Q3 2024 Loblaw Companies Ltd Earnings Call
and Neil Geithner. Thank you, thank you, thank you.
Speaker Change: Good morning, ladies and gentlemen, and welcome. The general boss owns the third quarter 2024 results conference call. At this time, all lines are in a listen-only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. I would now like to turn the conference over to Mr. Roy MacDonald. Please go ahead.
Speaker Change: Thank you, Jenny, and good morning, everybody. Welcome to the Loblaw Companies Limited third quarter 2024 results conference call. I'm joined this morning by Per Bank, our President's Executive Officer, and by Richard Dufresne, our Chief Financial Officer.
Speaker Change: So before we begin the call, I want to remind you that today's discussion will include forward-looking statements, which may include or are not limited to statements with respect to Loblaw's anticipated future results.
Speaker Change: These statements are based on assumptions and reflect management's current expectations.
Speaker Change: As such, are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations. These risks and uncertainties are discussed in the company's materials filed with the Canadian Securities Regulators.
Speaker Change: Any forward-looking statements speak only as of the date they are made. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether it's a result of information, future events, or otherwise, other than what's required by law.
Speaker Change: Also, certain non-GAAP financial measures may be discussed or referred to today, so please refer to our annual report and other materials filed with the Canadian Securities Regulators for a reconciliation of each of these measures to the most directly comparable GAAP financial measure.
Speaker Change: And with that, I will now turn the call over to Richard.
Richard Dufresne: Thank you, Roy, and good morning, everyone. I'm pleased to report that we delivered another quarter of steady operational and financial performance.
Richard Dufresne: We continue to provide value to consumers and carefully manage our expenses while delivering earnings performance in line with our financial framework.
Richard Dufresne: On a consolidated basis, revenue grew by 1.5% to $18.5 billion and adjusted EBITDA increased by 7.4%.
Richard Dufresne: Both consolidated revenue and same-store sales were negatively affected by the shift in Thanksgiving, which occurred in Q4 this year versus Q3 last year.
Richard Dufresne: compared to Q2, our sales performance improved in both food and drug.
Richard Dufresne: Adjusted diluted net earnings per share grew by 10.6% to $2.50
Richard Dufresne: On a gap basis, our net earnings increased by 25%, reflecting the recovery of $125 million related to a PC Bank commodity tax matter.
Richard Dufresne: In food retail, we attracted higher customer traffic and drove tonnage growth. The timing of Thanksgiving had a negative impact on a reported same-store sales of approximately 80 basis points.
Excluding this impact, same-store sales grew 1.3% in the quarter.
Richard Dufresne: Canada's grocery CPI has returned to normal, coming in at 2.3% in the quarter.
Richard Dufresne: Our internal CPI-like food inflation measure was slightly higher this quarter. However, when we look at our average article price data, which reflects items actually bought by our customers, our internal inflation rate was much lower than CPI and lower than our adjusted same-store sale figure.
Richard Dufresne: We're still seeing higher than normal price increases coming in from our global vendors.
Richard Dufresne: The weaker Canadian dollar, which is dropping versus the U.S. dollar, is having an impact on inflation mostly in fresh categories.
Richard Dufresne: Our hard discount banners, same-store sale performance, outperform our conventional stores, illustrating that the consumer shift to discount continues.
Richard Dufresne: We're still pleased with the success of our conversions and the ongoing success of our Maxi banner in Quebec, which celebrated the opening of its 175th store in the quarter. Last week, we opened our hot 183rd Maxi, and we have four more to go before year-end.
Richard Dufresne: We opened six small-format no-frills stores in Q3, and while it's still early days, we are pleased with customer reactions and overall performance.
Richard Dufresne: In Q4, we will be adding another 20 new Maxi and Nofril stores, with the majority of these being new builds as we continue to bring more value to communities across the country.
Richard Dufresne: For the full year 2024, we expect to have opened 50 new stores and converted an additional 42 stores.
Richard Dufresne: Right-hand side had a negative impact on food same-store sales of 53 basis points in Q3.
Richard Dufresne: These categories are accretive to our gross margin and we continue to carefully manage inventory levels.
Richard Dufresne: Discount continues to grow tonnage market share and our conventional stores are performing well. In drug retail, absolute sales increased 3% and same-store sales grew 2.9%. The timing of Thanksgiving had a nominal impact on drug retail same-store sales growth.
Richard Dufresne: Pharmacy and healthcare services grew same-store sales by 6.3%, driven by broad strength in prescription and new healthcare services.
Richard Dufresne: Our specialty acute and chronic prescription growth led our pharmacy numbers. Patients continue to respond very positively to the convenience and expanded level of primary care we offer through our more than 1,800 pharmacies across the country, including our 120 new in-store clinics.
Richard Dufresne: As expected, our front store, Same Store Sale, improved over Q2, but declined by 0.5% year-over-year. Beauty continues to deliver strong growth, in particular the Prestige category.
