Q4 2022 North West Company Inc Earnings Call

This conference is being recorded.

Cosy homes that don't have, as you see.

All participants, please standby. Your conference is ready to begin. Please be advised that this conference call is being recorded. Welcome to the North West Company, Inc. Fourth-quarter results conference call. I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead.

Thank you very much and good afternoon, everyone. Welcome to the North West Company's first quarter conference call.

I'm.

Just joining here today, we have been joined by John King, Chief Financial Officer, and Amanda Sutton, our VP Legal and Corporate Secretary.

I'm going to start the meeting by asking Amanda to read our disclosure statement.

Before we begin, I remind you that certain information presented today may constitute forward-looking statements.

Such statements reflect current expectations, estimates, projections, and assumptions.

These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements.

For additional information on me, for it.

Northwest Annual Information Form and its amnesty, under the heading of Risk Factors.

Yeah.

Yeah.

Thanks, Matt.

Thanks, everyone.

I'm really pleased with our results this quarter.

With the momentum we're building.

Providing you an overview of the key highlights in the quarter.

Consolidated sales in the quarter increased by 9.7% driven by inflation, foreign exchange, and the new stores.

Consistent with previous quarters, we continue to cycle from pandemic-related sales increases from last year, although the impact was less than in previous quarters.

So, shopping behaviors.

Following the same trends we've seen over the past few quarters, there has been a shift in spending towards food and essentials and a decrease in purchases of discretionary general merchandise. This is all a result of the impact of higher cost inflation.

This shift in spending was a key factor contributing to the increase in food and decrease in general merchandise on a same-store basis.

The impact of higher cost inflation and changes in sales continue to negatively impact our gross profit rate, as cost increases were not fully passed on.

And the retail prices, and we had higher markdowns on general merchandise.

Ted.

Three basis points on a basis point decrease in gross profit rate for the quarter were less than the trends in previous quarters.

Overall net earnings were down marginally in the quarter, but adjusted net earnings which excludes the impact of a large insurance related gains.

Last year were up 17, 9% compared to last year.

With that overview, I'll now provide some more details on our results for the quarter. I'll start with the Canadian operations.

In Canada, sales increased by 86% in total and were up $26 on a same-store basis, with a 103% increase in food sales offsetting.

Back to the two 9% decreases.

Merchandise sales due to the shift in spending that I referred to earlier.

The increase in same-store sales was also due to higher inflation and government inflation relief payments, combined with a good in-stock position.

The new stores we opened earlier in the year also contributed to the increase in sales.

We added a new store and chassis in Newfoundland.

And two quick stop convenience stores in court for hardware.

A little Grand Rapids, Manitoba.

Overall, we were able to maintain a good in-stock position on our central items, particularly in the sheets and pillowcases section in stores and with the support from NFC, which contributed to the sales increases.

Speaking of NSA, in addition to the sports you provided, our retail stores also had a very strong quarter, driven by high craft utilization in both cargo and passenger areas.

Increase in the third-party cargo.

The increase in passenger volumes also played a factor.

In addition to these factors, the higher revenue for the airline is also a result of passing through increases in aviation fuel costs and leveraging the investments we made in a large cargo door ACR in the fourth quarter of last year.

To offer cargo services.

Larger items.

Alright, let me switch gears and briefly comment on international.

Sales increased by 5% with new stores in Alaska.

Results in the Caribbean and Pacific regions are similar to what we reported last quarter.

We opened a new store in Alaska in December, which had a great reception from the community.

This is on top of the new Medicare outlet store opened and we did that earlier in the year.

Same store sales increased by 4%; we continue to see a similar story in Canada where there was a 7% increase in same-store sales. Same store food sales offset a 14% decrease in general merchandise sales.

Let's continue to shift spending to food.

Less disposable income, resulting from a combination of higher inflation and lower.

Support funds.

On the other hand, certain Caribbean markets, like the V. Our BVI, are performing very well compared to last year, as tourism has improved after the pandemic.

Similar to Canada, the US markets in the Caribbean and Pacific continue to cycle through government income support funds.

They represent.

Last year, but are no longer available.

Now, a few comments on the gross profit expenses.

The teams have prioritized operational excellence to help mitigate the impact of inflation.

Merchandise cost Inflations container continued in the quarter, although we've seen some moderation on the pace at which these costs are rising there are still increases being passed on by suppliers.

So, when we factor in higher fuel and transportation costs.

The impact of inflation on shelf prices is even greater in the north compared to southern retailers, given the remote nature of our markets.

We continue to work with our suppliers and transportation partners to minimize the impact of cost escalations as much as possible for our customers and for the bottom line.

