Q4 2024 Loblaw Co Ltd Earnings Call

Good morning, ladies and gentlemen, and welcome to the Loblaws Incorporated 4th Quarter 2024 Results Conference Call. At this time, all lines are in listen-only mode.

Following the presentation, we will conduct a question and answer session.

Speaker Change: If at any time during this call you require immediate assistance, please press TAR 0 for the operator. This call is being recorded on Thursday, February 20th, 2025. I would now like to turn the conference over to Mr. Roy MacDonald. Please go ahead.

Speaker Change: Thank you, Constantine, and good morning, everybody. Welcome to the Loblaw Companies Limited fourth quarter and fiscal year 2024 results conference call.

Speaker Change: I'm joined this morning, as usual, by Per Bank, our President and Chief 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, but are not limited to, statements with respect to Loblaw's anticipated future results.

Speaker Change: These results 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 day they're made.

Speaker Change: The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than what's required by law.

Speaker Change: Also, certain non-GAAP financial measures may be discussed or referenced today. Please refer to our annual report and other materials filed with the Canadian Securities Regulator for a full reconciliation of each of these measures.

Speaker Change: The Most Directly Comparable Cap Financial Measure. And with that, I will turn the call over to Richard. Thank you, Roy, and good morning everyone.

Richard Dufresne: We are very pleased to have delivered another year of consistent operational and financial performance.

Richard Dufresne: Our businesses continue to perform well, reflecting our focus on retail excellence.

Richard Dufresne: On the full year, revenue came in at $61 billion and adjusted earnings at more than $2.6 billion.

Richard Dufresne: We delivered improving sales momentum, stable gross margins, and carefully managed our expenses while once again delivering strong earnings performance.

Richard Dufresne: In 2024, we repurchased $1.8 billion worth of our shares and increased our dividend per share by 13.9%.

Richard Dufresne: We also accelerated capital investments in our stores, adding 52 new food and drug retail stores and 78 pharmacy care clinics, representing 1.1% of square footage growth. We're already seeing a meaningful lift to our absolute sales from these stores.

Richard Dufresne: As we announced on Tuesday, we plan to reinvest over $10 billion back into the Canadian economy over the next five years, improving access to affordable food and healthcare services and creating jobs and communities across Canada.

Richard Dufresne: This includes opening another 80 stores and approximately 100 pharmacist care clinics in 2025.

Richard Dufresne: Turning to the quarter we continue to see growing momentum across our businesses.

Richard Dufresne: On a consolidated basis, revenue growth was solid at 2.9%, reaching $14.9 billion, and adjusted EBITDA increased by 4%.

Richard Dufresne: Consolidated revenue and same-source sale were positively impacted by the shift in Thanksgiving which occurred in Q4 this year compared to Q3 last year. Our sales performance in food improved even when adjusting for this shift and improved from Q3.

Richard Dufresne: Adjusted diluted net earnings per share grew by 10% to $2.20

Richard Dufresne: On a gap basis, our net earnings decreased by 14.6%, primarily driven by a non-cash charge of $129 million related to the revaluation of our existing PC Optimum Program liability.

Richard Dufresne: This non-recurring charge reflects the fact that customer engagement with our popular PC Optimum program is increasing, leading to higher redemption rates in our stores in recent years.

Richard Dufresne: We increase this liability based on our expectations and more customers will redeem more of their PCO point going forward reflecting the long-term success of our program.

Richard Dufresne: In food retail, we attracted higher customer traffic and drove tonnage growth.

Richard Dufresne: Absolute sales grew 3.7%. Our reported Foom same-store sales increased 2.5%.

Richard Dufresne: As previously mentioned, the Thanksgiving shift, our right-on-site performance, and the elimination of multi-buys all impacted our same store sales.

Richard Dufresne: Our adjusted same-sale growth was up 2% in the quarter. Canada's growth-free CPI was 2.4% in the quarter. Our internal CPI, like food inflation measure, was lower than CPI this quarter.

Richard Dufresne: But also looking at our average article price data, which reflects the full basket mix bought by our customers, our internal inflation rate was much lower than CPI.

Richard Dufresne: Looking ahead, we're still seeing higher than normal pricing increases coming in from our larger global vendors and many are requesting double-digit price increases.

We continue to push back to mitigate these increases.

Richard Dufresne: This is compounded by the fact that we are working with a Canadian dollar that trades at its slowest level in over 20 years.

Richard Dufresne: A year ago, the Canadian dollar traded at $0.74 US and we began Q4 at that level, but since, our dollar has declined by 5% to $0.70.

Richard Dufresne: This adds further inflationary pressure at a time when Canada relies on U.S. imports for most of its fresh produce.

Richard Dufresne: We see consumers continuing to favor discount offerings. This is clearly demonstrated in our hard discounts banner, same-store-sale performance, which is outperforming our conventional stores.

