Q2 2024 Empire Company Limited Earnings Call
Any different approach Canadian consumers cannot afford more inflation.
As an industry, we need to look at every single way, we can minimize price increases and this has to be done in close collaboration with our supplier partners.
While the vast majority of cost increases requested by suppliers over the past couple of years have been justifiable and fair. We are now seeing more than a few of our large supplier partners send through cost increase requests for February.
And.
Some of them are distressing.
They just cant be justified.
Inflationary times are not an excuse to pass every single rising cost onto grocers and more importantly to Canadians.
This was not the way business was conducted before these inflationary times.
We have instructed our national sourcing team to be even tougher on this latest round of cost increase request, we will not take unfair cost increases and pass them on to Canadians.
It's not the right thing to do and that that results in a few holes in our shelves. We believe the Canadians will more than understand.
This is not an indictment of all our supplier partners I am referring in several big multinational cpg's.
And as I've said, many times, our federal government has a huge role to play in taking out costs that have accelerated food inflation.
Yes.
As a company, we will be pursuing new solutions to help mitigate inflation one way that we can keep cost down is through our own brands portfolio, where we have greater visibility and control over prices then with national brands as we and others have said for several quarters private label products are in high demand and we will give even more space.
So our own brand products, if it will help us maintain lower prices on shelf.
Turning to our results I believe that our business continued to perform well in Q2 as I said.
It was a bit of a messy quarter to analyze given various quarterly puts and takes regarding crombie REIT and real estate dispositions the strike at our bond distribution facility and the sale of our western fuel business in Q1.
Mac will make sense of all that for you in his remarks in a couple of minutes.
Mac: All in all when I look at Q2, I felt that our execution was just as sharp as Q1, but consumer confidence affected our results a little bit.
Mac: We continue to attract more customers to our stores with higher transaction counts are promotions are constantly improving and are attractive to our customers, while still protecting our margins and we continue to see very strong on shelf availability.
Mac: <unk> ability consistently above the market.
Mac: Moving to our financials, our sales excluding fuel grew by two 4% this quarter with same store sales of 2%.
Mac: With our full service and discount banners outperformed the market in their respective channels and voila grew sales over 15% in the quarter.
Mac: We also maintained stable gross margins, despite increased promotional penetration and supply chain challenges due to the bond RSC strike.
Mac: We're pleased with how we continue to protect and grow the fundamentals of the business regardless of the macro environment and we are optimistic that we will pick up momentum as inflation eases.
Mac: Overall, we delivered an adjusted EPS of <unk> 71 this quarter.
Mac: Onto an update of our strategic priorities.
Mac: When we announced our long term goal to grow adjusted earnings per share by 8% to 11% one of the key pillars to achieve this ambition, which focus on efficiency and cost control.
Mac: While Empire is out of its transformation era, we still see many areas to be more efficient and we've begun simplifying and taking a back to basics approach with all of our core SG&A activities. We're doing this across several initiatives that are tried and true at Empire. We're good at this we've done it before.
Mac: While I'm not going to share with you. The full extent of these efforts we felt it would be helpful to give you some insight into where we're focusing.
Mac: As we announced last quarter, we have begun making organizational changes to optimize our structure and reduce costs a refresh of what we did in sunrise, but on a smaller scale.
Mac: Almost seven years have passed and we are very different company now we have advanced data and analytics capabilities, new strategic assets in our portfolio and a much stronger team before the focus was on fixing what was broken now the focus is on supporting our go forward strategy to drive growth in the in the core.
Mac: And this isn't just about cutting the team is being very strategic and is also looking at what we can bring in house to do better and more efficiently.
Mac: You will see San Francis and our financial adjustments this quarter and through to the end of fiscal 'twenty. Four these costs will be substantially completed by the end of fiscal 'twenty four as we progress this effort.
Mac: Another area, where we are pursuing cost efficiencies is within goods not for resale, whereas I often call it non merch procurement.
Mac: This is an area, where we had great success during project Sunrise and <unk> opportunity to optimize by leveraging our national buying scale and working with suppliers to simplify our assortment and reduce rates. As one example, during COVID-19, we saw the prices of vital clouds, which many of our teammates in store have to wear rise significantly.
Mac: Through this initiative, we have been able to negotiate with suppliers to lower our rates generating over half a million dollars of savings from this one item. We have done this in many other places too such as with paper bags deli bags and product containers.
Mac: And our supply chain team, we have developed new capabilities to simplify our operations and streamline our engagement with carrier partners. We are laser focused on our simple yet effective back to basics approach to ensure we're getting the best cost from our suppliers. So we can offer more value to our customers.
Mac: So just a few initiatives of many that we are pursuing but are areas, where we are confident we will generate savings we've done it well before and know we can do it again.
Mac: Now for an update on some of our key customer and sales driving initiatives regarding our space productivity program. We have successfully completed all pilots for the first phase of this project, which allows us to deploy optimize.
Category Planet grams by banner in region based on our algorithms.
Mac: We are very pleased with the actual results from the pilots.
Mac: Are there is good or in some categories, even better than the algorithms predictions.
Mac: Seeing the success from the pilots we have now rapidly begun rolling out new plan O grams category by category across our stores and going forward. The majority of new plan O grams, we rollout will be based on this new technology.
Mac: There are over 100 distinct <unk>.
