
The impact from the cyberattack on these early weeks.
Maybe you can help us with in terms of understanding the impact there.
Yeah, well just to clarify in terms of are we expecting any more impact from the cyber attack.
It's behind Us.
The impact on financials, though yes. So we will continue to incur some direct costs in Q4 nowhere near to the extent that we had in Q3.
Small amount.
And then we may get to insurance recoveries in Q4, but we may get in Q1 and Q1 of next year.
Little bit of amazing picture, but I think that key messages.
Vast majority of the costs are behind us.
Okay. Just one last one if I may on the <unk>.
13% EPS CAGR for horizon.
I guess looking above and beyond this year and next the next couple of years, and we have enough initiatives and momentum.
To sustain that level of growth.
While we.
Well the simple answer is we have a new three year strategic plan.
As we said before we're not talking to the market externally announce it but we have one internally.
And again the rationale for that is that for the <unk>.
Six years, we've been executing a turnaround.
And around is complete and now we are competing.
<unk>.
So we have that plan internally it has a series of key initiatives put against it.
So we're excited to bring those to the market and bring those to fruition. Yeah. We lost we're not giving a number yes.
We're very excited about that that progression of the business over the next three years.
Great. Thanks for your answers.
Okay.
Thank you. Your next question comes from Macau at RBC Capital markets. Please go ahead.
Thanks, and good afternoon, everyone.
Could you just kind of following up on the discussion around around trading down I guess, PL said that doctor has seen trading down and fresh.
Are you seeing trading down to lower priced options and into frozen or are you seeing trading down as in volume going down and going into discount banners.
Uh huh.
Theres many type of trading down we are seeing.
So with national brand to private label.
So which is obvious more and more.
Before because of our performance, we are probably a bit more impacted because we are growing faster than the market.
So by trading down it's not good for same store sales is good for our customer and it's good for us.
But we are doing extremely well in the owned brands right now.
That's one of the trade down.
Yes people are we can see that also fresh too.
It wasn't true two can meet some of that type of trading down.
Obviously people are looking for deals so pressure on promotion is there. So there are various trading down behaviors, we're seeing in the market. It depends on every single customers.
Definitive choice you want to make it personal choice, but we have those all options.
Available for our customers and we are trying to.
Showing that value to customary bridie. So we have many initiatives I think Michael said in his opening remarks.
The team is focusing right now and since a couple of months.
Since we recovered from the cyber event to build those initiatives to demonstrate the value we are having in our stores for customers.
We're seeing as I said very positive trend right now with those initiatives.
That's very helpful. Thank you. So when we think about your private label penetration how would you describe it relative to.
Pre pandemic slash the renewed emphasis on private label and you also mentioned I forgot the exact number.
<unk>.
Private label product introductions can you can you give us an idea of what sort of categories you are targeting.
As I said I think a year ago.
<unk> Horizon, we had an initiative to rebuilt every single category and owned brands.
So I think we have four different waves of rebuild which is complete right now.
<unk> of it is on shelf right now.
Is good.
Totally finished because we have to.
Bringing the new product we developed in the last waves on shelf, but most of it is on shelf, but we rebuilt every single category. So in some cases, we have more assortment in some other cases, we have less assortment.
We revisit their form of those we revisit the packaging you can see more and more value size product into our assortment.
So I cannot speak specifically on every single day.
<unk> can spend a full day to speak about it but it's across the board.
Single category, mostly in grocery for sure because it's where the value is.
But we have those.
<unk> product also in fresh frozen.
Frozen dairy and every single categories.
That's great. Thank you and final question. Please.
The evolution of the fresh co presence in Western Canada can you talk about the evolution of the different store core cohorts as you've kind of gone through the different waves, how they're maturing whether there has certainly been any changes that you've made in.
Sure.
How you would describe the existing network in terms of share are you.
How long, it's taking to get to maturity.
Hi, its Michael.
I would tell you that when.
When you open a new store with a new brand in a new market. It takes.
Don't just suddenly.
Pop out of their old store and come to your store no matter, what you're doing how good. It is so I think we are what we see is that the first year is good and then after that just accelerates and Thats in every market. We saw we went to BC. If you remember one and.
And so the first year was good.
And we said it was good but then it really kind of rocketed after that as customers saw that one of the reasons one of the reasons. We went to western Canada. There was a hole in the market for discounts like that and that kind of box and as soon as I started trialing it in and and.