Richard Dufresne: We recorded double-digit growth in absolute sales across our discount network in Q4 and in TNT Canada. TNT Canada is our fastest-growing banner.

Richard Dufresne: While the gap between hard discount and conventional has stabilized, the growth in hard discount continues to be significantly higher than conventional.

Richard Dufresne: Last year we added 58 hard discount stores to our network through conversions and new bills.

Richard Dufresne: These stores continue to resonate well with Canadians, driving strong performance.

Richard Dufresne: Q4 was a particularly busy quarter for our teams. We opened 26 new grocery stores, including our first TNT supermarket in Seattle, Washington.

Richard Dufresne: In Q4, we also concluded our network optimization initiative in Quebec. We now have 187 hard discount maxi-stores in Quebec, leading to market share growth in that province.

Richard Dufresne: Going forward, we will continue to expand our hard discount presence by adding approximately 50 new stores across the country in 2025.

bringing more quality and value to more communities across Canada.

Richard Dufresne: Hard Discount is still gaining tonnage market share and our conventional stores are performing well. In drug retail, absolute sales increased 1.3% and same-store sales grew 1.3%.

Richard Dufresne: Pharmacy and health care services grew same-source sale by 6.3% again this quarter driven by broad strength in prescription and new health care services.

Richard Dufresne: Our specialty acute and chronic prescription growth led our pharmacy numbers. Patients continued to respond very positively to the convenience and expanded level of primary care we offer to our more than 1,800 pharmacies across the country, including our 152 new in-store clinics.

Richard Dufresne: Our front store same-store sale declined 3.1%, primarily driven by the month-long Canada Post strike and our decision to exit electronics categories. We see ongoing pressure in convenience categories like food and household items.

Richard Dufresne: That said, we have continued strength in Prestige Beauty. Coffin Cove was also weaker than planned, largely driven by a mild fall.

Richard Dufresne: Looking ahead, our decision to exit certain low-margin electronics categories such as laptops, computers, TVs, cameras, and games and consoles will have about a 1% impact on front store sales in 2025.

Richard Dufresne: That said, we remain pleased by the underlying strength, profitability, and sales momentum of Shoppers Drug Mart's front store business.

Richard Dufresne: Online sales in the quarter increased by 18.4%, carrying on our momentum from Q3. Within grocery, delivery continues to outperform as a channel. We remain pleased with our online sales penetration in both food and pharmacy.

Richard Dufresne: Full year sales grew at 16.9% to 3.9 billion dollars and our food penetration rate increased slightly.

Richard Dufresne: Across our Grosvenor Pharmacy banners, we are proud to see Canadians increasingly choosing our stores for value, quality, service and convenience.

Total retail gross margin was 30.9% down 20 basis points.

Richard Dufresne: The decline was mainly driven by sales mix, the impact of the closure of postal services during Canada Post strike and the Thanksgiving shift, partially offset by improvements and shrink in this quarter.

Richard Dufresne: I'm pleased with the strong shrink improvements in both food and drug this past year. Food is now back to 20-20 shrink rates, but we still have work to do across our pharmacies.

Richard Dufresne: Turning to SG&E, our spend rate as a percentage of sales improved by 20 basis points, driven by the lapping of prior year labor costs, including expenses related to the ratification of union labor agreements and some operating leverage. This was partially offset by incremental costs related to the ramp-up of new storyline conversions.

Richard Dufresne: Fourth quarter retail EBITDA increased by $47 million, yielding a margin of 10.8%.

Richard Dufresne: PC Financial's revenue decreased 2.3%, driven by lower services growth in our mobile shop, which was partially offset by growth in the credit card portfolio.

Richard Dufresne: The bank's adjusted earnings before tax increased by $20 million with higher interchange and credit card fee income, lower operating costs, and positive year-over-year impact to the ECL provisions of setting the lapping of benefits associated with the renewal of a long-term agreement with MasterCard.

Richard Dufresne: 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.

Richard Dufresne: On a consolidated basis, adjusted EBITDA increased by 4% to $1.7 billion.

Richard Dufresne: Our retail free cash flow was $828 million and we repurchased $352 million worth of common share.

Richard Dufresne: On a full year basis, our retail free cash flow was $1.5 billion. We grew our common share dividend by 13.9% and we repurchased $1.8 billion worth of common shares.

Richard Dufresne: Our balance sheet remains strong and we continue to improve our key return metrics.

Richard Dufresne: Our return on equity sits at 23.6% and our return on capital at 11.8%.

Richard Dufresne: Looking ahead to 2025, we have a solid plan in place to keep on delivering consistent financial and operational performance while advancing our growth initiatives.

Richard Dufresne: We plan to open approximately 50 hard discount stores, approximately 30 shoppers drug marts, and 2 TNT in 2025, bringing quality, value, service, and convenience to our customers.

Richard Dufresne: These new stores will grow our retail square footage by less than 2%.

