EMLAF Q2 2025 Earnings Call

Operator: Good afternoon, ladies and gentlemen, and welcome to the Empire Second Quarter 2025 Conference Call. [Operator Instructions] This call is being recorded on Thursday, December 12, 2024. I would now like to turn the conference over to Katie Brine, Investor Relations, Treasury & Pensions. Please go ahead.

Katie Brine: Thank you, Joanna. Good afternoon and thank you all for joining us for our second-quarter conference call. Today, we will provide a summary comments on our results and then open the call for questions. This call is being recorded and the audio recording will be available on the Company's website at empireco.ca. There is a short summary document outlining the points of our quarter available on our website. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer; Matt Reindel, Chief Financial Officer; Pierre St-Laurent, Chief Operating Officer; and Doug Nathanson, Chief Development Officer and General Counsel. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors. I will now turn the call over to Michael Medline.

Michael Medline: Thanks, Katie. Good afternoon, everyone. In Q2, the story at Empire continues to be an improving consumer environment with solid execution. We saw momentum in green shoots in both the economy and our business. Our same-store sales have gradually, but meaningfully increased over the last two quarters and we continue to make improvements to our margins and to our costs. As you know, through the period of rising interest rates and inflationary pressures, we focused on protecting the fundamentals of our business while also working on initiatives that would set us up for success once the economy started to recover. Inflation has now moderated and interest rates have begun to decline, representing a positive inflection point for full-service, which we've clearly seen over the last three quarters. We've laid the groundwork on our major initiatives and now the strength we've been building in our business is beginning to come to life in our results. Today, I'm going to focus on two topics, our Q2 results and market trends and then a quick update on our e-commerce business. First, our results and market trends. Same-store sales grew by 1.8%. We're pleased with the progression of our same-store sales, which is in part due to many of the early market indicators that we highlighted in Q1 and that continued to gradually build in Q2. Food inflation has been stabilizing for the last three quarters, contributing to a more predictable operating environment and interest rates fell by 75 basis points during the quarter, improving consumer confidence. Both our full-service and discount channels continue to grow faster than their respective markets. And for the fourth quarter in a row, we continue to see the gap between full-service and discount same-store sales closing. We said this last quarter, and I'll say it again, we believe this will be advantageous to us as we continue to lean into our strengths as a full-service foremost grocer. Over the last few years, we have made investments to highlight and deliver value to our customers across all of our banners. For example, we know that our own brands products remain top-of-mind for our customers and we have launched a significant number of large-format, multicultural and value-oriented products in response. The early indications we saw last quarter of customers returning to more favorable and predictable shopping behaviors continued to present themselves in Q2. We see customer numbers growing in our stores and smaller declines in the average basket size. That's positive, but it will take time for stretch customers to fully return to their more typical purchasing behaviors. Gross margins continued to improve this quarter, supported by a focus on stores, supply-chain and purchasing more efficiently. Margin improvement of 48 basis points was driven by many small, but meaningful actions. A few initiatives that continue to enable our growth include our ongoing deployment of space productivity, significant improvement in our non-theft shrink and our supply-chain. With regards to shrink, we have continued to leverage best practices and expertise across our banners to implement new ways of working in our stores, which are focused on optimizing forecasting, ordering and delivery schedules. And within our supply-chain, there are two key areas we can highlight. First, we're executing with a higher degree of precision and discipline. In practice, that means we're getting better at utilizing our advanced transportation management systems, strengthening partnerships with our carriers and streamlining deliveries to reduce costs and mileage. This has enabled us to get better in areas such as outbound delivery to stores where we have optimized delivery frequency and order windows. Secondly, we've been focused on consolidation and expansion across our supply-chain network. As an example, in Q2, we completed the expansion of one of our distribution centers in Ontario and expect to realize savings by converting high-volume direct store delivery vendors to our distribution center. Not only have these initiatives enhanced our margin, but they have also enabled us to achieve significant improvements in freshness, waste reduction and product availability. While we've been protecting the fundamentals, we've also put much effort into improving our cost base, which is starting to show in our results. Our SG&A rate grew 46 basis-points this quarter compared to 69 basis points in Q1 and is the lowest rate of growth over the last six quarters. Over the last year, our strategic sourcing team has worked extensively with suppliers to enhance value on the products and services that support our operations. This, in combination with the impact of the restructuring and the many supply-chain initiatives have collectively enabled us to improve our cost base. Overall, we delivered adjusted EPS of CAD0.73 this quarter. When excluding other income and share earnings from equity investments, we delivered EPS growth of about 8.7% versus the prior year. And now for a quick update on our e-commerce business. We had total e-commerce sales growth of 12% in Q2, driven largely by strong top-line performance from Voila. With Voila, we've enhanced our omnichannel marketing approach, reengaged labs customers and made a number of operational improvements. You've heard us say this before. Growing Canadian e-commerce penetration is the key tailwind that we need to accelerate the growth of Voila and we're beginning to see that. Again, green shoots but movement in the right direction. We've also launched partnerships with Instacart and Uber Eats in Ontario at the very end-of-the second-quarter. These platforms launched in Western Canada last week and will continue rolling out to the rest of Canada in calendar 2025. We wish everyone a safe and a happy holiday season. And with that, I'll turn it over to Matt.