And there was more of a.
Could get multicultural items, they didn't have before.
They gravitate toward US and then we started seeing that if that explode. So we went to each market in different order in different cities in different order and they all followed that pattern.
And so it gives us a really great and very consistent among the stores and so it gives us great confidence when we open up stores peer deal anything you want to.
We are grateful <unk> also are really close to their community and we are seeing adjustment and Jess argument to be relevant for their Permian.
So we're really pleased with their engagement to make sure that we have the right assortment for their needs and just be pleased with that.
Katy showing me a note here Irene that I forgot to mention that theres minimal cannibalization, because if you remember way back when we announced this in.
2000, I think it was late 2017 whenever it was we think we've got a lot of questions from <unk>.
Shareholders and analysts about.
Whether it be cannibalizing, but we have gone through an unbelievable amount of work to say this is the right market to convert a safeway to refresh go here, we're not and we've experienced less cannibalization than we had thought we would at the beginning and it's incredibly minimal. So it was additive and there wasn't a lot of.
Takeaway sales from existing stores.
That's great. Thank you. Thanks.
Thank you next question comes from Chris Lee and Thanks, Jordan. Please go ahead.
Good afternoon, everyone.
On something you said earlier.
<unk> transmission costs remains healthy that customer should not leaving the stores.
Trading down in certain categories. Just wondering is that what gives you the confidence that as inflation normalizes customers will shift back asked because even at inflation normalizes is still going to be quite a bit higher than what it was a year ago. So I'm just trying to understand how easy it would be for you to win back when the back months inflation normalizes.
The answer is yes.
That is a great indicator of our confidence in and.
But for a bunch of other things too that we look at it.
Including customer studies and brand studies.
And we have a lot of data that we take a look at.
There's always there's always.
Can't say, 100% of everything we wanted and everything the same way.
It's pretty obvious to us as it as the prices go down.
That we benefit disproportionately just like we benefited disproportionately when prices went up it was a good study by the RBC economist. This week that people have this much how much money they have to spend so a lot of customers who are not shopping around even more some of them are they just have only so much money they can spend and so when they can spend it on more goods or they have.
I have more.
Or other input costs like high inflation rates or high petroleum rates.
People only have so much money and not make some difference as well, but I can tell you that.
Every single day, we wanted to see what's going on in terms of cost increases and price increases in inflation and we're very pleased to say that we're seeing really hopeful signs like I said I would like to see a higher Canadian dollar that will even help us more on the fresh side, but especially on the grocery side, we're going to be seeing inflation come down in our estimation.
Okay. That's helpful, Michael and maybe just related to that.
Obviously, there was a big gap in same store sales between yourself and your peers and for good reasons that you mentioned earlier.
As inflation kind of take shape the way that you envisioned in the back half of the year as things start to normalize is there a reason to believe that your same store sales growth should not be as.
As your peers.
No.
Oh, sorry.
Always hard to say, how fast and how slow things happen, but there is no reason to believe it shouldn't be higher at some point it's too.
We're a way a better company than we were we were doing great before the pandemic kind of inflation and we're better today, so as things stabilize.
Well give them a good run for the money.
Okay, Great and then just in terms of grocery gateway just wondering if you can share with us the size of the business is it comparable to.
What I'm trying to understand.
If the volumes are significant enough to really move the needle on getting to EBITDA breakeven quicker.
Well.
Will it help.
Accelerating our path to get things CFC warrants breakeven quicker, yes, absolutely. We've said all along that a key driver of.
I'll get into profitability as sales volume.
If you visit the CFC.
Getting a feeling just highly efficient.
Building like that is it is all topline sales driven so yes, it will help us get to breakeven profitability quicker.
But we're not we're not disclosing.
As Walter.
The sales is currently for grocery gateway.
But but it's smaller than voila, let's put it that way so.
But it still.
A significant chunk of business that we're very very happy to be combining those two businesses. They will it will help us CSC for sure I mean gateway has been around 2025 years whenever it's been and has a good book of business, but fallout rocket by it.
Quite some time ago, because that doesn't mean grocery gateway is not good but well is bigger.
As Anthony long ago, and as his team got.
No.
And how we do business and the leadership with territories, they felt more and more comfortable.
And trusting their business customers too.
To follow on that.
