Earnings Call: Q1 2021

Sep 10, 2020

Good morning, ladies and gentlemen, and welcome to the Empire First Quarter twenty twenty one Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, 09/10/2020. I would now like to turn the conference over to Katie Brine, Director, Investor Relations. Please go ahead. Thank you, Joanna. Good afternoon, and thank you all for joining us for our first quarter conference call. Today, we will provide summary comments on our results, what we are seeing in the industry today, 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 Michael Vell, Chief Financial Officer and Pierre Saint Laurent, Chief Operating Officer, Full Service. Today's discussion includes forward looking statements. We 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 and A for more information on these assumptions and factors. I will now turn the call over to Michael Petline. Thanks, Katie, and good afternoon, everyone. So much has happened at our company since we last spoke in June. We announced our new three year growth strategy, Project Horizon. We launched Voila, our game changing e commerce solution, we continued to grow our number of Farm Boy and FreshCo locations, we ratified our crucial Alberta labor agreement and we were upgraded by S and P to an investment grade rating. Today, I want to focus on a few key topics, the early progress we're making on Project Horizon, our performance this quarter and an update on the trends we're seeing as a result of COVID. We announced Project Horizon, our new three year growth strategy in July. And while our announcement was slightly delayed as a result of COVID, the team was already in flight on many of the initiatives. Through Project Horizon, we plan to deliver an incremental $500,000,000 in annualized EBITDA by the 2023. When we launched Project Sunrise over two years ago, we had a few doubters. Many thought we couldn't do it. They discounted our goals, said the savings went dropped to the bottom line. But our team came through and we proved them wrong. We delivered on time, above target and above expectations and we plan to do so again. Project Horizon is just as bold and equally as ambitious. We know we have a lot of work in front of us to get to the $500,000,000 but we are much more optimistic now than we were three years ago. We are a completely different company today than we were when we started Sunrise. We have reset our foundation, transforming Empire from a regional to a national company. We have sharpened our talent at every level and in my opinion now have one of the best executive teams in Canada. We have sustainable earnings growth, we have standardized our operational processes and we've improved our cost structure. Although we only announced Horizon in July, it was not a standing start, not at all. Our initiatives are either underway or they are initiatives that I've seen successfully completed at other companies. Horizon is not rocket science. The only rocket science are the algorithms we're using and voila and the artificial intelligence we're using throughout the company. Many of these initiatives we identified at the start of Sunrise, but we simply needed to do things in the right order at the right time. We needed a solid foundation to be able to achieve our earnings potential. Our earnings growth over the next three years will come from one, growing market share and two, building on the cost and margin discipline we developed during Sunrise. I will speak to you about the initiatives we have ongoing to grow market share and Mike Bells will take you through our cost and margin initiatives. A number of initiatives are underway to support market share growth, including investing in our store network, scaling up grocery e commerce, growing our private label portfolio, continuing our Western FreshCo expansion, including the Farm Boy area. First, investing in our store network. Toward the end of Project Sunrise, reinvesting in our stores became a key priority. We have seen extremely strong returns on these projects. Indeed, they are our best return projects. We have an ambitious store renovation program that ensures we deploy capital to revitalize most of our stores over the next seven years. Our renovations will range from a refresh to a full reset of the store, but at a minimum you will see enhancements to decor and modifications to our key departments to better support our strategy. So far in the first quarter, we have touched 21 stores. Over the three years of Horizon, we plan to touch and improve approximately 30% of our store network. Next is expanding Farm Boy in Ontario. Farm Boy continues to be a weapon for winning share in urban markets in Ontario where we were underpenetrated. At the outset of the pandemic, Farm Boy saw a slight decline in their same store sales as a large portion of their offering is focused on prepared foods. However, their same store sales have been restored to even higher than historic levels as the exceptional leadership team at Farm Boy continues to successfully innovate to adapt their stores and offerings. The Farm Boy store count will grow in a mix of urban and suburban communities with diverse store sizes and formats to fit the needs of local customers. We have announced plans to open another three Farm Boy stores in calendar twenty twenty and seven in calendar twenty twenty one. This brings Farm Boy's total announced store count to 42 stores and this, of course, is just the beginning. The FreshCo team is doing a great job too and I want to talk about FreshCo's Western expansion. FreshCo continues to outperform other discounters nationally while making progress expanding the discount banner to the West. Our brand equity scores are very high. Since the start of this fiscal year, we opened