Matt Reindel: Thank you, Michael. Good afternoon, everyone. I'll provide some comments on our quarterly performance as well as our expectations for the second-half of the year and then we'll open it up for your questions. In Q2, we delivered another quarter of solid performance generated by improving top-line momentum. As we've been saying for the past few quarters, we clearly see gradual improvement in the consumer sentiment, thanks to lower inflation and decreasing interest rates. The combination of consumer behavior is beginning to normalize and solid execution on our initiatives is translating to improved sales performance. This, combined with our strong margin and cost-control, will help generate improved profitability. Our Q2 adjusted earnings per share was CAD0.73 and was CAD0.02 higher than last year. Further, our other income and share of earnings from equity investments in Q2 was CAD8 million lower than last year. So, excluding this from both years, our adjusted EPS was about CAD0.04 or 8.7% higher than last year. Our same-store sales was 1.8%. The same-store sales gap between discount and full-service businesses continues to narrow and is a great indicator that consumer behavior is continuing to gradually normalize. In e-commerce, across all of our online platforms, sales were 12.2% higher than last year. Voila continue to be the main driver of this solid sales growth. Our new partnerships with Uber Eats and Instacart were active for less than two weeks during the quarter. It's early days, but we believe that they will be a very good complement of Voila. Our gross margin rate, excluding fuel, increased by 48 basis-points versus last year, which was consistent with the improvement we delivered in Q1. We continue to target 10 basis points to 20 basis points of margin expansion per year as a medium-term expectation and while we've exceeded this over the last few quarters, we will begin comping very strong growth next quarter. Our SG&A is well-controlled. In Q2, our SG&A dollar growth after excluding adjusting items was 2.4% higher than last year, which was lower than the 4% increase we saw in Q1. As in prior quarters, growth in SG&A spend reflects our investments in the store network, tools and technology to support our strategic initiatives and higher retail labor costs, but partially offset by our cost-control initiatives, including goods not for resale, supply-chain and the benefits of our organizational restructuring. As Michael noted, our SG&A rate when excluding adjusting items was 46 basis points higher than last year, a marked improvement from the increase we had in Q1. As our top-line sales performance starts to improve, we will see a better absorption of our fixed costs and so we expect that the pace of our SG&A rate expansion will gradually taper moving forward. As I mentioned earlier, our other income and share of earnings from equity investments was CAD8 million lower than last year, but it was higher than we expected in Q2. Our earnings from Crombie were higher-than-expected due to their acquisition of the remaining 50% of our residential property. That reflects the lumpy nature of real-estate transactions and why we opted to provide the best possible guidance we can give you for this extreme of income. For fiscal year '25, we continue to expect our pre-tax aggregate contribution from other income and share of earnings from equity investments will be in the range of CAD135 million to CAD155 million. We expect that 7% to 10% of this range will be generated in Q3 with the balance in Q4. For the full-year, we are trending to the upper-end of the range and we will provide you an update on our full-year guidance during our Q3 earnings call. Our effective tax-rate for Q2 was 25.8%, which was higher than the 22.3% we had last year. While we benefited from non-taxable capital items in both years, last year's tax-rate had a larger benefit from these capital items, as well as benefiting from some investment tax credits, which led to a lower effective tax-rate. For fiscal '25, excluding the effects of any unusual transactions or differential tax-rate on property sales, we continue to estimate that our effective income tax-rate will be between 25% and 27%. Okay. Let me move on to capital allocation. Our balance sheet remains strong, driven by solid cash-flow generation and disciplined capital spend. In Q2, our CapEx was CAD149 million, mainly on-store renovations, construction of new stores and IT. We remain on pace to spend CAD700 million on CapEx in fiscal '25 with approximately 50% of this investment being allocated to store renovations and new stores. Our share buyback program is on-track and we fully expect to complete our CAD400 million plan for fiscal '25. As of this week, we have repurchased 5.7 million shares for a total consideration of CAD213 million. So let me wrap things up. As we enter the back-half of fiscal '25, we're very pleased with the top-line momentum we are seeing in our business, especially in full service. With many of our key initiatives starting to add incremental sales such as space productivity, loyalty, personalization and our expanded e-commerce strategy, we're starting to deliver better top-line growth while continuing to expand gross margins and effectively managing our cost base. So we are well set-up for the future, particularly as consumer sentiment continues to gradually normalize. And with that, I'll hand the call back to Katie.