The impact of higher merchandise and freight cost inflation was not fully passed through retail prices. The change in sales blends that I referred to earlier, as well as higher markdowns, all contributed to a 23 basis point decrease in our gross profit rate in the quarter.

Similar to previous quarters, expenses increased by 6% compared to last year due to cost inflation, including:

Higher fuel, base utility expenses, and staff costs.

Pact of foreign exchange on the translation of international operations expenses and your export storage method.

In terms of inventory, our levels are higher than last year, largely at least largely due to the higher inflation and the impact of foreign exchange.

As I just mentioned, we did take markdowns in the quarter for students.

Nice categories that do not have sell-through, do we expect it in the holiday season?

That said, the overall increase in inventory is predominantly in center store grocery categories like motorized and home furnishings, as they were impacted by some delays due to supply chain disruptions.

The durability of these items and the relevance that they still have in the communities we serve, we still expect to sell through these items in 2023.

I'll wrap up by saying that I'm optimistic about our journey ahead.

History has proven time and time again that we are resilient.

Equation and lingering potential of a global macroeconomic slowdown are headwinds that will affect our outlook.

Our core competencies and essential services, we provide to the communities. We serve will help mitigate the impact of these challenges overall, we expect to lap the pandemic related impacts can be seen comparing to a more normalized post pandemic earnings in the second quarter.

Looking forward, there are some potential tailwinds, including government transfer payments and increased infrastructure spending in the communities we serve.

I'm optimistic about the future; there is tremendous untapped potential, so we can at least drive efficiencies and grow.

Opening new stores in new markets in Alaska, and Canada has demonstrated our capabilities to bring to remote markets of central products and services to the communities. We serve I appreciate in value.

Our conviction to our purpose of making People's lives better and the communities. We serve is as strong as ever and we will continue to build and own and optimize on our core capabilities in merchandising.

Operations and logistics and this is one of our top priorities.

We will also continue modernizing our technology to enable greater efficiencies within our business and provide scale and capability for the future.

With that, let me open up for any questions, and thank you.

Thank you.

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The first question is from Michael Van <unk> with TD Securities. Please go ahead.

Hi, guys! I am standing in for Mike. Congrats on a strong quarter.

I just had a question, just had a question on gross margin. So.

In Q3, we saw your gross margins contract.

About 80 basis points year-over-year in this quarter, we saw them contract only about 20.

I would have expected that the high inflation in Q4 would have pressured our margins more than what we saw can.

Can you walk through some of the factors that changed in Q4 versus Q3 that prevented gross margins from coming down as much as they did in Q3?

Sure Theres two factors are we are we did pass on more to a to the to the customers is obviously a needed.

We needed to be done, and also, the NSA and, let's say, increased as a result. I told you there was a higher performance there, and given some of the charges. The charges that we talked about, we did pass those on as well, so that's it.

That's what led to that impact.

Okay, great. Thanks, and is there any change in the competitive activity or our competitors.

Passing on more than than they were in Q3 as well and thank.

Thank you can talk to you about that yes.

Yeah, No I think that's absolutely that's one of the enablers to allowing us to pass on some of our pass on some of our cost is exactly right because a lot of the competitors are obviously feeling the pinch I would say as much if not more than we are and are definitely are taken for stride and raising some of their prices.

Okay, great. Thanks.

Looking at sales in <unk>.

You had mentioned that government placement relief payments as a contributor.

Can you talk about when this started when it's expected to finish in sort of what level what amount we're talking about.

Sure Evan it's Sean.

What we're talking about is that the federal and provincial governments have issued.

And various inflate.

Inflation relief payments is what we've called them. Who has an extra G.S.T.? That vehicle was used in several of the provinces and territories for additional payments. So, those all added up.

To make an impact in the quarter.

Great. Thanks, I'll get back in the queue.

Thank you once again. Please press star one at this time if you have a question. The next question is from Kunal with CIBC. Please go ahead.

Hi, Thanks for taking my question.

So I wanted to know if you could talk about.

Hum, shopping - and where does that stand right now versus a year ago, and then pre-pandemic levels?

Okay.

So, as far as do I have, I seen a significant increase in oat shopping.

I don't think.

I don't think so, and the reason being is because, as I indicated, a lot more oh.

People's money is going towards essential and central items, so I'd say that our people's disposable, that went towards more general merchandise, which is typically more out shop, is.

Is this prevalent? But if you're talking about previously, there were no restrictions on travel. So people who traveled out of markets definitely procured out-of-market.

