Q4 2026 North West Co Inc Earnings Call

Speaker #2: Please be advised that this conference call is being recorded. Welcome to The North West Company Inc. fourth quarter results conference call. I would now like to turn the meeting over to Mr. Daniel McConnell, President and Chief Executive Officer.

Speaker #2: Mr. McConnell, please go ahead.

Speaker #3: Thank you, Operator. Good afternoon, and welcome to the North West Company's fourth quarter conference call. Joining me here today are John King, our Chief Financial Officer, and Alexis Cloutier, our VP of Legal and Corporate Secretary.

Speaker #3: Alexis, will you please read the disclosure?

Speaker #4: Thank you, Dan. Before we begin today, I remind you that certain information presented may constitute forward-looking statements. Such statements reflect North West's current expectations, estimates, projections, and assumptions.

Speaker #4: These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements.

Speaker #4: Any forward-looking statements are current only as of the date they're made, and the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results, or otherwise, other than what's required by law.

Speaker #4: For additional information on these risks, please see North West's Annual Information Form and its MD&A under the headings 'Risk Factors.'

Speaker #3: All right. Thank you, Alexis. I'll start with an overview of our results for the quarter, and then comment on our outlook in the Next 100 program before opening the call for some questions.

Speaker #3: Overall, the quarter was challenging, particularly when compared to the strong results we delivered in Q4 last year. Headwinds in our Canadian operations negatively affected our overall results, which were partially offset by solid performance.

Speaker #3: In our international operations, consolidated sales for the quarter were up slightly year over year, following a 4.9% increase in Q4 of 2024. Sales and earnings in Canada were negatively impacted by reduced money in market, including the elimination of the Inuit Child First Initiative food voucher program and lower water settlement payments, which contributed to a very strong result in Q4 of last year.

Speaker #3: In contrast, international operations delivered strong results, with sales up 5.4% and EBIT up 9%, supported by a solid tourist season in the Caribbean and market share gains in certain stores through Alaska.

Speaker #3: It did impact these factors, resulting in a 7.7% decrease in net earnings this year compared to an exceptionally strong 18.9% increase in net earnings in Q4 of last year.

Speaker #3: All right. Let's unpack this, starting with some sales. Consolidated same-store sales increased by 0.5% this quarter compared to a 5.4% increase last year. This primarily reflects headwinds in Canadian operations and the challenge of matching strong sales comps from Q4 of last year.

Speaker #3: Canadian same-store sales were down 2.8% compared to a strong 6.7% increase in Q4 last year, and this is all due to the lower money in market with the elimination of the Inuit Child First Initiative food voucher program and the reduced funding for Jordan's Principle programs compared to last year.

Speaker #3: Expected decrease in drinking water settlement payments compared to the fourth quarter last year was also a factor, but to a lesser degree. Both food and general merchandise same-store sales were down compared to very strong sales in the fourth quarter last year, and again, that's due to the lower money—the less money—in market and also a shift in consumer spending from general merchandise over to food.

Speaker #3: These factors were partially offset, again, by increased consumer demand for First Nations child-in-care settlement payments. Turning now to international operations, international sales increased 5.4% for the quarter.

Speaker #3: With same-store sales increased 5.2% in food, and 9.5% in general merchandise. This is on top of solid same-store sales gains in the fourth quarter last year.

Speaker #3: The tourist season in the Caribbean was positive compared to last year, and we were pleased with the overall results in the region. In Alaska, we opened a new store in Utqiagvik at the end of October, which contributed to market share gains.

Speaker #3: These factors more than offset continuing softer economic conditions in some South Pacific markets. With those key drivers of sales in the quarter, I'll briefly comment on consolidated gross profit and our expenses.

Speaker #3: Gross profit decreased 2% for the quarter, and the gross profit rate decreased 74 basis points. These results are comparing against a solid Q4 last year, where gross profit increased 9.4% and was up 141 basis points as a rate to sales.