Katie Brine: Thank you, Matt. Joanna, you may open the line for questions at this time.

Operator: [Operator Instructions] The first question comes from Chris Li at Desjardins. Please go ahead.

Chris Li: Hi, good afternoon, everyone. Just maybe I start-up with Michael, I think you mentioned in your opening remarks that you continue to see a smaller decline in average basket size. I was wondering if you can provide a bit more details in terms of what's driving that smaller decline. Is it driven mostly by the higher dollar amounts or are you seeing some pickup in terms of unit volume? Thanks.

Michael Medline: If you don't mind, I'll pass it over to Pierre.

Pierre St-Laurent: Yes. So basket size compared to last year and two years ago is improving right now. So the decline is smaller. And in some region, we're seeing basket size increase right now. So indicator on basket size is improving. The gap -- because we know over the last two years, we had more transaction. With smaller basket size, it was a general trend in the market, including in a discount business. And recently we saw an improvement in the basket size trend and in some region, we're seeing basket size increase right now.

Chris Li: Okay. So -- and that's because you're seeing more just people buying more units? Is that one of the reasons?

Pierre St-Laurent: Yes. Exactly unit also -- unit indicators showing improvement. There's many components that we're looking at. So, basket size is improving, unit is improving, unit per transaction is improving gradually, but we're seeing positive trend in those indicators.

Chris Li: And is that sort of more broad-based across the country or is there certain regional markets where you're seeing that?

Pierre St-Laurent: In both full-service and district.

Michael Medline: Across the country.

Chris Li: Okay. Perfect. Thanks for that. And then maybe, Matt, just maybe a question on gross margin. It did increase to 40 basis points excluding the fuel impact. I'm just wondering at a high-level, how much of that improvement was due to mix? Because it does seem like the decline in fuel and wholesale tobacco revenues were a bit larger than previous quarters. So, I'm just wondering if you can maybe break it out for us, what was the mix contribution in the quarter? And then maybe related to that as you look into the second-half of the year, do you expect the declines in wholesale tobacco revenues to continue, so it will still provide a bit of a margin tailwind for the second-half of the year? Thanks.

Matt Reindel: Sure. Thanks, Chris. So yes, if you look at the 48 basis points of gross margin improvement during the quarter, I mean, it's -- as we said before, there's multiple initiatives that are all adding a small amount to that improvement. But mix is about 15 basis points of that. So that gives you the indication of that. And then like we also said, supply-chain contributed in Q2, which it did not in Q1 and then the rest is core. So mix is about a third of the increase. And then in the second half of the year for gross margin, first of all, let me set expectations on total. So as we've said, I will not move away from that 10 basis points to 20 basis points. That's what we expect on an ongoing basis. But for wholesale, in particular, yes, I mean, it's a continuing trend that tobacco sales would decrease. So we'll see what happens on wholesale. That may give us a small mix impact benefit in the second-half of the year. We'll see how that progresses.