Richard Dufresne: This year, we will also begin migrating operations to our new 1.2 million square feet, fully automated distribution centre in East Gwillimbury, Ontario. This facility will further enhance our best-in-class supply chain while delivering efficiencies once fully operational.

Richard Dufresne: Please note that in 2025 we will have an extra week.

Richard Dufresne: We estimate that the resulting incremental impact on our EPS will be approximately 2% for the full year.

Richard Dufresne: Excluding the benefit of the extra week, we expect our retail business to grow earnings faster than sales and adjusted earnings per share growth in the high single digits.

Richard Dufresne: We plan to invest approximately $2.2 billion in capital expenditures, or $1.9 billion net of proceeds from planned property disposal.

Richard Dufresne: Again, we plan to return most of our free cash flow to shareholders through dividends and share buybacks.

Richard Dufresne: We begin the new year encouraged by our early results in Q1.

Richard Dufresne: Same store sales in both food and drug retail are off to a strong start, including positive same store sales growth in Shopper's Front Store.

Richard Dufresne: Looking ahead, our focus on retail excellence and on the execution of our strategic initiatives will allow us to keep on delivering value to our customers and strong performance to our shareholders and sets us up well for the future. I will now turn the call over to Per.

Per Bank: Thanks Richard and good morning everyone. Looking back on 2024, I'm so pleased with our progress and performance. We maintained an unrelenting focus on providing quality, value, service and convenience to our customers to help Canadians live life well.

Per Bank: We ended the year with revenue growth of 2.5%, surpassing the $60 billion for the first time.

Per Bank: and we delivered adjusted EPS growth of 10.3%. The strength of our performance allows us to reinvest back into the business to support our future growth and set us up to continue to deliver consistent financial performance.

reflecting Loblaw's commitment to enhancing its store and distribution network.

Per Bank: creating job opportunities and improving accessibility to affordable food and healthcare services for communities across the country.

Speaker Change: A year ago, I talked about traveling the country, listening to customers, visiting colleagues, suppliers, investors, and other important stakeholders. This remains an important part of my job.

Per Bank: Customers are not shy to tell me that they continue to feel stressed from affordability pressures and economic uncertainty.

Per Bank: We focus every day on how we can deliver against the expectations, and we continue to work hard to reduce the impact of global food inflation on Canadians.

Per Bank: We launched several net new initiatives to demonstrate this. With innovative features like Hit of the Month and programs like Marvel and Collect and Save, we brought more specials and everyday value across our business. And we removed multi-buy and hard discounts.

Per Bank: Customers responded positively to these initiatives, rewarding us with our best full-year food mileshare growth in more than a decade.

Per Bank: Our colleagues are doing a great job serving our customers, while at the same time working to reduce costs and find ways for us to be even more efficient.

Speaker Change: Let me give you a couple of examples. So we made some difficult decisions in exiting low margin categories like electronics. These decisions will set us up well for the future, but will be headwinds to our front store sales growth over the next year.

Speaker Change: We are realizing more value from existing assets, creating new market and creative businesses like Fader and the Service, and this year we joined a large European buying group to lower our purchasing costs on certain commodities and control brand products.

Digital engagement grew at a strong rate in 2014.

Speaker Change: More members-only pricing and gamification of our app. Hopefully many of you have spun the price wheel in Q4 and took home some free products. If not, stay tuned. You can expect to see even more excitement with greater frequency this year.

Speaker Change: Customers can also use our Swap and Sale feature as a digital tool to save on everyday groceries.

Speaker Change: And based on recent customer feedback, we have, within a few days, added Swap and Shop Canadian tab to allow you to easily find products prepared in Canada.

Speaker Change: As we continue to expand this feature, we are already seeing a significant uplift in sales products identified as prepared in Canada.

Speaker Change: Our digital business continues to grow. In addition to enhancing the customer-facing features, we have added free delivery to our no-fill stores in the fourth quarter, introducing new customers to our digital offer.

Speaker Change: Refreshing the right-hand side of our superstores is another initiative that has created a lot of customer excitement. We have put together a new look and feel, with better navigation for customers, extended our range across many categories, and introduced new and exciting brands, all underpinned by action-oriented offers. We need more call to action.

Speaker Change: We are just getting started. We have three pilot stores and we expect to roll this upgrade to many more stores this year.

Speaker Change: The uniqueness and strength of our Pharma Pri and Sherbert Rockmart pharmacies continues to impress me.

Speaker Change: This is just an incredible asset, unlike any pharmacy I have come across in my career. And we are investing to grow our network.

and better positioning for the future.

Speaker Change: We are bringing customers more value to convenience-focused shops and we are strengthening our leadership position at Cosmetic, adding new brands and targeting younger customers.

Speaker Change: We are improving our processes, rolling out central fill capabilities, and improving app-based scheduling for pharmacy appointments. And by the end of 2025, we will have built over 250 new in-store customer care clinics.

Speaker Change: where our pharmacists can offer private patient care. Last year our pharmacists provided 3.1 million prescribing services and we expect demand to grow as provinces expand their scope of care for pharmacists.