seven FreshCo stores bringing our total store count in the West to 22 stores open. And we have eight in different stages of development including two that we announced today in Regina and Grand Prairie. We are very pleased with our early results in the West. We also reached a mutually beneficial labor agreement that will allow us to expand FreshCo into Alberta, the final Western province impacting our expansion. This is a huge milestone for the FreshCo West team and for the company. Our first two FreshCo stores in Alberta are expected to open in spring twenty twenty one. I'm going talk about improving store space productivity. Driving better space productivity in the current store network is a crucial engine for long term market share growth. The foundation of productivity is the customer offering and assortment in each department as well as the mix in the store as a whole. During Sunrise, the company revamped its offering through the category resets program, but with a significant constraint, maintaining the current space allocation within stores. During Project Horizon, the company will drive a step function improvement in space productivity using advanced analytics to optimize every customer facing element of the offering, store footprints, department space allocation and strategies, layouts and adjacencies, category assortment and localization decisions. We're also going to win Canadian e commerce. In response to the increased penetration we have seen in grocery e commerce throughout the pandemic, we accelerated the customer launch of Voila, our game changing online grocery home delivery service to meet the increasing demand from customers for delivery. We began with a relatively small number of SKUs to test the system and have been ramping up big time. Voila launched in the GTA in June and we are very pleased, very pleased with the yearly results. Customer feedback has been overwhelmingly positive and our customer Net Promoter Score is the highest I have seen in my career. Customers are seeing the benefit of a central fulfillment model. And one of my favorite customer quotes to date is, I received all that I ordered and this is no less than a miracle nowadays. I immediately saw the benefits of picking from a dedicated warehouse versus store. Produce was really fresh and well packed. On time delivery was exactly within the slot I requested. I felt the price of items was good and so were the range of promotions and we did not pay that person to write that. Positive customer experiences are translating into strong repeat behavior, much stronger than we forecast, and positive word-of-mouth referrals. This, coupled with a strong marketing campaign blanketing the GTA, has meant steady and strong week over week order volume growth. We're delivering best in class customer service with near perfect on time and fulfillment rates. Our second customer fulfillment center will launch in Montreal to service the Montreal and Ottawa area in early twenty twenty two. We have accelerated our plans for the remaining two Voila e commerce customer fulfillment centers and have even more confidence than ever in that plan. That's going to give us a total of four customer fulfillment centres across Canada covering about 75% of the population and 90% of the spend. In the few areas of the country where our customer fulfillment centres will not deliver or are not yet built, we will be introducing Ocado's proven Store Pick solution. In August, we started testing Store Pick in Nova Scotia with plans to expand to customers by the end of summer and then move west. It is clear now more than ever that we must be able to serve customers where, when and how they want to shop. We are well positioned to win grocery e commerce in Canada. We're growing our Empire Private Label portfolio. We've been working hard to improve our Private Label business through increased product innovation and the reset of key categories. Already as a result of these improvements, our Private Label sales have grown faster than the industry. In August, we launched a campaign to highlight the rebranding of our entire components portfolio, very happy with that. We will remain focused on improving our private label portfolio as we know it would become increasingly important in uncertain economic times. And we're going to provide best in class customer personalization. We're moving forward aggressively with investments in analytics and technology to deliver on our vision for unique customer experiences. Building a personalization capability enables Empire to better identify customer preferences and support direct individualized experience and personalized communication, evolving from mass communication to personalized connections with its customers. We're going to rely on both of those. The goal is to deploy world class and practical personalized communications and offers to inspire customers to improve the experience and relevance of promotions. Personalization is a key enabler in delivering unique customer experiences, driving incremental behaviors and engaging new customers. Now on to our first quarter results. Results were strong. You saw that. Grocery sales are still significantly higher than historical levels and we continue to gain market share nationally. Same store sales excluding fuel were up 11% this quarter, slightly below the average of 13% for the first six weeks of the quarter that we gave you on our last call. Basket size is way up and transaction count is down over prior year, but we see trips slowly increasing week over week as some customers are beginning to initially feel safe enough to shop a little more frequently, a little more. Pharmacy has stabilized and as Canadians have gradually been traveling more across Canada, we see