Customers are going to get even better treatment.
Okay. Thank you and all of that.
Thank you so much.
Thank you. Your next question comes from Vishal <unk> at National Bank. Please go ahead.
Okay.
Hi, Thanks for taking my questions.
Hi.
I'm interested in knowing about a little bit more about how you see the next year's unfolding with respect to.
Items directly in your control. So as you look at your plans and initiatives in the years ahead, maybe you can give us a sense of what the big drivers.
Growth will be over the next couple of years is it.
Promo effectiveness, how much legs does that have.
No space effectiveness or new store growth there.
While our leverage how should we think about it.
Yeah, Theres some theres somebody let me give you a few.
<unk> seen platts, which is just in its infancy and it's just about to go into go back which is one of our strongest if not our strongest market.
He is going to have huge impact over the next few years.
Not only because the customers really like it but because of what we can do from a personalization and data standpoint.
Space productivity initiative, which we don't talk a lot about is is to me one.
One of our most exciting things and has an.
Some people like me used to call the category reset part two but I'm not allowed to call. It that I've got a cost base.
And youre going to see <unk> continue to take off.
We are cognizant that we have to be as efficient as we can be and we will continue to as we spoke last quarter that we take.
Our efficiency and our cost very very seriously and you'll see more on that.
What else do you want to add.
I would just maybe add.
The work we've been doing on our hospitals does not act at the end of horizon.
We've had fantastic returns from that renovation and new store program over the horizon and that will continue so.
Yeah.
<unk> program and will continue into 2026, and we will continue to add stores.
And Pierre doesn't let us talk much about the sales driving initiatives as well so I'll state quieter on that but obviously.
As we become a more mature company and we're past the turnaround phase we have a lot of initiatives to be able to drive.
Sales coming up in real estate is just one part of it.
Okay. Thank you for that color.
Thank you, Matt management said on the call that.
That threshold was gaining shares versus peers, if I heard that correctly and just given the backdrop and the uncertainty wondering if.
If there is any plans to further expand that banner or are you content with the with the size of the business currently.
We're continuing to play here.
Meaningfully expanded.
We're content with the plans we have so far in place when we look at the markets. We look at where full served as well and we have enough to make choices, now and which which banners. We put in two different markets because we have our choice.
Not just discount but between the full service.
We saw an opportunity in western Canada to really grab some market share and improve our business and by the way to turnaround a struggling region, which we've done.
And so I think we're happy we'll continue to look as we as we always do now where where we can put press goes up in Ontario and.
In Western Canada, where they make sense, but that's our current plans are what we've already told you.
Thank you.
Thank you next question comes from Michael Van.
TD Securities. Please go ahead.
Alright. Thank you and then just to follow up on that question.
I'd take it from your response there is still no.
<unk>.
Discount banner in Quebec, or Eastern Canada.
Atlantic Canada, sorry.
I don't usually comment on future things, but I'm going to in this case to be clear that no no.
At this point, we're happy we look obviously, we look at everything and then we look at the markets. We look at the opportunities. We look what our competitors are doing we look what our opportunities are.
In terms of the real estate plan that we've shared with you we're content with it.
Okay.
<unk>.
The.
I just wanted to clarify on your the shrink commentary you gave.
Right.
One time, you you've talked about shrink being included in that $32 million.
Number that youre breaking out for cyber security amendments and then if I understood you correctly, you talked about shrink as well being one of the reasons why adjusted gross margin was flat excluding fuel.
So.
Is it adjusted for her not to shrink.
So the strength is adjusted.
So that's included in the in the adjustment and the adjusted EPS.
But what youll see in the financial disclosure, we don't show an adjusted gross margin number.
Okay. So we just had.
Gross margin as it is.
And that's the reason that we called that out is that gross margin is flat, but we noted that there was an impact from.
From this strength.
Okay. That's helpful. Thank you.
Okay.
And then.
When you when you look at the <unk>.
Volumes of your business I mean, I know you talked about.
Not not customers aren't leaving the stores, but the tonnage.
I have to think is down considering where the where the sales arent where inflation is.
So I'm wondering if what you are doing.
Protect differently.
Near term at least to protect margins and.
Volume of spend.
Yes.
That's volume efficiencies diminish.
Considering the very high level of inflation considering.
A lot of behaviors from customers to trade down on different.