Speaker Change: For over a decade, our new store growth has caused our food and pharmacy business to lack Canadian population growth.

Speaker Change: Our team has now developed a very strong pipeline. In 2024, we opened 50 new stores, growing our retail square footage by 1.1%.

Speaker Change: We are now in an even better position to meet the growing demand for hard-discount groceries.

Speaker Change: with the addition of 12 new no-fill stores and the conversion of 30 stores to maxi.

and the opening of five new match resorts in Quebec.

Speaker Change: These stores are performing very well. Looking ahead, we plan to accelerate our growth, adding approximately 80 new stores this year, focused on hard discounts and as well focused on pharmacies.

Speaker Change: In December, we proudly celebrated the very successful opening of our first TNT stores in the U.S.

Speaker Change: If you were thinking that TNT was only a Canadian thing, I can tell you it's not anymore.

Speaker Change: in our first of two plant stores in Seattle, our new TNT plant store.

Speaker Change: settling a new sales record. Just two months in, this 55,000 square foot store continues to outperform every store in our network. Just last week, we also opened our second TNT store downtown Toronto, just steps away from Yonge and Dundas Square.

Speaker Change: I'm really proud of what the team has accomplished and can't wait to see what the new stores are bringing us.

Speaker Change: This month, we will begin shipping frozen products from our fully automated 1.2 million square foot distribution center outside the DTA.

Speaker Change: This DG will deliver improved capacity and efficiency for the future. This year will demonstrate a carefully planned ramp-up of volume in frozen, then fresh and finally ambient products.

Speaker Change: I'm proud to note that the DC will be equipped with a massive array of solar panels, expected to be the largest rooftop solar array in Canada.

Speaker Change: Our ESG principles remain embedded in everything that we do. Today we are providing an early release of our 2024 ESG disclosures.

Speaker Change: We hope you will visit our website to catch up on some of the great work we have accomplished against our two main pillars of advancing social equity and fighting climate change.

Speaker Change: Together with our customers, colleagues and suppliers, we collaborated on dozens of events that raised more than $35 million in the year. We helped put that money to work, feed almost a million children in our local schools and provided more than $12 million in support of initiatives that improve women's access to care in Canada.

Speaker Change: And just last week, Shabbat Foundation for Women's Health announced a 10 million donation to the Manitoba government's new healing and empowerment fund.

Our everyday focus remains on retail excellence.

Speaker Change: executing well across our operations and maintaining an unrelenting focus on our customers.

Speaker Change: which is what allows us to continue to invest in our business and in growth. We are really excited and optimistic entering the new year. Our portfolio of businesses remains strong and well-positioned to deliver for Canadians who are increasingly turning to us for quality, value, service and convenience.

Speaker Change: I would like to extend a heartfelt thank you to all our colleagues for the pursuit of these goals every single day and for what they are doing for our customers. Thank you.

Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number 1 on your touchtone phone. You will hear a prompt that your hand has been raised.

Speaker Change: Should you wish to decline from the polling process, please press star followed by the number 2.

Speaker Change: If you are using a speakerphone, please make sure to lift your handset before pressing any keys.

Speaker Change: Your first question comes from the line of Irene Natal from RBC Capital Markets. Please go ahead.

Speaker Change: Thanks and good morning everyone. From everything that you just said, it sounds as though you exited 2024 with accelerating momentum across the platform, putting aside the issue of the lower sales electronics and front store shoppers.

Speaker Change: Can you talk to us a little bit about what is driving that momentum, you know, what is your PCOptimum and PC Bank data telling you about sort of your share of customer wallet? Is it really mostly, you said conventional is up, but you know, what, is it really more discount and how we should think about that unfolding in 2025?

Thank you.

Speaker Change: typically like those stores open more later here than at the beginning of the year and so on as we start 2025 we're benefiting from the full momentum of all of all of these stores so that that is definitely a factor.

on Front Store specifically.

Speaker Change: You probably remember that in the fall we had a pretty mild fall

Speaker Change: So we did mention that coffin coal sales were pretty weak.

in the fall compared to peak period we've experienced.

Speaker Change: But if you look outside, here in Toronto, I can tell you it's white everywhere and it's minus 10 degrees.

Speaker Change: So coffin cold sales since the beginning of January have been very, very strong and they continue beyond what is typically the normal season. So we're getting a benefit in front store.

That essentially was a delay.

Speaker Change: So those factors, along with new stores, are what's giving us momentum as we start the year.

Speaker Change: Thanks Richard, and if I can add, we ended the year very strong on a market share gain and we also...

Speaker Change: As I said, had the best market share gain in a decade and we also do expect to have another.

Speaker Change: But I also do believe that a lot of the initiatives that we put in place last year, the longer we go, the more they are embedded in our stores and the more they are working in our favour.