Speaker #3: The decrease in gross profit rate in the quarter is primarily due to changes in sales mix, including changes in aircraft utilization and higher aircraft maintenance costs over at North Star Air.

Speaker #3: Additionally, an increase in markdowns and shrink in both Canadian and international operations were also factors. The increased shrink was particularly due to weather and other delays, which impacted timely delivery of merchandise to stores in Canada and Alaska, and the impact of lower sales in certain stores in the South Pacific resulted in higher shrink and markdowns.

Speaker #3: On the upside, we continue to see the positive impact of our Next 100 work, including refinements of our merchandise assortments and our procurement. Expenses decreased 1.1% for the quarter and were down 30 basis points as a rate to sales, largely due to lower annual incentive costs, partially offset by higher depreciation and share-based compensation costs.

Speaker #3: In the quarter, we also incurred $1.3 million of one-time expenses related to executing the Next 100 program, compared to $1 million in the prior year.

Speaker #3: These one-time expenses were more than offset by the benefits from our Next 100 initiatives, including store labor productivity gains, which are driving lower store staff costs as a percentage of sales, other cost savings initiatives, and the positive impacts on gross profit I just mentioned.

Speaker #3: Excluding the share-based compensation costs and one-time costs, the net impact of all these factors resulted in a 1.3% increase in adjusted EBITDA in the quarter.

Speaker #3: In summary, the good results in our international operations this quarter were more than offset by the sales headwinds in Canada, which resulted in a decrease in net earnings compared to the very strong net earnings gain in Q4 of last year.

Speaker #3: All right. Now I'll briefly talk about our outlook and provide a few comments on the Next 100 program. First, I want to comment on the money-in market outlook for 2026.

Speaker #3: The elimination of the ICFI food voucher program and a reduction in funding for the Jordan's Principle programs are expected to continue to impact Canadian sales in Q1.

Speaker #3: We expect these impacts in the first quarter to be partially offset by an increase in consumer demand from First Nations Child-in-Care settlement payments, which have started to increase modestly compared to the fourth quarter.

Speaker #3: Although it is still early, based on the settlement payments that have been issued in the communities we serve, our sales capture rate is meeting our expectations.

Speaker #3: Additionally, we expect the distribution of Child in Care settlement payments to ramp up in 2026 and extend for a number of years, based on the requirement for individuals in the removed child class to reach the majority age before payments are issued, combined with the anticipated opening of the application process and distribution of settlement payments for the other eight classes.

Speaker #3: We also continue to monitor macroeconomic conditions, including the ongoing war in Iran and the impacts of higher oil prices, which will affect fuel-related freight and utility costs, and have downstream implications on inflation.

Speaker #3: We are starting to see some fuel surcharges impact freight costs, and we anticipate these pressures will continue in the near term. However, the duration and magnitude of these fuel cost pressures still remain uncertain.

Speaker #3: But I do want to stress that, keeping in mind, the impacts of these fuel increases is a compounding factor in the North as compared to in southern retail.

Speaker #3: But as regarding the Next 100 program, we remain focused on execution and driving cost efficiencies. The refinement of our merchandise assortments and procurement strategies, with a focus on expanding our private label offering, is ongoing.

Speaker #3: Throughout 2025, we ramped up the rollout of new assortments and expanded private label offerings in both our Canadian and international operations. Private label penetration trends remain positive and have sustained as the rollout has progressed.

Speaker #3: Additionally, the implementation of store-based inventory forecasting and replenishment technology, along with a new warehouse management system, is also underway. These initiatives are expected to improve on-shelf availability, streamline ordering processes for store warehouse teams, and reduce inventory shrink and markdowns.

Speaker #3: The Next 100 operational excellence focus has helped mitigate some of the external headwinds that impacted our 2025 results, and the foundation we are building is expected to continue to deliver value to our customers, shareholders, and our employees moving forward.

Speaker #3: With that, I will now open the call for any questions.