Mac: Grocery plan to Graham's being executed in fiscal 'twenty four across our banners with over 80% completed as of today now that the first phase is near completion, we are turning our focus to the second phase, which allows us to optimize the total non fresh space within each store we.
Mac: We have conducted several in store phase II space pilots over the last few months and are on track to start to develop.
Mac: Appointment distort stores with the highest returns within this fiscal year benefits will begin to ramp up the second half of fiscal 'twenty four with meaningful benefits expect into fiscal 'twenty five in fiscal 'twenty six.
Mac: <unk> also continued to progress this quarter outperforming our Q2 targets with strong new member growth increasing on card sales penetration and significantly higher active loyalty members than we had before.
Mac: Program awareness and member satisfaction of all increased significantly with Empire customers since launch through our partnership with Scotiabank, we have been able to drive new customers into our stores and we have seen a 400 basis point increase in Empire share of grocery spend on Scotia Bank credit card since launch.
Mac: We continue to pursue opportunities to leverage this outstanding loyalty program and work closely with our partners to provide even more value and benefits to our customers.
Mac: Lastly, we saw strong momentum from <unk> this quarter in particular, CFC, three which launched in Calgary in June has been gaining momentum week over week customers, who were previously using curbside pickup or moving to home delivery as we anticipated and we see strong basket sizes and net promoter scores across each CSD.
Mac: So while there was a lot of noise in this quarter, we continued to experience economic headwinds the fundamentals of our business remains strong and we delivered solid results. We have a clear strategy to deliver against our team continues to execute with focus and precision and with that I'll turn it over to Matt.
Matt: Thank you Michael and good afternoon, everyone I will provide some additional color on our Q2 results and expectations going forward and then we'll move to your questions.
Matt: Let me take some time to break down our adjusted EPS.
Matt: <unk> results were hottest of follow the normal due to the impact of our real estate transactions. This year and last the balloon distribution center strike on the side of our western fuel business.
Matt: Our adjusted EPS was <unk> 71, compared to 73 last year.
Matt: Three reconciling items that need to be considered which essentially offset each other.
Matt: Best real estate.
Matt: This year, we benefited from gains on lease modifications, whereas last year, we benefited from unusually high income related to crombie REIT property sales.
Matt: This year gains was slightly higher than last year and as such our adjusted EPS benefited by approximately two cents.
Matt: Turner with two issues that hurt our results.
Matt: Firstly, we have the impact of the strike and onboard in DC.
Matt: We've incurred some direct costs in Q2 as a result of the strike along with a temporary loss of sales and margin in the initial weeks of the strike.
Matt: However, due to the contingency plans we have in place the villain DC is now essentially operating at normal levels. So we do not expect to have a material financial impact moving forward.
Matt: Secondly, we had the sale of our western fuel business at the end of Q1. So Q2 was the first full quarter for these operations were not contributing to our results.
Matt: So the combination of direct strike costs and the loss of the west fuel business puts our adjusted EPS by approximately <unk> <unk>.
Matt: It's also important to note that our sales temporarily declined in the first few weeks of the strike, but operations are now fully back to normal.
Matt: I will now dive into the financial performance of the quarter, which can be summarized by one word resilience as.
Matt: As Michael said earlier that was there was some retrenchment from consumer is doing due to interest rates and inflation.
Matt: We delivered same store sales excluding fuel of 2%.
Matt: Decent inflation levels with sequentially lower which also contributed to the sequential decline in same store sales.
Matt: It's also worth noting that Q2 of last year was our strongest quarter with same store sales of three 1%. So we have some tougher comps.
Matt: Our gross margin rate, excluding fuel grew by five basis points versus last year.
Matt: The slight margin expansion reflected lower distribution costs, primarily driven by efficiency initiatives in supply chain, but partly offset by increased promotional penetration and some margin headwinds related to the vol. In D C strike.
Matt: Our gross margin expansion demonstrates the resiliency of our business.
Matt: Shifting gears to SG&A.
Matt: SG&A dollars were $81 million higher compared to the same quarter last year and our rate was 22, 6% in Q2, which was 74 basis points higher than last year.
Matt: Consistent with prior quarters part of the SG&A rates expansion. These G to planned investments in business expansion for <unk>, such as <unk> and <unk> as well as investing in new initiatives, such as personalization loyalty and space productivity.
Matt: But we also experienced inflationary cost increases in SG&A, including higher retail labor costs, driven by normal wage increases plus minimum wage increases.
Matt: We also had higher depreciation and amortization driven by Opex investments, partially offset by some lower utility costs.
Matt: Now one way of mitigating these inflationary increases is by focusing on driving efficiency and cost effectiveness throughout our business. This is a key pillar of our financial framework.
Matt: We have plans in place to manage our cost base and to deliver savings across several key areas.
Matt: Mike will provide details on a few of the cost initiatives, we are pursuing including non merch procurement supply chain and organizational restructuring.
Mike: On non merch procurement team is focused on driving cost efficiencies across a wide range of business areas, including goods not for resale and <unk> services.
Mike: Our supply chain initiatives will continue to generate cost savings and efficiency across the transportation processes technology and automation.
Mike: And finally, our restructuring program is in place to optimize our organizational structure much like we implemented in the early days of Sunrise, but on a smaller scale.
Mike: Beyond these areas, we continue to pursue opportunities to increase efficiencies and reduce costs, leveraging our scale size and our enhanced digital and analytics capabilities.
Mike: Our effective tax rate was 22, 3% in Q2.