Richard Dufresne: Headwinds continued our decision to exit certain low-margin electronics categories and from lower consumer spending on food and household convenience.
Richard Dufresne: Our decision to exit these electronic categories, including laptops, computers, TVs and cameras, is having a 1% impact on front store sales in 2024.
Richard Dufresne: We recently decided to also exit game consoles and games altogether, which will affect Q4 this year and add 1% more pressure on front store sales next year.
Richard Dufresne: These sales come at extremely low margin and do not drive basket building.
Richard Dufresne: We remain pleased by the underlying strength, profitability, and sales momentum of our front store.
Richard Dufresne: Overall, drug retail sales growth continue to outperform food and have a positive impact on our margin mix.
Richard Dufresne: Online sales in the quarter reflected our highest growth rate in two and a half years, increasing 18.5%.
Richard Dufresne: Within grocery, delivery continues to outperform as a channel. We remain pleased with our online sales penetration in both food and pharmacy.
Richard Dufresne: Across our grocery and pharmacy banners, we are proud to see Canadians increasingly choosing our stores for value, quality and service.
Total retail gross margin was 30.9%, growing 30 basis points.
Richard Dufresne: Trading margin in our grocery business was flat. I'm pleased with the strong shrink improvements in both food and drug, which drove our retail gross margin improvement this quarter. That said, improving shrink remains a major focus and opportunity for us.
Richard Dufresne: Our teams continue to do a great job managing costs. Our SG&E spend rate as a percentage of sale decreased 30 basis points, driven by year-over-year benefits of certain real estate activities and some operating leverage. This was partially offset by incremental costs related to the ramp-up of new stores and conversions.
Richard Dufresne: Third Quarter Retail EBITDA increased by $130 million, yielding a margin of 10.9%.
Speaker Change: PC Financial's revenue increased 0.8% driven by growth in the credit card portfolio and partially offset by lower service growth in our mobile shop.
Speaker Change: The bank's adjusted earnings before tax increased by $14 million with higher interchange and credit card fee income and lower operating costs offsetting higher credit losses.
Speaker Change: We remain very comfortable with the risk profile of the bank's portfolio. We continue to take a conservative position in our provisioning with a strong and well-capitalized balance sheet.
Speaker Change: On a consolidated basis, adjusted EBITDA increased by 7.4% to $2.1 billion. Our retail free cash flow was $562 million and we repurchased $523 million worth of common shares.
Speaker Change: Our balance sheet remains strong and we continue to improve our key return metrics. Our return on equity sits at 23.3% and our return on capital at 11.8%.
Our tax rate is returning to normal versus last year.
Speaker Change: As we approach the end of our fiscal year, we remain confident in our ability to deliver our financial framework, and we now expect EPS growth for the year to be slightly higher than our original outlook.
Speaker Change: Additionally, as a result of the accelerated pace in store openings, we now expect to invest approximately $2.3 billion in gross capital expenditures or $1.9 billion net of proceeds from property disposal.
Speaker Change: The fourth quarter is off to a good start. Food same-store sale growth is improving over the previous quarter, but we expect incremental top-line pressure on front store and shoppers as we lap our biggest quarter of electronic sales.
Speaker Change: Also, gross margin is expected to continue to benefit from incremental shrink improvements.
Speaker Change: Customers continue to respond well to our focus on delivering the value, quality and service they are looking for. Our assets are well positioned, we are executing well and we are investing for the future, all while delivering steady operational and financial performance.
I will now turn the call over to them.
Speaker Change: Thank you Richard and good morning everyone. So we continue to build momentum in our food and drug business in the quarter. Canadians remain focused on value and we deliver the quality, prices and service our customers count on.
Speaker Change: This quarter, more customers once again visited our stores and our tonnage grooves, demonstrating that we are meeting their needs.
Speaker Change: As expected, we saw improvements in our same-store sales performance in food.
Speaker Change: And we see that continuing into the current corona. The shift to discount and to value continues and sales goes in our discount as well.
Our banners outperformed our conventional banners once again.
Speaker Change: In our hard discount division, our team opened 29 new Maxian No-Fill stores in the quarter, including six new small No-Fill stores. I'm proud to add that we now have three new no-name pilot stores operating in Ontario.
Speaker Change: with the latest one opening in Brockville only two weeks ago.
Speaker Change: This is a great example of the innovative solutions that we bring to Canadians.
Speaker Change: The intent of these stores is to take out all unnecessary costs and then pass those savings back to our customers.
Speaker Change: This means we are priced up to 20% below the cheapest of our competitors.
Speaker Change: I'm very pleased with how the team implemented this initiative. A small team took this from concept approval to a first door opening in less than two months. It's still too early to draw meaningful conclusions. We're still learning and refining our offer.
Speaker Change: If it works, we will open more. If not, we will pivot, take the learning and apply them to our discount program.