Chris Li: Perfect. And if I may just sneak in just maybe one last question maybe on Voila. I know you don't disclose the earnings dilution impact anymore, but are you able to share just whether on a year-over-year basis, if that level of dilution has stabilized or perhaps improved as a result of some of the cost-saving initiatives that you have implemented over the last three or four quarters? Thanks.

Pierre St-Laurent: Yes. So I'll add to that one. The good news, Chris, is that for each CFC, the losses they are making are getting less. So it's accretive now to our business. As you said, we're not going to quote the actual figures, but the good news is it's gradually getting better.

Chris Li: Perfect. Thanks, everyone, and have a safe and happy holiday.

Michael Medline: Yes, sure. Thank you, Chris.

Operator: Thank you. The next question comes from Tamy Chen at BMO Capital Markets. Please go ahead.

Tamy Chen: Hi, thanks for the questions. On the food side, you mentioned in-store initiatives executing well on them. Can you elaborate on what you're referring to? Is there anything new or distinct that you're doing in terms of how you're managing the stores and stock and your offering? Or is this just the consumer is showing up more to your stores now than recent quarters?

Pierre St-Laurent: I think it's both. So, there's multiple initiatives that are lending in store. It's a teamwork effort between merchandising, cooperation, marketing and supply-chain. So fresh is the real focus for us. And our business is improving faster in the fresh business. It's improving everywhere, but we're seeing better improvement on fresh, which is our strength and we're pleased to see that. So our real focus on fresh is great. The turns are improving, the freshness is improving. There's a lot of small initiatives well owned by operators, which is very nice to see right now. So all that strategy and initiatives are lending in-stores and then the strong ownership by operators and dealers and franchisees. So, we're pleased with that connection between different functions and they're working really, really well together.

Tamy Chen: Got it. Okay. Thanks for that. And my follow up question is, at a high-level, curious how you're thinking about your different banners and the strategy for them going-forward. So in Ontario, I'm just curious on the Farm Boy and the Longo's banners. Do you feel there's still material runway in that province for these two banners? Could you expand them elsewhere? And also wondering out west for FreshCo, I think your target has been to convert 25% of your footprint there to FreshCo. I think you're getting close to that target. How are you thinking about that mix out there? Could that target change? Would you consider in converting some more after you reached that 25%? Thank you.

Michael Medline: Yes, hi, it's Michael. Thanks for the good question. And you hit -- I don't think you could hit a banner. I'm not happy about, right, this second, but we are seeing -- you're going to see many new Farm Boy and Longo's stores going up over the next year and two years and probably after that, but we're -- we've already-approved many that you'll see we're incredibly pleased with the progress of both those banners in Ontario. Could they go to other provinces? I think Farm Boy could go to other provinces, but they're not going to go to other provinces because we think that the brand resonates so well in Ontario and we have so many opportunities to put up and even convert some of our stores to Farm Boy's. And in terms of FreshCo out west, yes, we always are looking for opportunities to put stores up where we can make a lot of money and serve our customers and take market-share from our competitors. And so you'll see more stores going up in Western Canada and Ontario in FreshCo. So -- yes, we have a -- I think what we're seeing right now is that we can renovate stores at a lower-cost and get a really good return right now and we'll take the capital that we're spending on renovations and put up new stores in geographies where we don't have coverage, where we can take market-share and where we can throw the customer and you're going to see that across pretty well all of our banners across Canada in a measured, smart way. That's good for our shareholders.

Tamy Chen: Thank you.

Operator: Thank you. The next question comes from Vishal Shreedhar at National Bank. Please go ahead.

Vishal Shreedhar: Hi, thanks for taking my question. I was wondering now that Scene has more than 15 million people, it's quite a large installed-base. How should we think about the evolution of that? Have we hit a steady-state or do you anticipate there's more room to go in terms of installed-base and usage?