Mike: The Q2 tax rate was lower than the statutory rate primarily due to capital items taxed at lower rates on the benefits of some investment tax credits.
Mike: From a capital allocation perspective, our balance sheet remains solid as our <unk>.
Mike: Funded debt to adjusted EBITDA declined to $2 Nymex from $3, one <unk> last year.
Mike: In Q2, our capex totaled $135 million mainly.
Mike: <unk> spent on investments and store renovations construction of new stores investments in advanced analytics.
Mike: On other technology systems.
Mike: Presque stores and Western Canada and brought US Afcs also contributed to the Capex.
Mike: We are on track to hit our fiscal 'twenty goal of $775 million.
And with regard to share buybacks. We're also on track with our fiscal 2000 foot goal of $400 million and as of this week, we have repurchased approximately $6 7 million shares for a total consideration of $243 million.
Mike: Finally, before I hand, it back to questions as in previous quarters, Let me take you through the items, we excluded from our adjusted results in Q2.
Mike: Firstly, we excluded cyber insurance recoveries in Q2, the amounts amounted to $15 2 million after tax or <unk> <unk> of earnings per share.
Mike: These are complex claims and we continue to expect additional recoveries throughout fiscal 2004.
Mike: Secondly, we excluded expenses associated with our continuing plans to optimize our organization.
Mike: In Q2.
Mike: We incurred costs of $12 4 million after tax <unk> <unk> of earnings from jet.
Mike: We've incurred $19 5 million of after tax cost year to date.
Mike: And anticipate additional costs throughout the remainder of fiscal <unk> related to these restructuring plans.
Mike: These two adjustments reconcile our reported earnings per share of 72 to.
Mike: Our adjusted EPS of <unk> 71.
Speaker Change: And with that I want to wish you, all a safe and happy holiday Casey.
Speaker Change: Bill back to you for your questions.
Bill: Thank you Matt Joanne you May open the line for questions at this time.
Speaker Change: Thank you.
Speaker Change: 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 with retail prompt acknowledging your request.
Speaker Change: You are using a speakerphone. Please go ahead, the headset pressing any Keith.
Speaker Change: Yes.
Speaker Change: Next question comes from George <unk> of Scotiabank. Please go ahead.
Yes, hi, good afternoon, Michael Madden peer just wanted to get started on the same store sales number.
Michael Madden: Called out an improvement on Q3 to date, so just wondering whats driving that.
Michael Madden: And last quarter I think you guys are pretty happy with the basket performance just wondering how that's performed this.
Speaker Change: This quarter. Thanks.
Speaker Change: Okay. So.
Speaker Change: Actually what Matt why don't you take it and then turn it over to Pierre.
Matt: Yes, I'm, saying on same store sales we included that.
Matt: Disclosure for a specific reason.
Matt: When you look at trend Q1 was a $4 one or Q2 is at 2.0, what we didn't want is anyone leaving this quarter thinking on Q3 same store sales is going to be zero.
Matt: So same store sales is better than Q2.
Matt: Not as good as Q1.
Matt: And as key drivers behind that one is.
Matt: The cyber security events from last year, which will improve our Q3 same store sales, it's not a massive number if you remember last year. We said we had some initial.
Matt: Loss of sales at the beginning of the cyber event, but it's not a significant number so it's small but it will contribute to it.
Matt: What we've seen so far and what we hope for the balance of the quarter consistently improved momentum in the performance of the business.
Matt: Okay.
Matt: Plus we continue to see the same trend on the transaction count like Michael said in this.
Matt: In the script.
Matt: We continue to have traffic in our store.
Matt: Our promotion continued to be very efficient rather than for customer.
Matt: And with a good balance in managing with lower margin. So fundamentals remain very strong.
Matt: Just like to like comparison that we give more color to everybody to understand that when numbers.
Matt: Okay and just my last question on gross margins up five basis points, I think 10 X fuel adjusting.
Matt: Adjusting for the strike.
Matt: Matt I think you've mentioned previously and expansion.
Matt: 10 to 20 basis points, that's kind of a comfortable range that you wanted to get into.
Matt: Should we expect that kind of for Q3 than other quarters.
Maybe how long do you think we can expand margins I guess in the context of our competitors, having some margin compression.
Speaker Change: Yes, I mean, we said I think I said last quarter. The days of the massive increases in gross margin that we've been reporting are basically gone and we were now at the point, where we have a very stable business and some of those big opportunities have now been captured so on an ongoing basis 10 to 20 basis points would be a very healthy.
Speaker Change: Improvement in gross margin that is what we will target.
Speaker Change: Im not going to commit to anything moving forward.
Speaker Change: As we know this is a very challenging environment, but we have enough.
Speaker Change: <unk>.
And our projects when you look at supply chain. When you look at space productivity. When you look at the work we're doing on promotions to continue to improve that margin moving forward and that's certainly our intention.
Speaker Change: Okay. Thanks for the bottom line.
Speaker Change: Thank you. The next question comes from Jimmy Chen of BMO Capital markets. Please go ahead.
Jimmy Chen: Hi, good afternoon. Thanks for the question.
Jimmy Chen: I had to go back.
Jimmy Chen: Q, Michael your comment on competitors.
Michael Madden: The promotional penetration so I think you said that.
That's still up but the intensity you said in the quarter with stable.
Michael Madden: Some of the other retailers recently.
Michael Madden: It sounded like they're seeing intensity go up a bit so I just wanted to ask at this point now.