Speaker Change: Across our super and market banners, we continue to provide a very strong, differentiated, full-service grocery shop.
Speaker Change: We have continued to improve our offering and are providing more value, more quality and more choice for these full service customers. Every year we bring great new products to our stores.
Speaker Change: Some of these innovative products come from our smaller local vendors and others from across the globe. This year we have introduced more than 650 new products to Canadians.
Speaker Change: And I'm excited to share a few of my favorites with you on our Holiday Inside Us report. My personal favorite is the PG Ultimate Pork Rib Roast. Not only is it simple to prepare and delicious, but it's priced at only $15.
Speaker Change: Our innovation is also evident in our leadership in bringing multicultural food to Canadians.
I saw an interest that first-generation immigrants
Speaker Change: And that number is growing faster than any other G7 country.
Speaker Change: This is why you will notice new merchandising and more multicultural products across our stores, including more T&T private label products. And speaking of T&T, we have recently opened new stores in London and Canada and Ontario and last week in Brossard, Quebec.
Speaker Change: All three opened with huge customer excitement. I'm sure you have seen the videos on social media from Tina. And our TNT stores continue to outperform our existing network and is generating consistent high single digital same-store sales growth.
Speaker Change: We shall call out the impact of our right-hand side on our food sales.
Speaker Change: This is another area where we are creating excitement for customers and bringing more value to innovation. Last quarter I mentioned that we plan to add new apparel brands and that was just the beginning. We now have two of our real Canadian superstores piloting our new right-hand-side concept.
Speaker Change: and a third in Milton, opening at the end of November.
Speaker Change: We're still in the early days, but we are very pleased with their performance.
Speaker Change: Across our retail banners, we have also introduced some fun into the shopping experience with our first ever Marvel collectible card programs.
Speaker Change: A subsequent customer survey shows that most customers felt the program was exciting and well executed. And our customer data shows that we attracted new customers, drove higher baskets and more trips.
Speaker Change: Next up is our new cookware program. Launched in October, customers collect stamps, then redeem them for 75% off high quality pots and pans. We've seen great customer interest and it is already exceeding our initial expectations.
Speaker Change: I am pleased with these results as these programs help to create excitement in our stores today and build loyalty over the long term. And we gain valuable insight that we will apply for future programs.
Speaker Change: Overall, our customer traffic at Tonnage was up in the quarter. This is a testament to the positive customer response to all the things we are doing to deliver great value and service to Canadians.
Speaker Change: And speaking of value, I was very pleased to see that Canadians again choose the PC Optimum as the most trusted loyalty program in BrandSpark's annual review.
Speaker Change: Turning now to our drug retail business, we are seeing a return to normal. Growth in pharmacy and healthcare services continue to be strong, reflecting long-term trends that continue to position us very well for the future.
Speaker Change: Our same-store sales and front-store growth improved compared to Q2, but we expect sales pressure to continue in Q4. As Richard highlighted, we saw continual strength in our Precise Beauty category, but saw pressure as we exit low-margin electronics categories and a slowdown of consumers' convenience spend.
Speaker Change: We have been working to address this. This week we launched a new program across our shoppers and farmers network to lower the prices of hundreds of items that are most important to our customers.
Speaker Change: With Fundstore improving and pharmacy healthcare services growing, we are well positioned to further strengthen our leadership position.
Speaker Change: This quarter I wanted to take a minute to highlight our commitment to have all our control brands and in-store plastic packaging aligned to the Consumer Goods Forum Golden Design Rules by 2025.
Speaker Change: The reality is that the issue of plastic is one that will require a collective effort and technological advances to tackle. The solution is well beyond the actions of any single company.
Speaker Change: As a retailer and a brand owner, we have the opportunity to play an innovating and leadership role. In collaboration with our suppliers, we have already achieved a compliance of almost 80% of our control brand and in-store plastic package products.
Speaker Change: And we're working with our national brand vendors, encouraging them to join us and adopt the Golden Retirement Rule by 2025.
Speaker Change: As we work hard to close the year, our focus remains on our strategic pillars of retail excellence, driving growth and investing in the future, while at the same time embedding ESG into everything we do. Our success allows us to make important investments into our growth areas.
Speaker Change: creating operational efficiencies and into protecting our planet. This in turn allows us to offer Canadians the best value and service.
Speaker Change: We now open the call for questions. Thank you. Thanks, Per. Jenny, if you'd please introduce the Q&A process.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the one on your touchtone phone. Questions will be taken in the order received. If you wish to cancel your request, please press the star followed by the two.
Speaker Change: Once again, that is star 1 should you wish to ask a question.
Speaker Change: Your first question is from Tammy Chen from BMO Capital Markets. Your line is now open.