It also aligns with the fact that it's a I guess, you're probably in Toronto, but the season is a little longer right now as far as the winter Road. So there is a lot there is more out shopping than there would have been last year.

So I'd say things are probably at a normal level as far as our own shopping, but a little bit more than last year for the reasons I mentioned. Generally, the winter roads are open a little longer, and I think people are definitely getting into the market more.

Okay. Great. That's helpful. Thank you, and then my second question, head on.

Just kind of gross margin for the year.

Given you're going to be lapping some pretty.

Gross margin.

I think with the pricing that you're passing through.

And the market right now, we could probably see a gross margin.

<unk>.

Hope Asset.

Equal.

I mean, that's.

That's the hope. I mean, as you can see, we've definitely come around. We don't have a crystal ball, really. Some of the economic dynamics are so difficult to understand, like what the inflation rate is going to be next year. We don't think it's going to drop as significantly as we would all like, particularly in the first half of 2023.

Our intention and our hope is that we will see a gross margin or gross profit improvement in the latter half of next year or this year.

Okay.

Okay, perfect. And then my last question is.

And the hockey talk about making selective price investments.

And just given that you're passing more pricey right now.

And definitely play, snaring environment impact.

How did the thinking, sorry, just a follow-up on your question, if you could clarify: How does the thinking of our past price investment impact the passing on of some of the cost increases today? So, to your point, is it yeah, yeah?

Ah, okay," I would say.

That.

So it's a it's frankly.

The price investment is something that we do on a regular basis. So that's what I have explained, I think, over the last couple of quarters. It's simply a fact of regular retail operations. So we're always trying to work and negotiate on behalf of our customers for better pricing. It's been obviously more difficult over the last couple of years, as we've tried to hold back.

Back on passing through.

All of the price increases obviously, just given a the.

The fact that we work hard on behalf of our communities, but we are taking a more, you know, optimized, I would argue, a slightly more balanced approach.

But in the future.

We have a number of initiatives that we're going to be exploring to try and bring more value to our customers, and so this is kind of the work that I indicated near the end of my discussion that we're focusing on because.

Despite the inflation and some of the macroeconomic measures that are coming our way, we think it's a great opportunity for us to look internally.

Within our company, we really want to put a lot more focus into the back office to try and optimize some more efficiencies and create some value that we can pass onto the customers and ER. Frankly, the shareholders are in this upcoming year.

Okay, alright, thank you very much.

Thank you. The next question is a follow up from the line of Michael Van <unk> with TD Securities. Please go ahead.

Hey guys, seven again.

So, just a few more questions.

So, if you're looking at SG&A, excluding depreciation.

You mentioned.

Higher.

<unk> cost and staffing costs.

Or are you seeing?

In Q1.

It can that line.

Yeah, Hi, Evan yes.

Like for communities in Northern Canada pre bought their fuel and was sent and that price is stable, but certainly our other communities. We continue to see pressure on the fuel related utility costs.

You know, other costs that are in the business, that you know, things like our insurance costs.

I don't know what cold weather, we specifically called that out but.

Those costs are up as well, so there is a general, I would say, inflationary impact that permeates through that SG&A, but those would be two items.

Okay, and how much of an impact was with the lower incentive plan cost.

Here in the fourth quarter.

We didn't quantify that.

They were down from last year, but.

That's just part of the factor.

Okay.

Great and.

Okay.

Just for <unk>.

Seasonality basis in a normal year.

Is it is it fair to say that Q4 is is weaker than Q3.

Yeah.

Yeah.

Go ahead, go ahead, John. I know, that's hard to say – oven that was on the (unk).

Transfer payments turn on the PFD.

It depends on the amount of money that is in the market. You know, it's tough to say really, now, conclusively.

But it's definitely.

Strong market for us, for sure - a strong quarter.

Okay, and then I guess, just one last question.

Could you talk a little bit about.

A decision to close the Curacao store and.

The relative size of that store versus other costs less stores and.

If there is.

Similar dynamics that are in play than it is in other islands.

This may affect your decisions.

And in those markets, not at all. In fact, it's a smaller store; it's always been one.

Our store, that we had some concerns over, and and.

So we were at a point where we didn't think that was the way.

The optics looking at the market the market conditions we.

We didn't think that it was the right place for us to be spending more resources; we believe there are other, better opportunities for us to allocate our resources.

Okay, great. Thank you.

Thank you.

No further questions registered at this time. I will now turn the meeting back over to Ms. McConnell.

Okay, well. Thank you very much for the time today, and I appreciate it. We'll see you next quarter.

Thank you.

Please.

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Simon, thank you for your participation.