Michael Madden: You're still seeing that the general intensity is stable.
Michael Madden: We're also seeing anecdotally.
Michael Madden: Fliers.
Michael Madden: Seems like the magnitude of number of deals there.
Michael Madden: Lately, so would be curious to hear a bit more of your thoughts on that area.
Michael Madden: Hello.
Michael Madden: No we don't see major changes in the intensity.
Michael Madden: Where we see.
Michael Madden: Pressure continuous pressure is.
Michael Madden: Penetration.
Customer or hunting for deals for obvious reasons, they are buying less expensive products and.
Michael Madden: And the increase they own their own private label purchases. So I think we can handle.
Michael Madden: Send that people are struggling with their budget and they are trying to.
Michael Madden: Get as much as possible with their money, but in terms of intensity, we didn't we didn't see major changes.
Speaker Change: Okay understood and R&D initiatives with respect to Opex in the restructuring are you at a position now to give any.
Speaker Change: Insights around.
What we should expect in terms of improvements on the SG&A. Once you complete these restructuring initiatives. Thank you.
Speaker Change: Thanks, Tom I'll take that one yes, I mean, we're not going to give.
Speaker Change: Specific details on an initiative by initiative basis, what I would say.
Speaker Change: Yes.
Speaker Change: As I said in my in my prepared notes.
You can continue to see severance being recorded through Q3 and Q4.
Speaker Change: Unlike most cost reduction initiatives with when you're talking about severance you get the immediate pickup the immediate savings.
Speaker Change: Those sentences.
Speaker Change: So in.
Speaker Change: Our cost reduction initiatives, which are critical to mitigate some of these cost increases that we have.
Speaker Change: We have a mixture of projects that generate immediate savings and some that are more of a medium term basis. So we're nicely balanced.
Speaker Change: To take cost out of the organization, but.
Speaker Change: No, we're not going to provide specific numbers on the restructuring.
Speaker Change: Okay. Thank you.
Thanks Tommy.
Speaker Change: Thank you. The next question comes from Irene <unk> at RBC capital markets. Please go ahead.
Irene: Thanks, and good morning, sorry, good afternoon, everyone really interested by your comments around the category resets can you give us an idea of what you're doing at the basis of some of the changes that youre, making how consumers are going to see this in store and sort of what the mix, let's say.
Irene: So brands versus private label will look like once you Dan.
Irene: Yes.
Speaker Change: It's kind of a reset was.
Irene: During Sunrise now were talking more about space productivity. So.
Irene: We're trying to optimize the sales per square foot into the plan O Gram and the macro environment of the stores. So now we have data and the algorithms and helping us to maximize sales per square foot. So that's what we are doing right now like Michael said, we did pilot with very interesting results vary.
Irene: Encouraging results on the <unk> itself.
Irene: Yes.
Irene: More than 80% of our preliminary arm had been completed well integrated with tools with new tools that the merchandising team working with.
Irene: And well integrated with our.
Irene: Planning with supplier so when we planning activities for the year, we have to engage with loaded into it. So this is well implemented right now and now we are in deployment phase for that so we expect same store sales grow through this initiative over time.
Irene: And so that's the the plan O Gram itself, but we're also looking at optimizing.
Irene: The.
Irene: Adjustments.
Irene: To the store the sequencing of gathering to the store so when we do renovation and when we do.
Irene: We identified opportunity in few stores you can see re lines in stores to optimize sales per square foot. So that's basically the project. We're working on is slightly different than what we did through category reset during sunrise.
Irene: It's an update but it's.
I would say more powerful project with more algorithms and data that we did not have access to during sunrise.
Irene: Let's say that most part right and we're not disrupting.
Irene: Store customer to the degree we had two in.
Irene: Category reset.
Irene: Yes.
Irene: Unless were doing a major renovation or building a new store, we're moving where customers are accustomed to fiber category. So if you want crackers and cookies.
Irene: Go get crackers and cookies, what you will see.
Irene: Our our changes in terms of.
Irene: Linear feet.
Irene: In terms of brand, sometimes and in terms of owned brands, where it makes sense.
Irene: And then we've got the algorithms and they're performing as I said as well or better.
Irene: Real life than the algorithms in terms of.
Irene: It'll be boosting sales and maybe some of the other numbers.
Irene: And it's probably the biggest project in terms of upside as we roll that out.
Irene: But we're very.
Irene: We're very confident in it but you don't want to rollout something in the store, which effects customers, whether its in testing and piloting and that's what we've been doing and we're extremely happy with such testing and piloting.
Speaker Change: That's super interesting, thank you and I'm, sorry, I misspoke I meant Amit planet grants.
Speaker Change: So if the customer goes into the store.
Speaker Change: Well the customer does it look meaningfully different.
Speaker Change: Part of this shift in Macau in the planting plan or is it really just very subtle, but but to deliver the increase in square footage.
It will vary by category.
Speaker Change: Some category will have extra space. Some other category would have maybe less space to give more space to category that we have more opportunity in terms of sales in terms of assortment and we're not expecting overall significant changes will just optimize what we already having.
Speaker Change: Expecting less assortment for our customer, but again it could be very valuable by category, but overall like Michael said, not very disruptive and.
Speaker Change: No major changes in <unk>.
Speaker Change: <unk> counts in our stores like <unk> that could vary but.
Speaker Change: Total store and not expecting big Big changes in terms of choice for customers.