Speaker #5: Thank you. If you have a question, please press star one one on your telephone. You will then hear an automated message advising your hand is raised.

Speaker #5: If you would like to remove yourself from the queue, press star 1-1 again. We also ask that you please waive your name and company to be announced before proceeding with your question.

Speaker #5: One moment while we compile the Q&A roster. For our first question, we’ll go to the line of Ty Collins of CIBC. Your line is open.

Speaker #6: Hey, good afternoon, guys. Thanks for taking my question. Maybe just for starters, I was wondering if you could provide a little bit more color on how you're seeing the settlement payments playing out in your markets—what sort of impact that's had in Q1 so far, and how are you seeing your customers who've received those payments show up within your stores?

Speaker #7: Sure. Hey, Ty. Yeah, definitely. So, we identified that we saw a slight increase in Q4. And I say slight—it was modest. And I'd say we were on that same trajectory onward into Q1.

Speaker #7: So, the good news is, from our luck, it's still a trickle. It's not coming in at the rate that we anticipate it to come in later on in the year.

Speaker #7: From the perspective of our capture, we are capturing the sales that we anticipated as far as our capture rate. We put a lot of planning into this to make sure that we're ready and in stock at the time when the money hits.

Speaker #7: And the money that we know has come into the market, it's hit our expectations as far as our sales capture rate on those particular stores.

Speaker #7: But again, I would even take it a step further, Ty, and say probably only half the stores that we anticipate have even seen a check.

Speaker #7: So that's a little bit more insight for you. So out of the, probably, what is it, 63 stores that we anticipate, only half of those have received checks at this point.

Speaker #7: And it's not been a lot of checks, so does that probably provide you—I think that should provide you some more context.

Speaker #6: Yeah, yeah. That's really helpful color. Appreciate that, Dan. And I guess, on a related note, I noticed that your inventory levels look basically flat on a year-over-year basis.

Speaker #6: Closing out Q4, I know previously you've talked about building some inventory ahead of some of this money coming into your markets. Certainly sounds like you're anticipating that to ramp up throughout the year.

Speaker #6: So, just wondering if you could comment on your inventory position at year-end, and what your expectations are as we move through 2026.

Speaker #7: No, you wrote the script. That's right. We're ready for business, and we have the inventory that we feel is the right inventory to capture the amount of sales when the money hits.

Speaker #7: So, it's the same program. And yeah, we're comfortable with both the level of inventory that we're carrying right now and the relationships, and—call it—the network that we've got engaged when we need to call on them.

Speaker #7: So yeah, we're in a good position.

Speaker #6: Okay, great. And if I could just sneak one more in—you mentioned some of the impacts of the Iran war and that you're starting to see some higher freight costs.

Speaker #6: Wondering if you could just discuss any sort of ways that you might be able to mitigate those costs, what you expect the impact might be if this continues, and maybe you could touch on whether you're seeing any impacts to consumer demand as well at this point.

Speaker #7: It's pretty early. We actually held our—we didn't pass on that before Easter, in fairness to our customers. So we haven't seen the reduction in demand at the store levels as of yet.

Speaker #7: As you appreciate, yes, our carriers have come forward with some freight increases. We're obviously going to take a balanced approach, as we have in the past.

Speaker #7: We do have to pass on those costs. It's just a matter of trying to be as strategic as possible to make sure that we optimize value for both our customers and our shareholders.

Speaker #7: But there's no avoiding it. These are costs that are going to have to be passed on to our customers. And yeah, so that's unfortunate, but that's, and obviously, we're not going to do it in full, but we're going to do it strategically and in order to optimize the situation on both sides.

Speaker #6: Okay, that's very helpful. Thanks. And I'll pass the line.

Speaker #5: Thank you. One moment for the next question. And our next question will be coming from the line of Michael Van House of T's Securities.

Speaker #5: Your line is open.

Speaker #8: Hey, guys. It's Evan in for Mike.

Speaker #7: Hey, hello. How's it going, Evan?