fuel sales increasing. Q1 sales were impacted in the first six weeks by remnants of a lockdown as restrictions start to ease up and over the last two periods of the quarter, we've seen sales rates slightly reduced, but still significantly elevated over prior year. We're now halfway through our second quarter and when we look at the last two periods of Q1 plus the first five weeks of Q2, the average same store sales has been averaging, that's a lot of averages, approximately 8% to 10% and it's sticking around there. It's clear that many Canadians' food habits remain changed and we predict will stay changed. They will stay changed due to the severity and length of COVID concerns. Full service continues to outperform discounts but the gap between the two is slightly lessening. Of course, sales are stronger in regions which are currently most concerned about COVID. Looking ahead, we believe same store sales may slow down a bit further but we see the stickiness in a good portion of the consumption that shifted from restaurants and hospitality businesses to grocery sales. Our gross margin dollars were positively impacted by our increased sales. Gross margin rate was 25.1%, up 50 basis points over the prior year. The margin rate improvement over last year is largely due to customers' continued preference for one stop shops that are full service banners, slightly less promotional environment and the annualizing of Sunrise savings. These positive improvements were partly offset by our service counters being closed for much of the quarter. We have now opened our service counters in almost every store across this country. EBITDA margin rate was 110 basis points higher than last year. And when we look again over the last twelve months, our EBITDA margin continues to grow faster than our major competitors. Our EPS of $0.71 a quarter is the highest in our company's history. And lastly and briefly, I'd like to talk to you a little bit about the trends we continue to see as a result of COVID. This pandemic has fundamentally impacted how most Canadians shop for food and continues to do so. And many of the trends that we discussed last quarter have continued over the last few We still see many, many Canadians gravitating toward one stop shop grocery stores that meet all of their household needs. Full service continued to grow faster than discount this quarter, albeit not to the same extent as during our fourth quarter in the heat of that pandemic. And we believe it will continue to do so for the short to medium term as most customers continue to seek out one stop shops. Online grocery sales in Canada continue to remain at elevated levels, although pulling back from their highs per our internal data as consumers have embraced e commerce on all forms throughout this pandemic. Empire's e commerce businesses in Quebec through iga.net and VC through Thrifty Foods had sales growth of approximately 370% this quarter. We continue to believe that customers will shop stores that invest in safety and sanitation for as long as we are without a vaccine and probably even when we do find one. Though provincial restrictions have eased, at Empire we have not let our guard down, We continue to maintain the increased safety protocols in our stores with occupancy limits, one way aisles and masks. When I arrived at Sobeys, we were non investment grade rated by our credit rating agencies. The senior team and our Board made it a priority to return Empire to the investment grade quality we knew it could be. We focused on operating a more efficient company, growing the cash flow through Sunrise and bringing more discipline to the capital allocation process to strengthen the company's balance sheet. Last July, DBRS upgraded us to investment grade and a few weeks ago S and P upgraded us as well. We now have an investment grade credit rating by all our agencies and being investment grade provides access to even more cost effective capital. The momentum at Empire continues thanks to the hard work of our incredible team of 127,000 teammates and franchisee partners from coast to coast. I've always said retail is a simple business, sales margin cost and capital allocation, but the trick is in executing consistently and we are doing just that. Quarter over quarter, year over year, we are making strides toward extracting this company's full sales and earnings potential and most importantly, thrilling our customers. And with that, over to Mike. Thank you, Michael. Good afternoon, everyone. We're almost halfway through our 2021. As Michael said, over the past fourteen weeks, we've seen same store sales averaging about 8% to 10%. Basket sizes are decreasing slightly, but we're also seeing customer visits increasing. Looking ahead, we believe same store sales may reduce a little further, but still expect the stickiness of the consumption that shifted the restaurants and hospitality to grocery to persist. We expect we will continue to incur 15,000,000 to $20,000,000 in SG and A expenses per quarter related to the increased cost of maintaining sanitization and safety measures and other COVID measures. Gross margin rate improved 50 basis points from last year. Through the lockdown, which was during our fourth quarter and a part of our first quarter, we held the line on prices in store to the benefit of our customers. At the same time, the mix of store of sales in our stores changed materially from the prior year with many more sales at regular store pricing, and we also benefited from continued Sunrise benefits. Our service counters that were closed for COVID, which are typically higher margin sales, slowly opened throughout the first quarter. SG and A as a percent of sales was 20.6%, an improvement of 55 basis points over last year. If you