Speaker Change: to harmonise and getting a synod from that. There's a lot of things that are going on, not least our hard discount, creating even more momentum. The small stores that we have put in place, so about 14 of them last year, they're doing ...

Speaker Change: They're doing really, really well. And just as one example of the things that we're doing, just the cookware promotion, that the customers, they can get savings on pots and pans. We sold four years of cookware in the duration of that campaign.

Speaker Change: And some of that stuff is really, really exciting, exciting our customers. And we'll do more of these things.

Speaker Change: It was the fastest growing of our formats, of our banners last year and it's continuing to grow.

Speaker Change: So I think with our superstores, our convenience stores, our hard discounts, our TNT, and not least our shoppers, we have a good store portfolio that caters for all of our customers' needs.

Speaker Change: That's great, thank you. And just one follow-up note, we're talking about new stores. I've been getting a lot of questions from investors about the drag on gross margins and performance.

Speaker Change: as you both accelerate the new store opening and also as you open the Frozen DC. Can you talk about how we should expect to see this in your financial results and the degree of confidence you have in delivering to your financial framework, notwithstanding those headwinds?

Thank you

and that have been incorporated in our plan.

Speaker Change: and form part of the guidance that we are providing to you this morning, i.e. renew the impact.

Speaker Change: We're on plan. We're on plan. So we definitely feel good on that. And we're just starting new stores. We have two new stores that have opened since...

and January now.

Speaker Change: I think also you should see the new stores as a guarantee for the future, because adding 50 last year, 80 this year, and I don't know how many next year, that's too early to tell.

Speaker Change: talk about the second year a new store is performing. It's growing maybe 3, 4, 5, 6 times the normal growth than a normalized store. So then we will start to see...

Speaker Change: So our strategy is really to grow our sales but also get leverage on cost and thereby keep the cost low. And that's all in our plan. So I believe with our strategy, which I very strongly believe in, we can both deliver the short term, the medium term, and the long term.

That's great, thank you.

Speaker Change: Your next question comes from the line of Mark Carden from UBS. Please go ahead.

Mark Carden: Good morning. Thanks so much for taking the questions. So to start, you're planning on adding another 80 stores in 2025, including 50 hard discount stores.

Speaker Change: As you guys look out over the course of the next few years, how do you think about the longer-term opportunity for unit growth? Could this pace be sustained beyond 2025, even if population growth slows? Your general thoughts there.

Speaker Change: I think it's true to say how many stores he will build in 2026, but we don't build stores on behalf of population growth. We find white spots.

Speaker Change: but also if I compare to other countries and the size of Canada.

Speaker Change: 80 stores is not a lot and we also have ambitions to continue to grow our top line and again that tailwind that we will get over time from our new stores will be important for us to sustain the growth going forward.

Speaker Change: Great. That's helpful. Thanks. And then with respect to potential tariffs, how much exposure do you have to imports from the U.S.? You talked a bit about fresh produce. How do you think about exposure on the packaged goods front? And then how will you pivot your sourcing?

Speaker Change: Thanks. No, yeah, no, thanks. That's a really good question, and first of all, it's less than 10% of our...

Speaker Change: It's mostly in produce. If tariffs are applied on produce, that's where we will be mostly impacted.

Speaker Change: And we're looking at it and we have some really, really good plans how we can mitigate. So on produce, it's probably the most difficult place. I think we can probably mitigate half of our suppliers.

Speaker Change: For us, we really understand the affordability challenges that many Canadians continue to face, but we also believe that on products, for example.

If tariffs are applied...

Speaker Change: they will buy less of that produce that comes from the U.S. with a tax on it. So, of course, it's our job to work hard with suppliers.

Speaker Change: So household and cleaning, that's one area where we have more than 30 vendors coming from the U.S.

Speaker Change: But we also have a very, very strong control brand portfolio in household and cleaning. We have our no name and our PC.

Speaker Change: But, of course, we have a very, very detailed plan how to mitigate it, but overall, it's again, it's less than 10% of our flows.

Speaker Change: That's a really good context. Thanks so much and good luck guys.

Speaker Change: Your next question comes from the line of Michael Van Elst from TD Cowen. Please go ahead.

Speaker Change: Hi, good morning. I just want to finish off on the square footage side of it, and I understood the response to your earlier questions, but I'm also wondering if, as you plan out your real estate expansion,

Speaker Change: Have you changed your return on invested capital parameters and hurdle rates?

Speaker Change: You know, as you look, as you add increasing amount of store in your stores.

Speaker Change: No, like Mike, if you look at our plans for 2025 are all approved, like right now when we're meeting, we're approving stores for 26 now. So all our plans were approved and we...

Speaker Change: We benefited from the dozen of small format stores we've opened last year to fine-tune our model.

Speaker Change: And so that became the basis for the site we chose for 2025. But no, we are not lowering down our return.

Speaker Change: And Mike, I know you know that, but still, 80 sounds like a lot, but a lot of those stores are small stores, and it's not 80 superstores we're building, there's a lot of shoppers and a lot of small hard discount stores.