Ways like I described earlier.
Now with the level of inflation.
Overall market niches down according to <unk>.
Metrics, where you're having from third parties.
So the overall market tonnage is down so the math between same store sales and inflation is no more relevant in a high inflation period like we are right now.
Oh.
We're not in a normal.
Business right now and there is so many trade downs.
That we cannot do that like we did in the past years.
Yes, I understand that but I'm, assuming you can see the tonnage in your tenure.
Yeah.
Am I wrong to assume that your actual unit counts are down to your tonnage count.
Estimated as them.
Absolutely, so basket sizes or so and.
And we have higher inflation, so less items in the basket.
But we have more transaction to mitigate.
Some of those Clos.
Okay. So is there anything else youre doing from a cost standpoint to try and protect margins in the interim while until you until you see volumes pick up again.
We're doing well on margin because most of it.
So that's all of it is a range of initiatives.
So we will continue to benefit from it.
We have our tools that it's well embedded in the day to day work an hour.
Merchandising route promote simulation is doing well this.
Space productivity generate some benefit there as well.
Seeing with more personalization that will help to be more relevant in our proportion with customers. So we have many initiatives to continue to protect margin and to deliver sales. So we're still very confident that.
We have all the tools.
And to navigate through this.
Inflation for you right now.
Alright, Thank you and good luck. Thanks.
Thanks, Mark Thanks, Mike.
Thank you. The last question comes from Peter Sklar, BMO capital markets. Please go ahead.
Matt I just wanted to make sure I understand this 15 adjustments so that is the direct costs.
Allow you to pull out less the insurance recoveries you received during the period.
Is that correct.
Correct, so to give you a little bit more.
Backgrounds.
Direct costs.
Rise of two main elements one is the the strength that we incurred in the business.
And the other is all of the direct cost associated with actually managing through the through the cyber event, such as hardware and software restoration costs professional fees legal fees et cetera.
Total costs are basically in those two buckets.
Yes, and that's what's in the adjusted EPS.
So theres no accrual for anticipated insurance recoveries.
Yeah, no so the insurance recoveries and only booked.
When you.
After virtually certain threshold for.
For accounting.
They will only get flipped when we when we reach that point with your insurance and Thats. Okay.
Okay. So when we see Q4.
Is the way, it's going to play out there'll be.
Like these costs these direct costs will be less.
Net of them there'll be some insurance recovery. So there will be an adjustment in Q4, but it's likely to be a smaller number or is that sort of how it's going to play out.
Good day.
As a possibility.
And when you get the insurance recovery will not have a negative adjustment right Larry.
Very small amount of cost that will have the insurance recovery. So yes, yes, okay got it I guess its good fair amount right.
To be clear for those on the phone okay, Yeah, no I understand.
I just wanted to ask you one thing on like you've given US an update on project horizon, the 500 million of EBITDA, but I don't see like EBITDA growing by 500 million. So.
Could you kind of reconcile where is the $500 million going and some of it invested back in the business and some of it are the items you talked about like.
Covid costs, and cyber events, and just explain where where is the $500 million.
Okay. So so first of all as we said the horizon objective is $500 million annualized EBITDA.
Over that period.
And as we've decided defined in the MD&A that excludes any of the impacts associated with that with this type of event.
So I have got it back all of those out.
From the the difference in the annualized impact of EBITDA and actually what we did.
Generate actually in our P&L by the end of fiscal 'twenty three it isn't a little bit lower than what we had initially modeled.
Couple of reasons for that.
There's some timing issues.
So the type of event is a set of COVID-19.
Delayed some of our key initiatives. So we thought that would be more of that EBITDA reflected in our actual fiscal 'twenty three results at the pace on an annualized basis impact.
There's also the differentiations and little bit higher than what we had modeled and fuel costs are a little bit higher than what we had modeled.
Biggest impact is the annualized <unk> impact.
This is what youll see in the fiscal 'twenty three at P&L.
Okay got it.
That's it thank you.
Actually thanks for the great questions everyone.
Thank you I will now turn the call back over to Katie O'brien for closing comments.
Great. Thank you Joanna we appreciate your continued interest in Empire. If there are any unanswered questions. Please contact me by phone or email, we look forward to having you join us for our fourth quarter fiscal 2023 conference call on June 22nd talk soon.
Yes.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect. Your line. Thank you.