remove the Hero Pay component of the COVID costs, it improved approximately 120 basis points, including the onetime retroactive lump sum payment of $15,600,000 made to our Safeway Alberta teammates for hours worked over the past three years. EBITDA margin rate was 110 basis points higher than last year. This was partly offset by COVID expenses as the first half of this quarter included Hero Pay and the onetime bonus we paid to our frontline and distribution center teammates when the temporary Hero Pay program concluded. Equity earnings decreased year over year, principally as a result of decreased equity earnings from Crombie REIT. This was primarily driven by some bad debt expense resulting from the impact of COVID-nineteen on the collection of outstanding receivable balances. Empire makes up over half of Crombie's rent, and Crombie has a strong flexible balance sheet and remains in good financial health. The effective tax rate for the quarter was 29.4%, higher than the statutory rate primarily due to a revaluation of deferred tax assets. Excluding the impact of any unusual transactions or different tax rates on property sales, we estimate that the effective income tax rate for fiscal twenty twenty one will be between 2628%. Earnings per share this quarter was net of a $05 per share of Voila dilution. Voila, as you all know, is a new business, so it is reasonable and expected that we will have a few years of dilution as we build the team and the processes required to get our volumes up to scale. We continue to expect dilution of approximately $0.20 for fiscal twenty twenty one and that the GDA CFC will be diluted for at least the first two years. As we get to critical mass, the curve declines quickly. It's too early to share specific data. We only launched June 22, but we are really pleased with our retention rates and customer reactions and repeat rates. Our cash flow generation continues to be strong. And in August, we returned to investment grade ratings with both of our credit rating agencies. This provides options to access the debt capital market with improved spreads in addition to renewing our existing credit facilities. Stobies has nonrevolving credit facilities maturing in our third quarter, and we are considering refinancing using public debt or a combination of public and bad debt. We have a disciplined capital allocation process, and we invest in projects that have a solid return for shareholders. We announced as part of Project Horizon that we expect to invest approximately $6.50 to $675,000,000 in capital this year. Approximately half of this investment will be allocated to renovations and new stores with 10 to 15 FreshCo stores opening in the West and eight Farm Boy stores in Ontario. Approximately 15% of the total investment will be in advanced analytics technology and other technology systems. We will invest approximately $65,000,000 in Voila, which includes our share of the Montreal CFC build cost. We renewed our normal course issuer bid in the first quarter to repurchase up to 5,000,000 shares, and it is the company's intention to execute on the NGIB this year. Project Horizon officially kicked off this quarter. Michael discussed the first element of the project, growth and market share, and I'll cover building on cost and margin discipline. This element is a continuation of Sunrise plus some additional initiatives. There's still so much opportunities to remove non value added costs and ensure that we contain our costs and optimize our margins as the top line grows. A number of initiatives are underway to support building on our cost and margin discipline, including first of all, driving non merchandising sourcing efficiencies. The strategic sourcing team we created as part of Sunrise is still in place, of course, and we'll continue to build further efficiencies and cost reductions in all indirect spend. We're a $26,000,000,000 company. And with the scale and scope, I have a lot of confidence that the team will continue to find benefits for many years. Secondly, we'll continue to build merchandising sourcing efficiencies. We continue to make investments in advanced data and our category planning process working with our supplier partners to ensure we bring the best value and offer to our customers. Now that we have completed category resets and we have our private label team fully in place, we believe they are categories where the sourcing costs could be better. Thirdly, we're investing in best in class analytics to enable effective promotions. Advanced analytic tools will be leveraged by our category merchants nationally across formats, which will expand our margins by improving our net cost of promotions while continuing to improve value for our customers. Fourth, optimizing our supply chain productivity. This quarter, we opened our newest distribution center in BC, which consolidated three previous DCs into one facility, securing a centralized location that increases our capacity and efficiency in network. We will also be looking to optimize our logistics networks and consolidate certain procurement processes across the entire country. And lastly, improving system and process. We'll continue to leverage technology to improve our systems and processes. These will yield efficiencies and cost reductions in our back office and our support functions. Our systems we have were built regionally, which makes them less efficient in our national structure. They don't hold us back materially, but our teammates look forward to the efficiency they will have pulling data from one system and improving processes across the country. Fiscal twenty twenty one started off with several exciting milestones for Empire. Launch of Voila, testing curbside pickup in Nova Scotia, just a couple of them. Additional stores announced for FreshCo in West and Farm Boy in Ontario. We ratified a new CBA for many of our Alberta Safeway stores. We were upgraded to investment grade by our credit agencies. And this is just the beginning. We have a packed agenda for the next three years of Horizon, and we're off to a strong start. And with that, Katie, I'll hand the call back to you for questions. Thank you, Mike. Joanna, you may open the line for questions at this time. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Karen Short from Barclays. Please go ahead. Hi, thanks very much. I just wanted to ask a couple of questions on e commerce. In terms of the Ocado update, that $0.20 per share for fiscal twenty twenty one, the first question I have is does that include curbside? And then I guess do you have any color or could you provide any color on what that assumes in terms of total sales in ecom? And then on curbside, I'm just curious what the driver of that decision was and maybe a little color, like, who's doing the picking? How is the Ocado platform integrated into that? Do you pay a fee for it? Things like that. And then I had one other question. Thanks, Karen. If, if we forget to, to answer any of those questions, let me know. I'll I'll answer the financial questions first, and I'll pass on to Michael for the logistics of curbside pickup. So, the dilution number for this year does include any costs related to curbside pickup. We have said before that we don't anticipate that initiative to be consequential to earnings in the year. Yes, it would include it. At this point, we're not gonna be disclosing sales numbers. I will say that our sales numbers are right on our business plan, very happy with it. But beyond that, we're not gonna provide the dollar number related to the sales for for voila. In terms of the logistics of curbside pickup, I'll pass it over to Michael. Thank you. Yeah. I mean, it's a it's a pretty simple system. We're using the front end, the great front end that we have at Voila. The customers are liking that and the testing we're doing on curbside. And it's our own teams in the stores that are doing the picking and interacting, using the right protocols in terms of safety and hospitality that we are proud of already in the GTA. So how we're doing that. You know, it's a great question. You know, we're you know, Mike and I have always been a big believers in centralized fulfillment in in in terms of ecommerce and and we still believe that. But at the end of the day, we're a customer focused company. Our customers are telling us they want e commerce. And Ocado's store pick solution has been tested in more markets more stores now. And we wanted to use an Ocado solution when we did store pick. So we're going to take advantage of that and put it in earlier than we initially planned for. But we're targeting two types of areas to put it into. Areas will never have a CFC, where we do not intend to lose market share and expect a halo effect on our bricks and mortar. And two, areas where we will probably place a CFC in the future and we want to get that business in and then convert customers over when the CFC is built. Truthfully, lion's share of sales, profitability are in the CFCs and a central pick solution. But we're in the business of serving customers and we'll serve customers and Canadians. And so you'll see most of the sales and most of our business will be through the CSCs. But in those two instances, we thought it was a good idea to do store pick. So so can you maybe just elaborate a little bit in terms of curbside if when you're looking at what you're offering versus your competitors, what you think your competitive advantage would be on the curbside? I mean, our competitive advantage is not as stark as it is. We have a huge competitive advantage obviously with the CFCs. Mammoth, At curbside, it's not as big a competitive advantage other than we have great stores and unbelievably great teammates as we've seen, especially through COVID. So that's the kind of thrill of the customer. We're both process oriented and customer oriented now. And that combination is really paying off. Even in the tests we're doing in Nova Scotia, that's what we're getting the feedback from our own employees and we'll soon get them from the customers. But that permeates our whole business and that's always your strategic advantage. Serve the customers, do it in a good way and you have a process so it's replicable and consistent across the country. And we're getting real good at that. Okay. And then my separate question would be, you made a comment in the prepared remarks, the discount format outperformed your peers. Wondering if you could give a little more granularity on that and why you think that's the case. From all the studies we looked at in our own internal and external work we've looked at, we gained market share against our discount competitors across the industry. Okay. Great. Thanks. Thank you. The next question comes from Mark Petrie from CIBC World Markets. Please go ahead. Hey. Good afternoon. With regards to Project Horizon and your financial targets, could you give us a sense of how to think about the timing and the composition of the improvements you have planned? Sure. We as we said, many of the Horizon benefits are continuation of work that we started, you know, during the summer, the first three years. And so, you know, benefits from the new the new Farm Boy stores, the discount rollout, the immediate quick wins we're having on some of our promotional optimization, you know, continued work on indirect cost reduction, just to name a few, you know, those are all initiatives that that we're invested in and and will will clearly be a part of our f '21 and and going forward