Tammy Chen: Hi, good morning. Thanks for the question. Maybe I'll start with shoppers on the front of store here. So I know you laid out a number of factors and what's going on there, and that's very helpful. I am just wanting to go back to, you know, if I look on a two-year stack, that front of store comp, it's still decelerating. You've talked about going forward, there's some additional electronics headwinds, so I understand that. But I want to talk about the segment without the electronics. Are you just seeing the consumer incrementally still pull back from this?
Tammy Chen: this channel overall? How are you thinking about that minus the electronics part going forward?
Speaker Change: No, thank you, that's a great question. So what we are seeing at the front door is that our prestige beauty is continuing to perform really, really well.
Speaker Change: So we are pleased with that. In the last quarter we saw that the cough and cold was slightly down, and that was on top of a very, very strong quarter last year.
and then food.
Speaker Change: The shift to value and discount, of course, has a slight impact on the food sales in our shop at Drug Mart stores.
Speaker Change: But we are realizing it by lowering more than 500 products by 10 to 50 percent, so we will encourage more and more customers to shop in our front store. And we stay confident going forward in our front store sales.
Richard Dufresne: Richard, do you have anything to add? Yeah, I just want to put a little bit more emphasis on cough and cold, because you've heard us over the last two years report every quarter that we had record cough and cold sales, and so that is now behind us.
Richard Dufresne: Like, we still are selling more cough and cold than historically prior to COVID. But those numbers are now starting to trend to normal. So that is also affecting our front store sales. And I expect that to continue going forward. And Hava was up as well.
Speaker Change: Okay, got it. Thank you. Another question I had is, it might be a little early, but just want to gauge your initial sense. Like, how are you thinking for next year 2025 in your framework? Like you've had, you know, three very strong EPS growth years that are above your framework. You know, you've been talking about the pre-opening costs because you've got the new store pipeline. Like what, as you look to next year, keeps
Speaker Change: your framework and your growth still in that 8 to 10% range? What are the risks and what are the levers in your control that you'll you'll lean on? Thank you.
Speaker Change: Let me start and then I'm sure Richard will add to this. So next year we are opening a new DC. Of course we are in control and we are sure that will be good. We are also opening more stores next year than this year. But at the same time...
Speaker Change: We will still be within our financial framework. So this is about investing in the future at the same time as delivering on our framework. So that will create some good tonnage growth next year.
Richard Dufresne: And there's a lot that's in our control, like further improving on swing, getting the top line up, and then maybe referring back to our strategy, which is long-term.
Richard Dufresne: getting the growth, keeping cost in control, and thereby being able to continue to deliver the profit we need to sustain to the framework.
I'm just going to double-click on this.
Speaker Change: focused on 2025, and as Per mentioned, we know that we're going to have a new DC that ramps up starting Q1 of next year, and we know that we're going to be building more stores than we have this year.
As such, we've been planning, accordingly, this year
Speaker Change: to be able to deliver the earnings growth that we've seen.
Speaker Change: We've made the investment community accustomed to. So the big picture point, and we're not giving guidance today, the big picture point is despite these two big factors, we are confident that we're going to be delivering earnings within our financial framework in 2025.
Speaker Change: Yeah, and I think it's important to say that we are planning for the long term not the short term because yes
Speaker Change: It is going to put some pressure on the short term, so like the next few years, but still.
Speaker Change: will be delivering within the framework, but it's going to help us long term, because as you rightly said, opening more stores will put a bit of pressure short term.
Speaker Change: Thank you. Your next question is from Irene Nettel from RBC Capital Markets. Your line is now open.
Irene Nettel: Thanks and good morning, everyone. Could you please spend a couple of minutes just giving us a little bit more insight?
Irene Nettel: into what you're seeing in consumer behavior within the grocery store, because I understand the shift to discount. You mentioned that your average unit price is down, so can you talk about volumes, baskets, penetration on promotion, profit label, and how all of that is playing into your gross margin run rate?
Speaker Change: Okay, so if I start again, then it's going to be more of the same, so more of what we have seen over the past half a year or year. So customers, they still like our promotions, so they are buying a lot into our promotions. They like our no-name.
Speaker Change: And they are shifting to value, but what we have seen is that they are not only shifting to like our hard discount, our max and no-fills, but they are also going more into our super stores. Because after...
Speaker Change: Having combined our real Atlantic superstores with real Canadian superstores, we're seeing a good benefit of that. So it's more value, but again, it's not only value in our superstores and hard-discount stores, but it's also value in our Sears and our Fortunos and our Loblaws.
Speaker Change: and the promotion. So it's a lot of things. So we try to cater for all customers' needs in Canada. So overall, the trend is going to be the same. I don't think we will see that trend going, you know.
Speaker Change: to be even stronger, but not weaker either. I think we'll continue to see the trend as we are seeing right now. Yeah, I mean specifically, lower traffic continues to be up.
Speaker Change: Okay, Basquiat is down slightly, but not more than any quarter so far this year, so we feel good. Obviously, we're adding square footage and it's definitely starting to make a difference.
Thank you.
Maybe we can save it.