Speaker Change: That's very helpful. Thank you and just one other question.
I was there any interest in your commentary around the price increase request multinationals, we're hearing it from others, but yet at the same time.
Speaker Change: Hearing from the multinational visit they're trying to they want to focus again on volume. So I'm just trying to kind of reconcile the.
Speaker Change: Yes.
Speaker Change: Behavior from from the rhetoric and wondering what kind of insights you may be able to provide there.
Yes, so paradigm met with.
Speaker Change: All of our all of our big suppliers and medium sized suppliers.
Speaker Change: Borrowings for a few weeks ago.
Speaker Change: And we.
Speaker Change: We spoke about the rest of our team also did a good job, but we lead it off by by.
Speaker Change: Talking in.
Speaker Change: I was pretty clear.
And I don't want to misstate. This is not the vast majority of our supplier partners. We have a great relationship and I believe a lot of them are struggling first recovered and then through inflation is very very tough on their businesses.
But we are seeing and I havent see I saw something last week winner.
Fireworks partner put out a press release multi.
Speaker Change: Multinational supplier put out a press release, saying, hey, we keep increasing prices, we keep making more money.
Speaker Change: We did not like that we.
Speaker Change: Not like that one iota that's not the way it should be it's very very bad business in the long run for supplier partners terrific to have that kind of a fast elasticity in their pricing.
Speaker Change: And it's bad practice.
Speaker Change: Also said I'll be perfectly Frank with you I said.
Speaker Change: Before before there was high inflation.
Speaker Change: You wanted to pass every increase on Turkey. If you pay your people a few bucks more you didn't pass it on to US who you know are going to get the blame for it and then onto the Canadian consumer.
Speaker Change: That's all right if ACA business, that's not what happened before I think in the short term some of them believe that can pass. This on that is completely elastic will get blamed as grocers.
Speaker Change: And Canadian suffered.
Speaker Change: And so we were pretty clear that and some of them are just ridiculous.
Speaker Change: <unk> looks like every cost you hop you either should mitigate or you should eat some of it.
Speaker Change: Every time, we have a cost increase we don't pass it onto the onto the customer we have to find ways to save money and we got to eat some of it if we have to and that's the way you do business and you find efficiencies in your own business, So and I'm not talking about a lot, but I'm talking about from big multinational companies and.
Speaker Change: Discussions with them.
Speaker Change: And I guess some of them some good discussions.
Speaker Change: I don't know how this is going to end up but we're not going to take we've said all along will take fair price cost increases, we will not take unfair cost increases and pass them on the Canadians.
Speaker Change: We will fill it with other goods on our in our store, including our own brands.
Speaker Change: That's very helpful. Thank you.
Speaker Change: And if I may on the positive side.
Speaker Change: That's the exception.
Speaker Change: This is a real switch out period going positive in Q1, and Q1, we said that.
Speaker Change: We had one third of the.
Speaker Change: Cost increases we had the prior year.
Speaker Change: So in Q2, we can see it's one shift of what we had last year at the same time, so the pressure on inflation is going down.
Speaker Change: The example that Michael gave it.
Speaker Change: Few supplier that they need to understand that to get the city of customer to pay more is is that the limit right now and we need to find different solutions, we're dealing with inflation since two years, it's not good for our industry is not good for their product.
Speaker Change: To continue to increase prices and we'll take care of that but again the trend is going the right direction.
Speaker Change: Les just increases in numbers and in magnitude than prior year to one five than we had last year in Q2, that's great to say and also we also had a discussion we've got to put more pressure on.
Speaker Change: Suppliers, where commodities are coming down and costs should be coming down for Canadian it's not just a.
Speaker Change: People always ask is Williams, great inflation is slowing and I think it will dramatically slow.
Speaker Change: But.
Speaker Change: Cases, where it rose because of global tensions or other other matters, if the commodity prices are coming down wire Canadians.
At elevated price Phil.
Speaker Change: <unk> discussion for companies to have and we're having right now.
Speaker Change: That's great. Thank you.
Speaker Change: Thank you. The next question comes from Michael Van <unk> from TD Securities. Please go ahead.
Speaker Change: Hey, guys, it's Evan in for Mike.
Evan: My My first question is on same store sales.
Evan: If I just use this.
Evan: Well math of taking same store sales ex fuel.
Evan: Less inflation.
Evan: Your same store tonnage is still negative around.
Evan: Let's say 354% range.
And.
Evan: This is where in the third year now.
Evan: Negative growth in that number.
Speaker Change: So given that comps are easier and do you expect that to stabilize soon and maybe you can elaborate a bit on the steps you're taking to stabilize that.
I haven't.
Speaker Change: We will.
Speaker Change: Peter and I will tackle this together just first of all.
Speaker Change: For several years now we don't talk line tonnage just because.
Speaker Change: Historically, there's so much new.
Speaker Change: Noise within the mix.
Speaker Change: Within tonnage. So we don't really talk about that on a macro level basis, though as we've said John this whole period.
Speaker Change: The tonnage lower yeah of course this is the whole industry.
Speaker Change: So.
Speaker Change: I think thats, probably just worth calling out but is there anything you want to add.
Speaker Change: The executive rate right now I think that the.
Speaker Change: What we did in the past with tonnage inflation in same store sales is no more rather than considering the magnitude of inflation, we have been over the last two years and customers behavior change a lot like we said <unk> is going down and the entire industry. So this smith is very difficult and irrelevant to do in my opinion, but.