numbers. But there are, you know, other initiatives that that start either increasing their contribution to earnings or beginning their contribution to earnings in in in years two and three. We have a renovation program, for example, that will continue all the way through the three years. But by the time we get to the third year and we're almost complete touching 30% of the network, we expect that compounding effect of the sales to be greater in year three, for example. Some of the work that we're thinking about doing on changing adjacencies, store layouts, that sort of thing, is likely to only begin in year three and towards the end of year three. I guess that's a long answer which says that we expect fairly steady and consistently increasing earnings throughout the three years with the implication being that the third year will be the largest. But there's no significant delays or big chunks of benefits that are anticipated to show up in year three similar to what we had, for example, with category research, which was a very long term project in the planning and ended up paying off mostly in year three. We we don't have, you know, large lumpy, numbers like that. So I think you can expect, you know, fairly steady earnings accretion over the three years with the third year being the greatest. Okay. That's helpful. Obviously, you're only a few months into voila, but I just wanted to ask a bigger picture question about the sort of connection and the synergies, between the online platform and your physical store business? You know, obviously, we can see the Farm Boy and Shallow product, and branding on on on Voila. But thinking beyond that, I'm just wondering how you look at that, sort of connection, how important that is to leverage, and and how we should sort of think about that over the next, you know, I don't know, whatever twelve, twenty four months? Yeah. You're thinking about it the right way as we gear up, and it was part of our plans at the beginning. And and obviously, we see synergies across our business as you pointed out, but it's it's bigger than that. I mean, the the the ability to understand customers that in in different times they're shopping with us or or or attracting competitive or shoppers who are currently shopping our competitors who we can now, when they do their bricks and mortar shopping, we can more readily attract to our stores, our bricks and mortar stores. Our interaction with current customers, new customers, be be able to use personalization and and and data to be able to serve those those customers is a huge part of our plans and is already well underway. So we we think it's big. And and the other thing that is is is I can't remember, Mark, if you agree with me on this. I think you do. But but that the when you're when you're really good at ecommerce, that it really does reflect well back onto the brand and to the bricks and mortar, and and and and we expect that to accrue to us as well. Yeah. Okay. That's helpful. And then I guess we're not We're not newbies at this. Right? We're not rookies. We we have had the number one market share in Quebec for a long period of time, and and and and so we have the the makings of you know, we've we've we've done this before. It's just not at not at this level. So thanks for the question. Yeah. No. Understood. And I guess sort of sort of sort of related to that, just my last question, You know, in in terms of the all in economics, of Wallach to to to the to the existing business, you know, how does that change when you launch into markets where you have a stronger physical store presence and a greater market share? I'd I'd expect, you know, you'd be able to leverage some of the infrastructure you've already built, but also, you know, the level of cannibalization, or the risk is is much higher. So just wondering how you think about that, and I don't know if you can put it in the context of the $0.20 of year one dilution for the first CFC, how we should think about that, for, you know, two, three, and four. Mike, do you wanna start and if there's anything I'll add on? Our perspective on that, Mark, is and, you know, I think we said this before. We have not assumed that our success in voila is gonna end up with with any any cannibalization or any significant cannibalization on existing bricks and mortar stores. We we we do think that done properly, and in particular, ability to link customers that shop online with customers that link in that that shop in our bricks and mortar stores, you know, that that that synergy and the halo effect, is gonna help, both of the formats. So, we're we're not assuming, a negative impact, on our on our stores. We we just think the brand will become stronger and and and that we'll we'll we'll win in both both formats. That that's been our experience in Quebec. You know, we've we've been at it, as Michael said, for some time. And, you know, I think in Quebec, in particular, it's just gonna get better because we're gonna have an even improved offering. But we think that's still going to be positive for the IGA store network. That's interesting, Mark, because we can argue it both ways. In the Greater Toronto area, we're we're we're not taking any business from ourselves. We're just taking customers from everybody else because we we currently have a lower market share. We're building that. And so that's all good. And then when we go to Quebec, we have a built in customer group who is already dying to try it. So we we our volume goes up quicker. Our basket size is gonna be larger, and our costs, obviously, at scale are so much better. And the customer experience is better. So in a weird way, can argue both. It's it's I'm excited about both. And I'm not even sure. Was gonna say one is better than