Speaker Change: Maybe we can add that we will add tonnage growth this year, so this year we will probably, as we see it right now, we will have the best year in a decade with regards to tonnage growth for the company.
Speaker Change: That's outstanding. Just following up, sort of tying that into the question of gross margin, I think you mentioned that you're going to be lowering prices on about 400 items in shoppers, you're talking, you know, we've got the hit of the month, we have other sort of value creation initiatives.
Speaker Change: How should we think about the gross margin impact? And I guess the real question is, do you have enough initiatives in the business itself to be able to do all of that and deliver some gross margin growth?
Speaker Change: Yeah, I think and I believe we have. It's also about the mix, because if Mercedes-Benz Beauty is sitting over and above the rest, we will have a slightly higher margin there to compensate for some of the others. But then again, of course, we also need to do our job and negotiate well with the rest.
Speaker Change: with our branded suppliers to make sure that we have the right cost base, which is important.
Speaker Change: Yeah, and specifically with the numbers Irene, like you've seen a significant performance and gross margin beyond our expectation because we've done a better job at managing shrink
Speaker Change: And this has been the story for 2024. It's coming down, the benefit of shrinking quarter after quarter, but it's still there.
Speaker Change: and happy to say that on the food front, we're back to pre-pandemic level on shrink. So that's quite an achievement and that to me is one of the reasons why we've done so well this year. On shoppers, shrink is improving but not at the same pace.
Speaker Change: So we're doubling down on our efforts with shoppers and this will be some sort of a tailwind for that business for the next year.
That's great, thank you.
Speaker Change: Thank you. Your next question is from Michael Daniels from J.D. Cowan. Your line is now open.
Michael Daniels: Thank you. You went through some of those numbers really fast, Richard, and could you just quickly summarize the puts and takes you're seeing in Q4?
Richard Dufresne: The puts and takes I'm seeing in Q4. So Q4 is... so let's start with outlooks. So we moved our outlooks...
Richard Dufresne: to slightly low double digits, because mathematically there was no way we could be able to hit our outlook. So expect for the year to be...
Richard Dufresne: Slightly low double-digit, but not that much, okay? So I want just to specify that. What you're going to see is front store in shoppers is going to get worse because of consoles. Consoles is a Q4 thing.
Richard Dufresne: And so, as you've heard us talk all through the year, though, we've made the decision to get out of electronics early in the year. But the console impact is only...
It's not only in Q4, but it's largely in Q4.
Richard Dufresne: As we were discussing consoles, I guess a few months ago, business came to us and said, hey, are we buying new consoles? And Per and I said, no, no, we're not buying any more consoles. So that's going to have a material impact on front store in Q4 for shoppers. Having said that,
Richard Dufresne: Our decision to get out of electronics, like we looked at whether or not it's driving a basket and it's not driving a basket, more than 80% of the transaction
Richard Dufresne: that are on electronics, customers come in and just buy that item and leave. So it's not good for our business, that's why we're deciding to exit it. And so the fact that we're not going to be doing consoles...
Richard Dufresne: anymore, is going to put more front store pressure for all of next year again, so that's why we set an additional 1%.
Speaker Change: Does that answer your question? Yeah, that's great on that front. And then.
Speaker Change: I think you had made some comments on on margin implications for both Putin
Speaker Change: Okay, yeah, Martin, we're gonna see, you're gonna see, so let's, let's go back, okay? We all said to all of the, all of you early in this year that our plan was to deliver
Speaker Change: flat gross margin, flat SG&E for the year. We've done better on gross margin because of shrink check. SG&E, we said we're going to be more or less flat, which is still our plan. So you're going to see slightly improved gross margin in Q4 and flattish SG&E rate in Q4.
Thank you.
Speaker Change: takeaways that you've seen so far from these pilot no-name stores that are heavily discounted in price and whether you see the much of a future for these stores based on some of the initial reaction.
Speaker Change: Yeah, thanks. So, first of all, we have received great customer feedback from those stores, but it's still very, very early days to make any meaningful conclusions about it.
Speaker Change: But I can say one thing is that we have already learned a lot from doing it. You know, how cheap we can build, how low we can go on prices, and how we can manage the operation. The team are doing a super good job on managing operations there.
Speaker Change: So, if not, anything else, then we're taking a lot of learnings there, as I said before, that we can apply to the discount business and help us continue to build new stores. But again, it's too early to say whether we're going to build more or whether we're going to pivot.
Excellent, thank you.
Bye-bye.
Speaker Change: Thank you. Your next question is from Martha Petrie from CIBC. Your line is now open.
Martha Petrie: Yeah, thanks. Good morning. You've touched on a bunch of my questions, but I just want to follow up on a few of them.
Martha Petrie: As you mentioned, the gap between full service and discount is narrowed somewhat, but are you seeing other indicators of trade down shifts?
Martha Petrie: you know, move at all, you know, POMO penetration, package size, you know, penetration of, you know, good versus best product, like, you know, are any of those shifting at all, or are those all relatively stable?