Speaker Change: First of all, they don't cost as much, so they don't take as much capex to build. And the square foot is down to 8,000 to 10,000 square foot.

Speaker Change: So, also putting that in perspective, I think because we're changing the way that we build new stores, it sounds like a lot, but actually on the square footage it's less.

Speaker Change: It sounds like, I think earlier you said, you know, not quite two percent score of footage growth, although it seems like most of your peers are also adding one to two, one to one and a half percent.

at a time when there's no no

Speaker Change: No population growth expected over the next few years. So I just wonder you you might be moving into other white space But you've got your competitors and might be moving into your territories And I'm just wondering how your plan modeling that in your gut in your guidance

Speaker Change: We're modeling that, like we know exactly where everybody is going, like because in the real estate world like you see where people are doing work and so but we take that into consideration as to where we put stores and it's a market by market analysis.

Per Bank: And as Per mentioned, we're not basing our stored decision based on population to come.

Per Bank: We're making store decisions based on the population that is here today.

Per Bank: I know it's a lot compared to the past, but it's not that many new stores into Canada. And of course...

Per Bank: There will be, you know, other formats will be impacted, but there's also a lot of other sources that are not, you know, among the big four that will be impacted.

Per Bank: Inflation rates, it sounds like you're maybe closer to 1% on inflation when the, you know, the CPI was was over 2% and it was closer to two and a half. So and of course your gross margins

Per Bank: We're down, maybe we call it flat if we exclude some of these timing differences in that, but...

Per Bank: With flat gross margins and tonnage gains, flat gross margins, increasing square footage, are you seeing a little bit more of a competitive market out there? Or is that lower inflation that you're recording more?

related to trade down into private label and other factors.

Per Bank: So, Mike, the market continues to be rational, as it's been for a long time in Canada.

Per Bank: And so, what you're seeing is like more and more stability, I think. I think that's how to think about it, like gross margin as we...

Per Bank: As we start this year, we're going to be back to normal. Our outlook for this year is to have slightly increased gross margin.

Per Bank: like we did last year, but Q4 was a bit of a blip for the factors we mentioned. The Canada Post thing was a bit of a surprise for us because we...

Per Bank: We were essentially caught in the busiest season of Canada Post and we have over 800 Canada Post outlets in Shoppers, Drug Mart, and so both traffic and the sales performance of those outlets

Per Bank: were essentially shut, and so that affected, that really affected Rose Margin in Q4. But going forward...

Per Bank: When we look at where we are now, we're like two-thirds of Q1 done, and we sort of feel that that's behind us.

Okay, great. Thank you very much.

Per Bank: Your next question is from the line of Tammy Chen from BMO Capital Market. Please go ahead.

Tammy Chen: Thanks, good morning. I wanted to wrap up the discussion on inflation, food inflation. How are you thinking about that this year versus last year? You talked a bit about the exchange rate, but it looks like, you know, you said 10% really of your bias from the U.S.

Tammy Chen: and you've also mentioned the vendor price ask. So I just wanted to start there and get a sense of how you're expecting food inflation to trend through this year versus last year.

Tammy Chen: So we are pleased, especially because customers, they are still having a tough time. And we will do, of course, our utmost to continue to keep prices low, whether that's pushing back on increases for suppliers.

and give them great promotions.

Tammy Chen: But of course, the effect has an impact, and if the Canadian dollar continues to weaken, there will be a further impact on inflation, but if it strengthens, then it will be positive for the consumers. And on tariffs, it is...

Tammy Chen: Still too early to say, and again, if tariffs are put on specific products, customers have the opportunity to mitigate that by...

Tammy Chen: You know, even clear to them how they can do that.

Tammy Chen: I just had some specificity around numbers, and in probably both Mike's question and your question, Tammy.

CPI in a quarter was 2.4

Tammy Chen: Our own internal measure of CPI, which is called LPI, which is a carbon copy of CPI using our stuff, our products.

Tammy Chen: That was slightly lower than 2.4. Our average article price, which is what customers are buying, was significantly lower, and Mike was in the zone in terms of what that number is, and that is the number that really...

It's part of same-source sales. And so we've seen stability.

Tammy Chen: and those figures for most of 2024. But because FX started to turn, because the peak was around the end of September at 74.5 cents-ish.

Tammy Chen: and it touched as low as $0.68 a few weeks ago, so that is inflationary and we've been starting to feel it quite seriously over the last few weeks, so it's definitely starting to sink.

Tammy Chen: to show, but I can't predict the future as to where it's going to go from here.

Speaker Change: specifically on the small no-frills. I'm just curious, I think most of the stores you've opened right now are in more downtown urban locations and so what have been the learnings there and what provides you the confidence that this format will also resonate in say places like the suburbs and rural regions? Thank you.

Speaker Change: Thank you. First of all, it will probably, you know, dependent by, you know, store by store, but normally a rule of thumb is that a retail store will, it will take like three to four years to normalize sales.