Michael Medline: Yes, it's been incredible growth. I think we started below 10 million and now we're over 16 million and it continues to grow. Obviously, we'll see smaller growth than we did in the early days when people were running to sign-up and -- but the big prizes haven't come home yet to -- for us, which is, we're seeing incredible work by our merchants and marketers and our operators to be honest. In terms of using this platform, the data it produces and the one-on-one interaction we can have and the data it gives us is phenomenal. So we're glad in terms of the number of customers, it makes us one of the most popular and well used loyalty programs in the country. And we are -- we're well-ahead of any sort of plans that we had in terms of the results so-far, but the big prizes are happening now and will continue to happen as we use it. So you're right though. I mean, you can't get to 100 million, but I think we saw growth in terms of the numbers as well. And I think our partners believe the same.

Vishal Shreedhar: Okay. I was intrigued by your comment and you've mentioned this before about consumer normalization and the improvement in your business and that's happening as you called out. Some of your -- there's different perspectives across retailer peers across Canada and I know you still keep your finger on the pulse of what's happening in retail. And not everyone feels that the consumer is necessarily improving in a meaningful manner. So I'm wondering once you look at your results, do you attribute that to your initiatives or, in fact, it is the consumer or is it easier comps or how should we think about exactly what's driving this improvement?

Michael Medline: I still force myself to stay in touch with everything and read everyone's transcripts and all that stuff. And I honestly am having trouble reconciling some of the statements being made out there with what we're seeing, but you'll have to ask other people what they're seeing. But what we're seeing -- and by the way, this is still a tough economy for Canadians, don't get me wrong, like we got -- this country deserves a stronger economy and I'm sure we'll get there, but it's improving gradually. If you're getting sick of the word gradually, you're going to keep hearing it because the only ones I can think of, the other synonyms are moderately cautiously and progressively and none of those are as good. But it is improving gradually. We said it early, we said it first, and we were right. And that's good for Canada. Now you're always going to have blips here and there over a period of time, but we're seeing green shoots as I think you call them, when a lot of the investors call them and we're seeing progress, but it's small, it's gradual. But that's all we need with the strength we've built-in our business and the execution improving across our whole business, but very -- a lot of it attributable to Pierre's leadership and his team. So yes, that's what I'm seeing. But I know I read different things and I just can't reconcile some of them from the -- either the economics or the reports that we get from people or from what we're seeing on-the-ground. So there is a bit of confusion. But whenever there's an inflection point, things change, some people are behind the curve.

Vishal Shreedhar: Thank you.

Operator: Thank you. The next question comes from Michael Van Aelst at TD Cowen. Please go ahead.

Michael Van Aelst: Great. Thank you. Good afternoon. Wanted to get back to the store expansion. You haven't had a lot of square footage growth. I think it was pretty flat this quarter. I saw I think 16 net negative stores, but they must been quite small in the last -- from Q1 to Q2. What stores are those that you're closing down and where do you see that square footage growth getting to over the next 12 months to 24 months?

Michael Medline: Matt will talk about the closures and you were right in terms of your summary there, but little bit more detail, then I'll talk about the growth.

Matt Reindel: Yes, just cover the 16. So as we continue to kind of strengthen our overall network, so the 16 stores we looked into it this morning, there's some liquor stores in there, there's some convenience and fuel, some fuel stations. So it's mostly those things as opposed to our big stores. And we will continue to do that to optimize our network. And then I'll pass it back to Mike.

Michael Medline: Yes, thanks. And great question, Michael. What -- so as I said, we're reallocating capital. And as you know, we're rather stingy with capital because we like to get returns. And what we've been seeing lately is that we can move money from our renovations and get a really good job done cheaper and that we're very keen as we see returns and opportunities on new stores, we see a lot of opportunity and so we're confident in that. And I believe by like capital allocation, moving money around that you'll see double the number of new stores next year and we're particularly bullish on Province of Quebec. We're particularly bullish on Farm Boy and Longo's as we said and, in fact, most of the banners, but I think you're going to see -- and this is a multi-year project, you don't just -- but next year, you'll see a doubling in terms of new stores.

Michael Van Aelst: Okay. So what would that gets you to in terms of square footage growth?