Speaker Change: Ken.
Speaker Change: We are dealing the same market.
Speaker Change: I think we are.
Speaker Change: I'm pleased with.
Speaker Change: Our overall performance when we look at every single format individually like we said earlier so in discount at sales. We're pleased with our performance we are growing our share and to discount market same thing in the full service. So we're pleased with the fundamental its way we remain extremely <unk>.
Speaker Change: And going forward.
Speaker Change: We're making progress we have strong plan and we believe that the same store sales will continue to improve.
Okay, great. Thanks, and then just.
Speaker Change: Yes.
Speaker Change: Discount.
Speaker Change: It seems like the trying to discount is still very much there.
Thank you for your discount exposure hasnt been increasing very much are you still planning to convert.
Speaker Change: Targeted 25% of stores in the western and what's preventing you from from <unk>.
Speaker Change: <unk> not yet.
Speaker Change: That conversion rate.
Speaker Change: So a couple of things there. So yes simple answer to your question is absolutely we still have some.
Speaker Change: Sometimes in the west to continue that conversion. So we still have some scope.
Speaker Change: The increase.
Speaker Change: Just again I always do that but just to clarify when we talk about this tied down to discount.
Speaker Change: Not necessarily trade down to a discount.
Speaker Change: Our customers are still in offshore we still have very strong.
Customer numbers in fact, they are increasing so what that tells you is that.
Speaker Change: Our customers are trading down in our stores.
Speaker Change: So they are looking for value in our stores as opposed to a trade down to discount so I would like to just clarify that.
Speaker Change: And then in terms of continued discount expansion look that's something that we will continue to look at strategically. So we know we still got some scope in the west that will take law we.
Speaker Change: Have some scope in Ontario.
Speaker Change: <unk>, we're not going to massively expand discount that's not the structure of our business, but we do have some scope to continue to expand.
Speaker Change: Michael Thanks that was well.
Speaker Change: Matt.
Matt: Just to clarify discount same store sales growth across the country is falling in terms of.
Speaker Change: Magnitude of numbers are coming down.
Speaker Change: Just to clarify too.
We stick to what we said as inflation abates.
Speaker Change: Abating fax now as we reach peak and start going down in interest rates. Unlike full service I like it a lot.
Speaker Change: I like where we're positioned and I like how we've had to change full service and make it even more competitive through COVID-19 and through inflationary times. This is not.
Speaker Change: Sure.
Other grandfathers full service store and so I like where we are like the changes that we've talked about here today like our strategy.
Speaker Change: And then when we get a little tailwind youll see here.
Speaker Change: Great Thanks, and if I can.
Speaker Change: Sneak one more in just on the SG&A.
Speaker Change: If I look at it excluding.
Speaker Change: Depreciation.
Speaker Change: Historically Q2 has typically been quite a bit below Q1 in terms of dollars.
Speaker Change: Other than last year and this year.
Speaker Change: What has changed in the timing of your expenses to account for that shift.
Speaker Change: So it's a good question when you look at SG&A as I said in my.
Speaker Change: In my script.
Speaker Change: Increase in SG&A is very consistent with what we've had for many quarters now as we continue to invest in a medium term initiatives as we continue to invest in store growth.
Speaker Change: So nothing has changed that has changed.
Speaker Change: Some of the inflationary cost increases so, particularly when you look at store retail labor.
Speaker Change: That has had a bigger impact on our P&L than in prior quarters.
Speaker Change: Again from wage increases minimum wage increases negotiated increases etcetera. So this is why we've taken the time today through Michael script in my script to really map out some of the cost optimization initiatives that were working on because.
Speaker Change: When you have inflationary cost increases like this you have to take these costs you have to take other costs out of your P&L to mitigate so you'd have to have.
Speaker Change: Significant.
Speaker Change: Cost reduction initiatives in play to have that mitigation effects.
Speaker Change: That's the reason we gave you the additional detail because this is not empty words. These are active cost reduction initiatives that were working on as we speak.
Speaker Change: You very much.
Your next question comes from Vishal Schreder with National Bank. Please go ahead.
Speaker Change: Yes.
Vishal Schreder: Hi, I just wanted to get your perspective on shrink, which you indicated was was increasing.
Vishal Schreder: Is this something Thats. It's concerning are there initiatives in place that you can implement.
Vishal Schreder: To reduce that and how should we think about the impact.
Vishal Schreder: On a year over year basis related to shrink.
Vishal Schreder: Yes.
Speaker Change: Okay. Thank you for your question good question.
Speaker Change: We saw a slightly higher shrink number.
Speaker Change: And some rising.
Speaker Change: Desktop shoplifting.
Speaker Change: Overall, our margin remains strong.
Speaker Change: <unk> levels.
Speaker Change: Net management shrink management is.
Speaker Change: There is always something very challenging but the business is used to deal with that.
Speaker Change: Women into the shrink, but yes, there is a bit more pressure from tariffs, but overall our margin remains strong all in so and the team continued to work on mitigating.
Speaker Change: Shoplifting in test and with action plan.
Speaker Change: Right now the volatility is creating pressure on shrink, but as I said.
Speaker Change: The shrink number is included in our gross margin performance and our girls performing performances above our peers. So we were pleased with that.
Speaker Change: Okay and some of your.
Speaker Change: Your other initiatives potentially causing.