Speaker Change: First of all, I don't think we said that it's narrowed. I think we said it's more of the same. So the gap continues to be the same as it has been.
Speaker Change: So the trend is still that customers are buying a lot into the promotion. So the promo penetration is staying very high.
Speaker Change: We're also seeing that customers more and more like our no-name brands, so of course the low end of our control brands. And that's it. So it is more or less the same. And still, customers, they really love our products.
Our market division, so our...
Speaker Change: or Supermarket Store. So it's not only discounts, we're also seeing good traction on delivering value in those stores. And I think it is important, again, to mention that it is both the range, like Frank in his division, he has put in a lot of multicultural products. So overall 600 new products and a lot of those multicultural.
Speaker Change: Clearly outperforming the rest of the new product that we are putting in. So that's also giving customer sentiment. And Mark, I want to add one point for you. We have data from our PC MasterCard that we look at.
Speaker Change: And when we look at our data, it tells us that Canadians are buying more groceries these days than they were the same period last year, at the expense of restaurants. So we are seeing that trend.
Speaker Change: Yeah, okay, that's helpful, thank you. On the private label penetration side.
Speaker Change: I'm wondering if there's any way you could sort of contextualize the listings.
Speaker Change: and sort of the penetration on shelf of private label, you know, versus a year ago or where that would have been kind of pre-pandemic or something like that.
I'm not sure we uh...
and of course it's also helping us on our margin.
Speaker Change: Okay, thanks. And then just two quick follow-ups just to clarify. Obviously, lots of puts and takes.
Richard Dufresne: But I think it's fair to say, Richard, based on what you were saying, that gross margin is the biggest factor in sort of outperforming the typical financial framework that you would have communicated to the street for that low double-digit EPS growth. Is that fair?
Richard Dufresne: I think that's fair, I think that's fair, but I think we still continue to do a good job on managing our costs also.
Richard Dufresne: It's masked a bit by some real estate gains that we have, but those are not material and we've been selling real estate for the last three years. You also need to take note that our tax rate is 2% higher this quarter than last year.
Richard Dufresne: And our non-controlling interest is actually $15 million higher than it was last year, and this is just timing. So when you look at all the puts and takes, it's actually a very solid quarter that we printed for Q3.
Speaker Change: Yep, understood. And then if I could just clarify the Q4 food same-serve sales trends, you said those are better
Speaker Change: I'm assuming that that still holds and you're giving this on a like for like basis sort of normalizing for the Thanksgiving headwind in Q3 and then I would presume a tailwind in Q4, is that right?
Yes. Okay. Thanks a lot. All the best.
Thank you.
Speaker Change: Galen Weston, Roy MacDonald, Roy MacDonald, Roy MacDonald, Roy MacDonald, Roy MacDonald,
Speaker Change: Thank you. Your next question is from John Zimbaro from Scotia Capital. Your line is now open.
Speaker Change: Thanks very much. Good morning. I wanted to start on the new store growth plans. I wonder if you could talk about the profitability metrics of new stores, and in particular hard discount, and just remind us how long it typically takes these stores to reach mature profitability levels.
Speaker Change: Yes, so the profitability on these stores is going to be the same as the rest of our stores.
Speaker Change: And it takes about three years for the store to reach sort of peak profitability. But more importantly for us is to see the sales.
Speaker Change: We know in the first six months whether or not the store will make it, based on where the sales are going. And that's why we're pleased right now, because we look at...
Speaker Change: The few stores we've opened already and we look at their sales performance and it's very, very promising. So that's how we're looking at it. Yeah, and think about the number of new stores. So we cannot talk about how many next year, but we opened 50 this year and it's going to be more next year.
Speaker Change: If we start on a consistent basis over the next few years, or maybe many years to more thoughts than we've done in the past.
Speaker Change: Year 2 for a new store is significantly over and above the average of the rest of the stores. So like the 50 stores that we open next year, we then turn same store sales. Next year, that will help increasing our overall sales for the likelihood.
Speaker Change: Yeah, and I want to add to that because that is true. What's also true is our absolute sales will also
Speaker Change: shoot up next year. Like with low inflation that we're in now, the fact that we have all these new stores that are opening right now and that we're planning more of that next year, you're going to see a higher, absolute sales growth for Loblaw in 2025 and beyond. And I think on the sales...
Speaker Change: So, again, it's early days on the right-hand side and the pilots we are doing there, but if they work, and the one that we are opening in Milton at the end of this month...
Speaker Change: If it continues to do as well as we're seeing right now, that's of course something that we're going to deploy over the next three, four years to all our superstores. And that will also help our sales. So it's not that we only focus on the hard discounts and the small stores.
Speaker Change: It's like we're looking across the piece in all our banners to improve sales and doing something that's better for customers.
We encourage you to go see those two stars.