Michael Medline: We'll get back to you on that. I don't have it at the tip of my finger.

Michael Van Aelst: Okay. And then I wanted to...

Michael Medline: These are not -- a lot of them are big stores. And then there's -- it's a good mix, but it's not -- this will be some square footage.

Michael Van Aelst: Okay. And then on the discount side, I think you're still short of your original target. I think 48 discount stores in Western Canada, you were thinking something in the '60s, if I remember correctly. And you've only added two in the last 12 months. And I'm wondering where the challenges in opening up new discount stores in Western Canada? Or is it just that you didn't -- you don't allocate the capital to that?

Michael Medline: Yes, it's a second. You hit it right on, which is -- so our plan -- we're pretty transparent today. So we're going to -- by the end of FY '27, our current plan is to have 65 or more stores in Western Canada. And it's just capital allocation they're doing. I mean as you -- I think you can probably see-through some of the reports or some of your information, they're knocking the cover off the ball in the West and we're getting stronger and stronger in terms of FreshCo in Western Canada as we build the brand.

Michael Van Aelst: Okay, thank you. And then last question for Matt. The OpEx growth in Q2 was like 1.9%. In Q1, it was 3.9%. So I know you like to look at it as a rate. But when I look at it sometimes as a growth rate year-over-year, it gives me an indication too since you don't have that much a big difference in your revenue growth. So it seems a little low at 1.9%. Obviously, it's a good accomplishment, but it seems a little low in this cost environment and I'm wondering was there some kind of timing in there or like a bigger number last year that we should -- so that we shouldn't expect that kind of pace like a 2% growth rate going-forward?

Matt Reindel: Yes. So, it's a great question. As we looked at our quarterly numbers, we digged into this a lot. So, if you remember last quarter, I said that the -- I look at slightly differently because I look at SG&A excluding adjusted items. Last quarter, we were 4% higher than last year, which I was not happy with. This year at 2.4% higher, which I am happy with. There's nothing particularly unusual in our Q2 results. There's no one time credits or anything along those lines. So we can think that it's a normal quarter. But as we go forward into Q3 and Q4, will we achieve a 2.4% increase? I would be very happy with that. Will it be somewhere between the 4% and the 2.4%? Probably. But we'll have to see how Q3 and Q4 evolve.

Michael Van Aelst: Okay. Great. Thank you.

Operator: Thank you. The next question comes from Irene Nattel at RBC Capital Markets. Please go ahead.

Irene Nattel: Thanks, and good afternoon, everyone. Just was really intrigued by your commentary around some of the work you've done on supply-chain and how that's helping not only on the cost side, but also just better in-stock. And I'm wondering if you could talk about where you are on that journey. And similarly where you are on the shrink journey and how much more you think there might be that could help on the gross margin side going-forward?

Pierre St-Laurent: Yes, supply-chain is playing a very -- a key role in our improvement. So they contributed to gross margin improvement as we said at the beginning by optimizing our outbound. So the team did a really good job optimizing routes and maximizing loads, but they also contributed to improving freshness and delivery frequency. It's very helpful right now. Our turns and stores is very good. Shrink is going down in both stores and RSCs. Also, the situation is more normalized in term of forecasting because we're seeing a more normal environment to work with. So all those components contributed to a better efficiency in supply-chain, a better efficiency and replenishment and an optimization. And as I said, supply-chain is not necessarily just cutting routes and maximizing loads, but they are close to the store needs. In some cases, we improved the frequency of delivery with way bigger results in the store results than this money we could save in cutting deliveries. So the supply-chain is working very, very closely with store operation and they are contributing to this improvement that we're seeing in margin and in their outbound costs.

Irene Nattel: That's really helpful. Thank you. So where would on this journey, are you where you want to be or do you think that there's still more that you can get out of the supply-chain piece of that?

Michael Medline: I've never heard -- Pierre say he's happy, so Pierre with [indiscernible].