Speaker Change: Causing or creating opportunity for shrinks, such as self checkout and if so how does management think about balancing that.
Speaker Change: That's part of the initiative, we adding in place already to mitigate shrink or uplift.
Speaker Change: Uplifting or type of thing like that there's many small things that we can improve and mitigate the shoplifting in stores and this is when the example, but it's not a big one.
Speaker Change: Lisa.
Speaker Change: Just to tack onto that is an interesting question vishal because.
Speaker Change: Alright.
Speaker Change: Yes. The other example, we could give you would be CFC III.
So when you launch.
Speaker Change: While our distribution center in that initial ramp up phase the shrink is a little bit higher I wouldn't call. It acceptable shrink because we don't like any shrink.
Speaker Change: And we're fighting against that all the time, but it might be an example of temporary layoffs shrink would be would it be higher on a launch.
Speaker Change: Okay. Thanks for that color and just changing gears here I was hoping to get some context on empires.
Speaker Change: Its supply chain in particular, its fleet of trucks and if there is options or if the company is exploring freight as a service.
Type initiatives and if so is that something meaningful that investors can look forward to in terms of opportunities for efficiency.
Speaker Change: Yeah.
Speaker Change: Xactly, we like.
Speaker Change: We said earlier our supply chain is one of the pillar two.
Speaker Change: Improve our cost and the team.
Speaker Change: It is already looking at not only looking at but we already seeing benefit of activities did it would be.
Speaker Change: Be optimize our routing the utilization of equipment has changed it has improved.
Speaker Change: Our relationship with some more carriers has changed and we are expecting to take charge of more.
Speaker Change: Load to reduce cost bring.
Speaker Change: Bring more product in our Rcs versus using DSD suppliers.
Speaker Change: Suppliers all of those initiatives are there to improve our supply chain minimize our costs improve our margin and it's already in place and we expect to see those benefits into this fiscal year and in next fiscal year.
Speaker Change: Everything is considered right now, including taking CIT are taking charge of our transportation activities more than we do right now.
Speaker Change: Thank you.
Speaker Change: Thanks Michelle.
Speaker Change: Thank you. Your next question comes from Mark Petrie from CIBC. Please go ahead.
Mark Petrie: Thanks, Good afternoon.
Mark Petrie: Wanted to just follow up on gross margin first and is it fair to say that the more modest expansion.
Mark Petrie: This quarter is mostly ex fuel is mostly a reflection of normalization and what youre lapping or where theyre greater pressures.
Mark Petrie: In costs.
Mark Petrie: Cogs anywhere in areas in Q2 versus versus Q1.
Mark Petrie: No its maura has more stabilization.
Mark Petrie: And you look at the different drivers of gross margin.
Mark Petrie: We benefited like like we said through supply chain efficiencies, we had a tailwind.
Mark Petrie: But then if you look at things like business unit mix and you look at the core margin of the business.
Mark Petrie: It's relatively stable period on period and year on year.
Mark Petrie: So in some respects is nice because we got to that point, where we're running a stable business.
Mark Petrie: But having said that we still are confident that we've got enough tailwind in enough fuel in the tank from our initiatives in freight as a services and might be a really good one that we just talked about.
Mark Petrie: To continue to gradually improve that margin over time.
Mark Petrie: And if I may in Q2 Q2 is fall.
Like Michael said earlier.
Mark Petrie: This rate increase as change again.
Mark Petrie: Sure on promo penetration.
Mark Petrie: The good news is it's not the first time, we have to deal with.
Mark Petrie: Similar behavior changes over the last two years and we have been able to.
Mark Petrie: Correct course, very quickly based on new customer behavior. So into Q2 fall back to school interest rates increased we saw additional pressure on promo for nutrition, but we have been able to correct course very quickly. So that's maybe another element into Q2 to consider.
Speaker Change: Understood, Thank you and and that.
Speaker Change: The promotional penetration pure did is that any different or that shift is it any different than discount versus full service.
Speaker Change: Well good question.
Speaker Change: Seeing the same appetite for deals for sure.
Speaker Change: <unk>.
Speaker Change: I cannot give you more information than that.
Speaker Change: Very good question, but every time, we've seen things in the news.
Speaker Change: We have to readjust, our promo mix to make sure that we stay in control of our margin. So.
Speaker Change: I don't have specific differences between discount.
Speaker Change: And full service.
Speaker Change: The Flyers smaller and discount there more.
Speaker Change: Nor regular price.
Speaker Change: That's difficult to say, but we're seeing the same customer behavior change everything there is something happening because people are shopping multiple stores not only discount we're just going to discount theyre going to full service to discount to their shopping what four or five stores on average. So it's the same customer shopping in different stores. So I <unk>.
Speaker Change: To see same type of behavior in both foodservice and discount.
Speaker Change: Yeah, Okay, and I know you don't typically talk about the regional performances, but just given sort of the shifts in square footage to discount in Quebec. In particular are you are you seeing any changes in the competitive intensity in that market or maybe just on the topic. We were just discussing in terms of promotional penetration.
Speaker Change: Yes, we saw a slight change in Quebec and in term of so.
Speaker Change: When our competitor announced many conversion from full service to discount.
Speaker Change: So yeah, we saw more activity in the real estate side and discount in Quebec.
Speaker Change: And obviously, we're not present in discount because.
Speaker Change: A number of store, we have full service in Quebec, So yes.
Speaker Change: Yes, it's been a bit more.