Speaker #8: Good. So I guess just to start off, getting back to the settlement payments. So for the markets that you've seen the checks come in, how are you seeing those being spent?

Speaker #8: Are people spending on big-ticket items, or are they trading up in food, or any color you can give around that?

Speaker #7: Yeah, definitely. I mean, you're getting both. There's sizable checks, so you can appreciate that we're definitely seeing the uptick in motorized and some of the big-ticket items.

Speaker #7: But there’s also been some trickle over into the food, for sure.

Speaker #8: Okay, great. And then secondly, with respect to your next 100 initiatives, where are you relative to getting all the benefits? Are you halfway, and how has that changed versus last quarter?

Speaker #7: Yeah, I'd say we're continuing to progress. Thinking of the number of votes, I'd say we're 50% to 60% of our way into it and through it.

Speaker #7: But there's some—I mean, it's not exactly linear, because we do have some of the more difficult tasks like supply chain optimization, which we're undergoing right now.

Speaker #7: We've worked through, and we've been doing a lot of testing on our forecast and replenishments this past year, and it's not fully mature in the fact that we definitely had some headwinds. Whenever you start off on a project like this, you jump in and you learn a lot as you go.

Speaker #7: So there's been some tweaking, but we're really optimistic and positive about what this is going to deliver for us in the future. But I would say, to answer your question, we're about 50 or 60 percent of the way through the initiative.

Speaker #7: But then, ongoing, I mean, we're just starting a warehouse management system implementation, and we're going over into Alaska to work to try and replicate our forecast replenishment that we've created here in Canada.

Speaker #7: To optimize some of that work for our Alaska division.

Speaker #8: Okay, thanks. And then just finally on the airline—so you noted changes in aircraft utilization and higher maintenance costs. Could you elaborate a little bit on those?

Speaker #7: Not much. I mean, it was a tougher quarter for North Star Air, as I mentioned, and it did have a negative impact on our margins.

Speaker #7: We see a lot of it as, yeah, there was maintenance overall in the year. It was actually fine. But for the quarter, I guess we thought we were outsmarting the maintenance fairy, but they caught us in the fourth quarter.

Speaker #7: And we had higher maintenance than we were trajectory throughout the year. And also, there were some aircraft utilization—there was some bad weather, severe weather, actually.

Speaker #7: Some of the markets saw more snow than they had in the accumulation of the three years prior. So it was one of those things that—it was, yeah, it was a tough one, a tough quarter for North Star Air.

Speaker #7: And the reasons for it were those reasons that I mentioned.

Speaker #8: Great. Thanks very much. That's all for me.

Speaker #7: Thanks.

Speaker #5: Thank you. One moment for the next question. And our next question will be coming from the line of Steven McCloud of BMO Capital Markets.

Speaker #5: Your line is open.

Speaker #9: Thank you. Good afternoon, guys. I just wanted to follow up on a couple of things. So, one, just with respect to the 63 stores that you called out having exposure to the spending coming through in 2026, I seem to recall it was 50 when we spoke last, or maybe it was more of a ballpark number.

Speaker #9: But I'm just curious, have you been able to get more insight into where these payments are going? Is that how you've been able to refine the store count?

Speaker #9: Just trying to get a sense of how that's evolved.

Speaker #7: Fifty might have been a ballpark. I think 63 is more precise for you. So yes. And do we have more? No, we don't have any more indication as to where they're going.

Speaker #7: We know, again, where we've received them and where we're anticipating that they will be. But I'd say, with a pretty good degree of certainty.

Speaker #9: Yeah, okay. No, that's great. And then just on the Next 100 initiatives, just to follow up—if you're 50 to 60 percent of the way through it now, do you still expect to be sort of 75% by the end of 2026?

Speaker #9: And then full run rate 2027? Or has that trajectory changed at all?

Speaker #7: Yeah, no, I'd say 2027 for sure as far as the 75% at the end of '26. I mean, it's logical progression, but I have to check back on that if I was going to give you any kind of direction there.