Pierre St-Laurent: The fun thing in our business is there's always room for improvement and the team are seeing the exact same thing. We're working closely also with our inbound portion and we have stronger partnership with inbound carriers and optimization of bringing product in our RFCs and in our store. So -- and we are operating really, really well. So we can focus on optimization right now. We're ahead of the curve. So we're planning well. The situation in supply-chain is very stable, so we can focus on optimization right now and we're seeing still opportunities to be better.

Irene Nattel: That's really helpful. Thank you. And just one final question, if I might. We've seen some really strong results from some of the drugstore players here in Canada. And I know that pharmacy is a relatively smaller piece of your business, but you do have a lot of pharmacies in Western Canada. Just wondering how those are doing in particularly whether there was any contribution to the comp as a result of some of that strength?

Michael Medline: Yes, you're right because those of you based in Central Canada wouldn't know that we have a relatively large pharmacy business, which is -- which operate is -- operating well right now and is contributing and doing a good job. I think as -- we've been putting a lot of effort into the food business and because that's our big business and that's where we can drive a lot of results and improvement in our business for our customers and our shareholders. And we are -- it's a good timely question that we haven't had in a while because in the last couple of months, we're working hard on strategy for pharmacy to even particularly improve it more and improve our results in our current pharmacies. And -- so I think there's -- although we're pleased with the results, I think there's upside that can be had there. And I know that the executives working on that and they report to peer, working hard on that and we're working on that strategy and tactics.

Irene Nattel: That's helpful. Thank you.

Michael Medline: Thank you.

Operator: Thank you. The next question comes from John Zamparo at Scotiabank. Please go ahead.

John Zamparo: Thank you. Good afternoon. I wanted to come back to the topic of square footage growth, but from the perspective of the industry. And it's accelerating or is relatively at an elevated level from some of the country's larger players? We've all seen what's happened with population, so it looks like that's coming down. I wonder what you think about the industry square footage growth and whether or not you consider it rational and is there a risk that the industry is adding too much capacity?

Michael Medline: That's a good question. No, I think that most of our competitors are pretty rational players and they're making their own decisions and they're making what they think are smart decisions and we'll have to see whether some of them are too aggressive or not aggressive enough. I don't know the inner workings of other companies. I can only talk about ourselves. We try to put up stores that make money and have good returns and we'll continue to do that. As you can see from the results right now, we're not suffering from people putting up new stores as we might have been two years ago or even 18 months ago in a different environment. So I think as -- I think the market can handle it, but at the same time, where we see opportunities to go into markets where we're not represented or underrepresented where we can take market-share and make more money and we're going to do so.

John Zamparo: Okay. I appreciate the color. And then moving back to gross margins, that's been up significantly on an ex-fuel basis to start the year. I would like to better understand the puts and takes for the back-half, especially as you lap an average of, I think it's 75 basis-point or 80 basis-point increases from the second-half last year. So is there a chance this comes in meaningfully above the 10 basis-point to 20 basis-points you typically target on an annual basis? And if not, should we expect potentially flat or decline in gross margins in the back-half of the year?

Michael Medline: Is there a chance? Yes, there's always a chance, but I certainly wouldn't expect it. Our expectations are 10 basis-points to 20 basis-points. As you said, we're going to start to lap some very significant increases in margins last year. And so yes, I wouldn't expect it. We're not.

John Zamparo: Got it. Okay. And then just one more on e-commerce. I wonder if you can talk about the performance from your new partnerships subsequent to the quarter. It was only in-place for a couple of weeks, as you said, but I'm wondering how that's going and are you seeing incrementality from these partners on-top of your existing Voila customers?

Matt Reindel: Yes, it's Michael talking that I should give the credit here to Doug and Pierre and Pierre's team for putting this into place very, very quickly. One of the fastest implementations we've seen. I think we're very happy with the partnership very early days. It allows us to hit a customer that we were missing out on. We're seeing very, very small overlap with our current business. We -- it's so early though and we want to look at more data. If we think it's higher than that small number, I'll tell you next quarter. But I think it's not cannibalizing our business and it's de-minimis. And we're capturing sales that we would not otherwise have captured. And I think it's good now. I think we're nailing it now. We're in the business to make our customers happy and our shareholders happy. And I think this is a nice addition and that's what it is to our overall business.

John Zamparo: Okay, great. I'll leave it there. Thank you very much.