Speaker Change: Discount activity in Quebec, and Tim or real estate, but many of those has been.
Speaker Change: With conversions.
Speaker Change: So, yes and in conversion in some places.
Negative liquor store, but in some other good effect positively in our stores.
Speaker Change: In the past we saw that.
Speaker Change: Full service store kind of engine conversion to discount.
And it was most of the things that are positive for AG.
Speaker Change: So right now there is appetite for discount but again.
<unk> is going down we have a bright future.
Speaker Change: We have strong stores strong networks strong banner in Quebec strong franchisee.
Speaker Change: We continue to believe in our strategy.
Speaker Change: Okay helpful and sorry, one just last sort of housekeeping.
Speaker Change: Is it fair to say that space productivity is not yet contributing.
Speaker Change: In the P&L or has that contribution started now or how material is the contribution now versus the total size of the opportunity.
Speaker Change: Let's say not material for now.
Pilots are done plan of Rems are done with the implementation will follow we will do with followed the category planning with suppliers. So like Michael said benefit will continue to come from now to the next six mountain into the device.
Speaker Change: Yeah.
Speaker Change: Let's see.
Speaker Change: Just seeing the beginning.
Speaker Change: Okay got it thanks, a lot for all the comments and all the best happy holidays.
Speaker Change: Thank you thanks Mark.
Speaker Change: Thank you. Your last question comes from Chris Li from Desjardins. Please go ahead.
Chris Li: Alright, thanks, everyone. I think the answer is yes, but I wanted to just quickly confirm so you are still seeing higher transaction counts at the conventional banner is that correct.
Speaker Change: Is that correct yes.
Speaker Change: Okay, Okay, and that's again, what gives you the confidence that as conditions normalize.
Speaker Change: We will see some of the basket size to trend up again as people buy more from the conventional banners.
Speaker Change: Okay.
Speaker Change: Yes, okay.
Speaker Change: Thank you Paul to comment on the SG&A expense reduction initiatives, that's very helpful.
Speaker Change: My question is when you look at yes Chi expense dollars.
Speaker Change: I know there had been growing at around 2% to 5% in the law.
Speaker Change: Pass through so quarters just from.
Speaker Change: For modeling perspective, do you expect a similar rate of growth.
Speaker Change: The rest of the fiscal year or do you expect that to start to ease.
Speaker Change: Some of these benefits start to.
Speaker Change: It would be realized.
Speaker Change: So let me take that and again I always like to look at this separately in terms of rate in dollars.
Speaker Change: From a dollars perspective.
Speaker Change: The shifts.
Speaker Change: Start to see that number come down.
Speaker Change: As well as the impact of our cost.
Speaker Change: Cost reduction initiatives start to bite.
Speaker Change: So that's not a commitment, but that's certainly what our expectation is.
Speaker Change: From a rate perspective, the two factors driving the rate was a little bit higher because we.
Speaker Change: We didn't have as much sales leverage on the top line with a lower sales growth number.
Speaker Change: We also have the cost increases from retail labor and the cost initiative program and have not yet really kicked in so as you move forward.
Speaker Change: We hope that that sales rates SG&A rate will start to decrease at a we have highest sales be.
Speaker Change: That aggravation on the retail labor line will continue but see the impact of our cost reduction initiatives will start to kick in and we'll start to see that in Q3 with the restructuring and all the work we're doing on supply chain in.
Speaker Change: Goods not for resale so.
Speaker Change: Yes, I think the expectation is that as a percentage of sales that should start to come down.
Speaker Change: Okay. That's helpful and my last question, maybe just on <unk> I'm, just curious more specifically in the greater Toronto area can you share with us how are sales trending.
Speaker Change: This market the cooling and then maybe secondly, if you look at the industry overall within the GTA what is the online penetration.
Speaker Change: No.
Speaker Change: Okay.
Speaker Change: Thrown in.
Speaker Change: And we will call you back later I would guide you to where you can look to see what the penetration is in the GTA I don't know if there.
There is a DTA number we'll take a look and maybe you could just talk about our own gathered ourselves going on.
Speaker Change: But one thing for sure.
Speaker Change: Online penetration is always either on fall and winter than it is in summer so.
Speaker Change: Without looking at the number I can guarantee you we have IR sales right now because the season.
And it will continue to grow during the winter.
Speaker Change: And like Michael said, we have strong NPS.
Speaker Change: This service continues to be highly appreciated.
Speaker Change: Is double digit growth.
Speaker Change: We're well positioned to capture that growth pusher.
Speaker Change: Okay. So you would exclude the launching Calgary this quarter, youre, saying well that sounds good.
Speaker Change: Positive yes.
Speaker Change: Yes.
Speaker Change: Yes, I mean again, when we launch <unk>.
Speaker Change: FC and the initial periods that the sales are very small line, so that ramping up and ramping up aggressively but from a very small base. So yes, even if you exclude CSC three healthy healthy growth.
Speaker Change: Okay, well, thanks, very much and happy holidays to everyone. Thank you.
Have a great holiday.
Speaker Change: Thank you we have no further questions I will turn the call back over to Katie Payne.
Katie Payne: Thank you Joanne we appreciate your continued interest in Empire. If there are any unanswered questions. Please contact me via E Mail, we look forward to having you join us.
Katie Payne: In our fiscal 2020 for a conference call on March 14th taxing.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today.
Speaker Change: Thank you for participating and we ask that you. Please disconnect your lines.