Speaker #7: I'd say, '27 fully mature, yes, but for the duration of '26, I can't verify that at this point—it's going to be 75%.

Speaker #9: Yeah, no, that's fair. That's fair. Thanks. And then maybe just finally on the international business—obviously, very strong quarter. You cited the Caribbean tourism markets, as well as some gains in Alaska from the new store.

Speaker #9: Have you seen any slowdown in activity in some of the tourism-dependent markets in more recent periods, just with the geopolitical issues that we've seen in Iran, and more broadly with the consumer?

Speaker #7: Since Iran—I mean, Iran's fairly soon. People already booked their travel. No, I'd say it's been pretty strong. I mean, with the shutdown of Cuba, with some of the direct redirecting of Europeans and Canadians going into the Caribbean as opposed to maybe to the US, the tourism in the Caribbean has been relatively stable.

Speaker #9: Yeah. Okay. No, that makes sense. Okay.

Speaker #7: Keeping in mind. Keeping in mind, too, on that international front, I might as well—I'd like to add that with the high price of oil, that's—other than other places and territories within the world—that Alaska, that is a benefit.

Speaker #7: And so, it's something that—yeah, it's something just to keep in mind, I guess.

Speaker #9: Okay, no, that's helpful. Okay, great. Thanks, Dan. Appreciate the caller.

Speaker #7: All right. Thank you.

Speaker #8: Thank you. One moment for the next question. And our next question will be coming from the line of Rylan Conrad of RBC Capital Markets.

Speaker #8: Please go ahead.

Speaker #10: Yeah, thanks very much. Good morning. I guess just to start off, on the higher oil prices—when you've had to pass on the higher fuel or jet fuel prices in the past, do you typically see a reduction in outshopping from your northern markets?

Speaker #7: That's a question? Because if it's a statement, if it's a statement, it'd probably be accurate. Because depending on the winter roads, but yeah, jet fuel, I mean, the cost of departing and leaving the communities is going to go up.

Speaker #7: So, I would say aside from the prolonged winter road—which is what we're experiencing right now—yes, I would say that's an accurate comment.

Speaker #10: Okay, perfect. And then just on the child and family services reform that was approved, I think, last week by the Human Rights Tribunal, just for the Ontario carve-out.

Speaker #10: I'm curious if you have any sense of maybe how much program spending is expected to increase under that new agreement, or at the very least if it's expected to be a tailwind in your stores in that province after Q1.

Speaker #7: We definitely anticipate it's going to be a tailwind for us, but the only unknown is when. You know how some of these, I'd say, just government bureaucracy operates.

Speaker #7: We're anxiously waiting, and I can tell you we're on guard as far as monitoring when we think we're—when we—what those infrastructure projects are going to be, and where that money will go.

Speaker #7: And we'll obviously do our best to make sure that we can service appropriately in those areas. But as of right now, given the short time ago that it was actually released, we don't have any other insights for you at this time.

Speaker #7: But definitely be monitoring it.

Speaker #10: Okay, got it. And then just last for me, on SNAP benefits in Alaska—I guess from my understanding, there was a bit of a grace period after the new eligibility rules went into effect.

Speaker #10: If they didn't meet the work requirements. So, I'm curious if you could just give maybe an update on what you're seeing in Alaska so far in Q1, and just whether there's been any kind of noticeable impact to same-store sales there as maybe some of these benefits roll off.

Speaker #7: No, no. I would say at this point, there's been no noticeable impact in Q1.

Speaker #10: Okay, awesome. Thank you very much.

Speaker #7: All right. Thank you.

Speaker #8: Thank you. That does conclude our Q&A session. I would now like to turn the call back over to Dan for closing remarks. Please go ahead.

Speaker #7: Thank you, operator. And no further remarks from us other than thanks to those who attended. We'll look forward to speaking with you in June for our Q1.

Speaker #7: In AGM.