Matt Reindel: Thank you.

Operator: Thank you. The next question comes from Mark Petrie at CIBC. Please go ahead.

Mark Petrie: Yes, thanks. Good afternoon. Just a couple of follow ups. Specifically on same-store sales, we heard a lot about shifts in consumer spending patterns over the last couple of years, specifically ascribed to trade-down like frozen versus fresh or lower-quality cuts or products. Would you say those are reversing along with some of the other behaviors that you've already summarized?

Pierre St-Laurent: Yes, it is. So we're seeing bigger increase in growth in fresh product. So the thing we saw during the decline, we saw a decline in fresh and people's trade down to frozen or canned meat and canned fish. The thing we're seeing right now, it's the opposite. People are coming back, shopping our fresh department, which is a very, very good news for us. And we're seeing higher-growth in the fresh departments -- fresh departments. So this is a -- this is exactly what's happening right now gradually, but it's exactly what we're seeing.

Mark Petrie: Yes. Okay, got it. That's helpful. Thank you. And I'm curious if basket composition then in online has shifted at all. I know it's a different baseline, it's also somewhat of a different customer and occasion. But do the shifts in the -- there's a shift that you're seeing in the store, are those mirrored in the online business as well?

Pierre St-Laurent: The online business remained pretty stable in terms of composition of the basket. The basket is way higher in e-commerce and Voila now especially with the assortment we have. But I didn't see a big change recently. But I didn't see the number in details, but the basket size remain very-high and stable. As to look at the position of this basket, theorically, we should see a little bit more increase in fresh and non-fresh. It's the same customer. Customers are shopping omnichannel. So we should see the same thing, but I don't have the number in front of me.

Matt Reindel: Well, Mark, we'll get back to you. If we -- if we're seeing something different, we'll get back to you on that, but that was my understanding too. But if we see something different, we'll let you know.

Mark Petrie: Yes, sounds good. And then just the last one, I wanted to follow up. I know you touched on shrink earlier, but I just wanted to make sure if you could just go over sort of where you are at in the evolution of shrink levels and if you expect that to become a bigger tailwind or is that a dissipating tailwind and how should we think about the materiality of that today?

Pierre St-Laurent: Again, there's always room for improvement, but year-over-year, we did a significant improvement. For many different reasons, as I said, because we are operating in a more normalized environment, everything is easier to manage, forecasting, replenishment, and this is easier. So this is one component of the improvement. The other component of the improvement is the focus in operation on shrink. And we did many small things to improve it. So I would say we will continue to improve our shrink. We're still seeing opportunities, but we won't deliver the same year-over-year results and improvement in shrink than we did last year, but I think there is still opportunity to capture.

Mark Petrie: Okay. Very helpful. Appreciate all the comments, guys, and happy holidays.

Michael Medline: You too, Mark. Same to you.

Operator: Thank you. The next question is a follow up from Michael Van Aelst at TD Cowen. Please go ahead.

Michael Van Aelst: Thank you. Just a quick one. Michael, you mentioned that you want to get to that 65 fresh store service in the West by fiscal year '27. With those 17 or so increase, would that -- would you expect that to be more conversions or new to industry?

Michael Medline: The question Pierre is for the FreshCo stores that we're putting up in Western Canada, the additional 17 or plus and what percentage do you think roughly will be new to the market rather than convergence?

Pierre St-Laurent: Most of the conversion have been done, so will be mostly new stores.

Michael Medline: There might be two or three conversions as we go forward, but…

Pierre St-Laurent: Most of the conversion have been done. So the loan include has been captured in conversion to FreshCo and we're very pleased with the same-store sales in Western Canada right now with FreshCo.

Michael Van Aelst: Okay, great. And happy holidays to everybody as well.

Michael Medline: You too, Michael.

Matt Reindel: Thank you, Mike.

Operator: Thank you. That concludes our Q&A. I will turn the call back over to Katie Brine for closing comments.

Katie Brine: Great. Thank you, Joanna. We appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by phone or email. We look-forward to having you join us for our third-quarter fiscal 2025 conference call on March 15th. Talk soon.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.