Speaker Change: Which is all the positive because then you will have over and above same store sales for for about three years

Speaker Change: after the first opening year, so it will take some time. But still, we're off to a very good start and see that we're getting to the sales numbers that we expected. Some of them even much, much better.

Oh, sorry.

Go ahead, Tammy. Your next question comes...

Oh, sorry. We're moving on to the next question, sir.

Speaker Change: Do you want to jump back in, Tammy, and we'll catch the second half of your question?

Speaker Change: Your next question comes from the line of Mark Petri from CIBC. Please go ahead.

Mark Petri: Good morning, thanks. I wanted to ask about shoppers. You know, you've made some important shifts to the offering and I guess obviously, you know, thinking of the exit of electronics, but also, and even more so the adjustments you've made to price and promo and sort of the go to market approach, especially in food and consumable.

Mark Petri: Just curious to hear your thoughts about, you know, sort of what you've learned about the business and learned about the customer from those adjustments.

Mark Petri: customers, they can now use the points on some of the products that they love the most, some of the beauty products, which is good for both us and them.

Mark Petri: and for customers, because having electronics in the shop was not really great adjacent product categories and it was not in line with what we sell overall in shoppers.

Mark Petri: not only the front store and the pharmacy, we're seeing some really good growth and also the GLP P1 is still growing very, very nicely.

Speaker Change: And does that sort of, does that response, and I guess specifically in food, does that sort of set the stage for other adjustments that you might make or are you kind of satisfied with what you've done so far and now it's more status quo?

Speaker Change: But for sure we will continue to make adjustments if needed.

Speaker Change: Okay, thanks. And then following up on the tariff question, I'm just curious if, sort of, in the conversations that you're having with your suppliers, if all of the uncertainty in trade and supply chain affects how they have approached the market at all with regards to their promotion or product innovation pipelines?

Speaker Change: Going forward, if you have a 25% tax tariff on Kellogg's, if that should come so far, then of course we will probably...

Speaker Change: promote our control branch instead of Kellogg's, because nobody will buy it if it's 25% more expensive. So, I think, yes, it will have some impact, but for now, no impact.

Speaker Change: yeah understood and if I could just squeeze in one more I know you're very pleased with the early results from the TNT in Seattle just hoping you could talk a bit more about your plans for growth in the US specifically and the total size of the opportunity as you see it

Speaker Change: Understood, thanks for all the comments and all the... Thank you

Speaker Change: Next question is from the line of Vishal Sridhar from National Bank. Your line is now open.

Thank you. Switching gears to financial and the ECL release.

Speaker Change: Is Loblaw expecting a more constructive consumer environment or is that more of a reflection of that the prior provisioning was over-conservative and the adjustment reflects more current thinking?

Speaker Change: Okay, so the ECL is a black box. It's very much driven by unemployment forecasts.

prepared by economists.

And so, specifically what happened is the build-up.

Speaker Change: of the ECL in Q4 this year was less than the build-up of last year, so year over year it created a benefit. So it's actually impossible to predict, I've tried.

Speaker Change: and so it's a bit of a volatile number that moves every quarter.

But like overall, as of Q4

Speaker Change: The health of the consumer was getting slightly better in Canada, yes. Okay, thank you. And the PC Optimum, the charge related to higher member participation and redemption rates?

Speaker Change: How is management interpreting that increase in participation? Is that a reflection of the offering or something that Loblaw is doing or is that more a reflection of consumers seeking more value?

Speaker Change: Yeah, so let me walk you through what specifically happened here.

Speaker Change: So, that rate was set when we merged PC Plus and PC Optimum, probably, I don't know, 6, 7, 8 years ago. And we never touched that redemption rate. And so, as years evolved, we saw...

Speaker Change: and that's what resulted in the one-time liability. We feel that that's going to give us room for like many, many, many years.

Speaker Change: going forward, but you're right. What it reflects is that more and more consumers are liking PCOptimum and are using it. And so from our perspective, this is a non-recurring, non-cash charge, and we're more than happy to do it because it reflects what's happening in our stores.

Speaker Change: Okay, and are you able to quantify the impact of the postal strike and specifically the electronics exiting category on shoppers?

Speaker Change: Yes, we know exactly we shall, but we won't tell you.

Sorry. Okay. Was the postal strike also related to the...

Lack of flyers

Speaker Change: at the store with the post office when the strike happened like traffic went down.

Speaker Change: And so that was overall store, front store impact on the whole business. Then there was the profitability associated with running the Canada Post outlet itself that essentially went to zero at the time of the year where everybody's trying to send a Christmas card to their families. And so we didn't sell Christmas cards and we didn't send any Christmas cards.

Speaker Change: So it was sort of the worst time for this to happen, and we really felt it. And it was interesting to see that the moment that the strike ended, we saw people come back to our store. Yeah, and we could easily verify that, because we have 800 with and 500 without. So for us, it's easily measurable.