Speaker Change: Understood. All right, that's good color. Thank you. Moving to the pharmacy side of things and coming back to exiting out of electronics and consoles.
Speaker Change: I wonder what it is you're giving that square footage or that shelf space to, and are there other areas of the store that next year, year after that you're thinking of reconfiguring as well? Don't expect you to share what those are, but are there other opportunities to grow even the dollars by reconfiguring your front end store?
Speaker Change: I think we are good where we are now. I think we have the right mix. And it's not that electronics takes up a lot of space and we can just...
Speaker Change: You know, take that space and convert that into a shop-and-shop of something else. Remember, it's a few items with a high ticket price.
Speaker Change: that we sell, so it's not that we have a specific electronics department in the...
Speaker Change: in our shoppers. But of course, what we will be focusing more on, that's the beauty side, both the perceived beauty and also the mass beauty. That's where we have a really, that's where we're really, really strong, and we are the biggest beauty seller in Canada and want to continue to grow that part.
Speaker Change: and also the market that is growing over and above the food.
Speaker Change: right okay that's helpful and then just one one clarification on on your guidance the increase in CapEx guidance it's it's relatively small but can you add any color on what's driving that
Speaker Change: Yeah, it's very small as you mentioned. It's just like new stores that we added up as the year progressed. So that's it.
Speaker Change: Okay, understood. I'll leave it there. Thank you very much. Thank you.
Speaker Change: Thank you once again. That is star one should you wish to ask a question. And your next question is from Abishal Shadar from National Bank. Your line is now open.
Abishal Shadar: Hi, just with respect to the changing population growth outlook in Canada, wondering how we should expect that to unfold as it relates to Loblaw? Are you looking at, are you anticipating different sales trends and associated different labour hiring challenges as you look at the population growth cadence?
Speaker Change: So, Michel, this is actually super interesting. We were actually looking at those numbers recently.
Speaker Change: If you remember, Canada reached 40 million people last June, June 2023.
Speaker Change: We reached 41 million in March of this year and we're Hinching close to 42 million as we speak
So, Canada continues to be...
Speaker Change: the country whose population growth is the fastest in the industrialized countries and while it may slow a bit, we still believe that it's going to grow and that's a tailwind that is very positive for grocery players like us so we expect that that trend should continue, maybe not at the same pace but it should be a positive for us. That's also why we are adding a lot of new SKUs in exactly on the multicultural assortment.
Speaker Change: which we are doing both in our discount stores but actually across the piece. And just seeing what we are utilizing the scale and the scale of the group and taking some of the TNT products and bringing them into our conventional business is also something that's really, really helping a lot.
Speaker Change: Okay, thanks for that. And Per, with respect to all the changes that have happened at Loblaw since you've come in, you've put in a lot of, you and your team have put in a lot of exciting new programs.
Speaker Change: Quite a few, but we're noticing the sales gap on the food side, that Delta versus Pears, not at the same level that we've become accustomed to for Loblaw. And I'm wondering if you know the multi-buy, the different promo changes, the lowering prices.
Speaker Change: if that's caused that gap versus peers to not be what we've become accustomed to, if there's other reasons, how should we think about that?
Speaker Change: I think if you think about it like what I said before, that we are having the best
Speaker Change: it makes more customers to come into our stores. So lowering prices, as we have done, will give more tonnage, but of course it puts a little bit of pressure on the overall top line.
Speaker Change: So you are right in that, but for us it is really important to be in tune with our customers and give them what they want and that's value at the moment.
Speaker Change: Okay, so you're content with sacrificing a little bit on the sales line.
Speaker Change: Maybe to gain the tonnage and as the rate of changes that you're implementing at Loblaw and the org's ability to adjust them, you were talking about the pressure on shoppers and the right-hand side pressure and all those initiatives, is that the right balanced approach for Loblaw at this point in time or as you look at your sales performance versus peers or is that not a consideration that Loblaw has?
Speaker Change: I'm not sure I understood it right, but I think all the new things that we are implementing, like the right-hand side...
Speaker Change: It's definitely the right thing to do because we have been declining.
Speaker Change: in our non-food apparel and beauty, or at least not growing over the past years, and it is marked in enhancing categories.
Speaker Change: And that side of the big superstores, it's about a little bit less than 40% of the space.
Speaker Change: and it's less than 20% of sales. So by doing that, we will both increase the right-hand side, but we will also increase the left-hand side of the store. That's what we're seeing in the pilot. Still early days, but we're seeing it. And one of the things we're doing, we're moving the pet food to the right-hand side, getting more customers over there. And when they see...
Speaker Change: What great stuff they can they can buy they they buy more into more into our range So yes, we have done a lot of course. We are now we're going to perfect what we have done the first year I've been here, so it's not that I will bring on ten
Speaker Change: big new initiatives because we have a lot on our plate and we're going to perfect it and do even better with what we have and I'm sure we can do that.