Speaker Change: Okay, and then just one last one here. In terms of the smaller format stores, you know, after the trial period and customers go to them, are you finding that they're sticking? Like, is their ability to do a full shop constrained and that creating issues with customer satisfaction, or is that not an issue?

Speaker Change: I'm glad that you asked that question because the small stores have a range of seven to eight thousand products so you are absolutely able to do a full shop. We might have less facing so instead of having the same product like

Speaker Change: 3 side by side, we might only have 1 or 2. And compared to the German discounters like Aldi, they will probably have a range of 2.5 to 3.000 and they still claim that you can do a full shop.

Speaker Change: So our hard discount in Canada is very different from hard discounts elsewhere. And you can do a nice full shop in Canada.

Speaker Change: which is also why it's so successful and why so many customers like it.

Speaker Change: It's fast in and out, and a lot of customers, they like time, so if they can do a shopping trip in 15 minutes instead of maybe spending 40 minutes, they are happily willing to do that.

Speaker Change: And we look at sales on a weekly basis, and those store sales are not dropping, they're actually going up every week, so people like them and continue to shop them more and more.

Appreciate the color, thank you.

Speaker Change: Your next question comes from the line of John Zamparo from Scotiabank. Please go ahead.

John Zamparo: Thank you, good morning. I wanted to come back to the same source sales and you referenced the strong start to the year. I wonder what you're seeing from consumers over the last few weeks, both on the shift in sentiment from tariff talk and also the theme of buying Canadian, either Canadian brands or Canadian retailers and as always appreciate your disclosures on LinkedIn but I wonder if you can add more color on this subject and just overall what you're seeing over the past three weeks or so.

Yeah, I...

John Zamparo: I can say that they are really seeking to buy more Canadian products. So again, when I'm out in stores, so every single person I meet, they want help and guidance how they can buy more Canadian products, and we're really trying to do everything we can to help them. One of our features on the swap to Canadian that...

John Zamparo: that our digital team have done in a few days, we are seeing an uplift.

John Zamparo: who are tapping into that feature and using it. And in store, I don't have last week's number, but I have the week before.

in Canadian, in Canadian product and that's...

John Zamparo: Even before, we have done a great, great job in helping them navigate in our stores. So, mid-next week, we will have the danglers and the flags on all products prepared.

John Zamparo: in Canada in our store. So we will probably see a further uplift when it comes to that. Else, I think customers are behaving more or less the same as last year. So there's not a lot of change.

John Zamparo: Our private label, especially our no-name, is doing very well and still we're seeing a shift to discount. We're seeing good tonnage performance as the year starts.

John Zamparo: As I said earlier, the effects are definitely affecting inflation and so that's a factor that we're now starting to see every week in our sales.

Speaker Change: This portion of the business to reach sufficient scale, where you plan to add more disclosure on it, and how did that business perform to end 2024?

Speaker Change: Yeah, we're seeing a good uplift this year and still not enough to disclose it for you, but it's up double-digit in profit this year and we expect it to continue to be so hopefully not not that long till we can start to report on it.

Speaker Change: Yeah, both are retail media business and freight as a service business will grow double-digit earnings in 2025

Great. Thank you very much. I'll leave it there.

Speaker Change: Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by the number one on your touchtone phone. If you'd like to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please make sure to lift your handset before pressing any keys.

Speaker Change: Your next question comes from the line of Chris Lee from Desjardins. Please go ahead.

Chris Lee: All right, good afternoon. Just maybe a question on the outlook for the year. Richard, you mentioned that you expect gross margin to increase modestly this year. Is that mainly driven by more shrinking improvement in shoppers?

Chris Lee: Like what we're expecting to see based on what you heard us talk about on this call is

Chris Lee: increase in gross margin rate. That's a part of our plan. You're going to see a very slight deterioration in this Gini rate driven by East Gwillimbury and new stores.

Chris Lee: And overall, all of this will allow us to deliver the high single digit.

Chris Lee: growth for EPS to which you need to add 2% for the 53rd week that we're going to be experiencing this year. So that's our outlook for 2025.

Speaker Change: Okay, that's clear. And my follow-up was, I guess, the cadence of that high single-digit EPS growth, we should expect pretty steady.

Speaker Change: Yeah, you should expect the way we budgeted the year, like each quarter looks a lot like the other. So, you should not see much volatility, that's our hope and plan, but that's how we've plotted the year.

Thanks and all the best. Thank you.

Speaker Change: There are no further questions at this time. I'd like to turn the call over to Roy MacDonald for closing remarks. Sir, please go ahead.

Roy MacDonald: Great. Thanks for your time and the great questions this morning. Give me a shout if you have any follow-ups and mark your calendar for Wednesday, April 30th, when we will be discussing our Q1 results. Have a great day, everybody.

Roy MacDonald: This concludes today's conference call. Thank you very much for your participation. You may now disconnect.