Speaker Change: Yeah, and just, Michel, I think I caught one portion of your question, though. I think, yeah, we made decisions to get out of electronics because we think it's best for the customer and it's sacrificing sales. Yes, we made the decision to get rid of multibuys because we think it's the right thing to do for consumers and it's affecting sales. But you know what? This is sort of the right things to do long-term for the business and our focus is on adding square footage.
Speaker Change: So if we have the right business model that works and resonates with customers, if we just replicate it with new stores, long-term we win. So that's how we're thinking about this.
Speaker Change: Thank you for that color and Richard maybe just to get your update on transportation as a service and media and how you expect that to unfold in 2025.
Richard Dufresne: transportation business in 2024 and we have again ambitious plans for for 2025 as we talked about media for a number of years this business continues to grow quite nicely but it's still quite small compared to the other one and but it's heading in the right direction
Speaker Change: Thank you. Your next question is from Chris Lee from Daydreaming. Your line is open.
Speaker Change: Hi, good morning everyone. Maybe I should start with a very quick clarification question, Richard. When you mentioned the sort of slight low double-digit EPS growth for this year, I think we should kind of read it as more like 10%. Is that kind of a fair assumption? In that zone, okay? In that zone.
Speaker Change: Perfect. And Richard, also, I know you and your team have done a lot of great work just over the years in achieving that consistent EPS growth quarter after quarter. And I wanted to ask you for next year, you said you're going to deliver the same financial framework, but I want to maybe get a bit of more...
Speaker Change: detail about how would you think about from a quarter quarter basis just because you mentioned you'll be opening a new dc in q1 so when we think about the the progressions on dps go should we model the same framework quarter after quarter like what you've achieved the last two years or should we be more like back and waited because of some of these one-time startup costs in the first half of the year
Speaker Change: So I don't want to be too specific about next year because we're not providing outlook yet having said that like we are planning for consistent quarter-over-quarter performance
Speaker Change: And we're planning to be within our financial framework. So that's as far as I can go today. When we come back to you after the holidays, we'll be able to be a little bit more clear as to exactly what that means. But that's how it's shaping up as we speak.
Speaker Change: Okay, well, that's helpful. And then here, maybe just follow up on I think, Tammy's question earlier, just
Speaker Change: You know, as you look out for next year, I wanted to ask you, you know, if you take a step back, maybe not looking at Loblaw per se, but looking at just the grocery industry in general, what do you see as one or two of the biggest challenges facing industry for next year?
Speaker Change: I don't see any new challenges that we haven't faced this year. So basically it is a boring answer. It's more of the same.
Speaker Change: And I also believe that a lot has to do with what we do, so some of the changes that we apply to our entire store portfolio, of course, will make a difference.
Speaker Change: customers, they are continuing looking for value, and that will be the theme, not only for the next year, but I think for the next many years. That's also why...
are much cheaper than the average store.
Speaker Change: Okay, perfect. And I just have maybe two questions left. Maybe just switching to the strength in the e-commerce sales that you're continuing to see. I'm thinking more in the grocery side. Is that coming more from you guys taking market share or are you seeing a bit of a resurgence in the adoption for e-commerce for the industry as a whole?
Speaker Change: I think it's growing slightly, so I think we are growing in line with the industry, but probably you can tell me whether that's true. But it is a good high growth that we're having, and we're also having a fair share that's over and above the average.
but two in addition to that point.
Speaker Change: are our optimum members. They continue to be very important for us.
Speaker Change: They once again grew, and year over year we have been growing by half a million with our Optima members. And we're also seeing a good increase in our weekly digital engaged customers, who are normally buying more than average. And of course that also has an impact on our e-commerce. So we're happy with the growth there.
Speaker Change: I guess probably in line with the industry growth. Okay, that's great. And my last question, this might be a tough one to answer, but I'm just thinking ahead. With some of these big GLP-1 drugs like Ozembec, Boron Generic in Canada in 2026,
Speaker Change: Do you expect a big sort of pick-up in demand? And then maybe another question is, at a very high level, is the generic version of these specialty drugs generally more profitable for community pharmacy than the branded version?
Speaker Change: I think the DLP wants the drugs. They are growing more than the rest. On a margin percentage, they are looting, but on a quantum profit, they are helping us. And whether it's going to pick them up more or less...
I don't know.
Speaker Change: But it's good. We're still seeing good growth right now in it. And generic are more profitable, just math. Because the price is lower and so you get more weightless. So that's how to think about it. It's just math.
Okay, thanks guys. All the best. Thank you.
Speaker Change: Thank you. There are no further questions at this time. Please proceed.
Speaker Change: Thanks very much, Jenny. Thanks, everybody, for your time today. If you have any follow-up questions, drop myself or Felipe a note. We'll get back to you quickly. And open your calendars and mark Thursday, February 20th when we will be releasing our Q4 results. Thanks, and have a great day, everybody.
Speaker Change: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.