the other. I'm not sure. So just because, you know, it's it's it's either good to already have that business or it's good to not have any business, one or the other. Interesting. Yeah. No doubt about that. Alright. All the best. Thanks. Thanks for all the comments. Thank you. The next question comes from Peter Sklar from BMO Capital Markets. Please go ahead. Okay. I believe you said that you're gonna be spending 15% of your CapEx on a on advanced analytics. That that that is a lot. Can can you elaborate a little bit about where you know, how you're spending that money, what you're spending it on? And, like, I assume you have an advanced analytics team or you're developing a team, and how do you recruit and find those people? Because it just seems like every retailer is talking about analytics now. So so maybe just talk a little bit about that. Thanks. So many people have told me over the years that I speak too quickly. So, what I what I actually what I actually said is advanced analytics and other technology investments. So, you know, that that would encompass all of the investments we're making in in new processes, personalization, analytics, improving our our regional SAP boxes, etcetera, etcetera, etcetera. So so sorry if I misled you on that, Peter. Okay. It's it's absolutely not advanced analytics only. It's it's it's it's technology spend. So what we were really what I'm really trying to point out, you know, is that we've we've made a decision as part of our strategy to, know, similar to a decision that that Michael made three years ago, you know, is was, you know, for example, to invest consistently in marketing, which we've done over the three years. We've also made a decision to invest very consistently in information technology that which would include advanced analytics and other tools for our merchandising operations people, you know, in every one of the three years of our horizon. And and we just we we decided to put a number to it in in in this year, and you can expect that to be, you know, pretty consistent going forward. Okay. And then the other area I would ask if you address, can you talk a little bit about, like, all these store conversions and new stores you're doing? So for example, there's the FreshCo conversions out west, and then there's the, you know, the Farm Boy expansion in Ontario. Can you talk a little bit about, like, how those how those stores perform and what the ramp looks like? And over what period of time do they lose money, and how long does it take before they generate the, you know, the sales level and returns you're looking for? So so the two are a little different. I certainly, I'll deal with maybe deal with Farm Boy first. So, you know, that that format has has proven to be winner every time we've opened a store since we bought the company. And and certainly, when we looked at and did the due diligence on that on that business, the the ramp up is quick. The, you know, the margins are are strong, and and that's that's a format that gets to maturity, you know, pretty quickly and is and is profitable, you know, at the very, very, very short day after launch. So so that's you know, that that is one of the things we we we we certainly like about that format, and and it's it's it's something that that JL and his team are just exceptional at. You know, it's it doesn't happen easily. It's a massive amount of planning and and an incredible amounts of recruiting the right team and and training them and making sure that that, you know, that they're they're doing it the Farm Boy way from day one. So so that but that's a that's a quick ramp up and and a fairly quick path to profitability. In terms of the the discount expansion, you know, two things happening there. First of all, some of them, in fact, probably most of them, are are going into stores that that are really either ill suited for the area that they're in because it's more, you know, suited to discount, or potentially, we have other, you know, full service stores in in the area that can pick up the slack. And so, you know, we're frequently taking over a store, obviously, with lower capital costs and an ability to immediately increment the margins and improve the sales performance. So we do start with that benefit. But at the same time, we're going into a new market with a new format and new employees in many cases. And so the ramp up for those stores is slower. We have said in the past that we expect a new store in that geography to be dilutive in year one at least, that has proven out. But now that we have stores that are lapping, they are doing well in spite of pretty significant competition. Nobody likes to lose market share, but we are happy with their performance. And the new team, particularly as we start to get to scale, which means more than one or two stores in an area or a third geography, we're also able to consecutively improve our labor efficiency and our margin expectations. So that's a slower build just because of the nature of the expansion, but it is performing to our expectations and we're comfortable with with with the rate. And, Mike, when you do these conversions, how does that get incorporated into, know, the same store sales numbers that you provide? I assume when a store is closed for, conversion, it comes out of the calculation. And when does it come back in? I assume not on the day one of launch. You wait thirteen months or whatever. It would come back in, when it's when it's when it's open, and we cough against the old Safeway sales. We treat it as same store. Okay. Okay. Great. Thank you. Thank you. The next question comes from Patricia Baker from Scotiabank. Please go ahead. Thank you very much. Michael, I just want to come back to Voila for a second. You market that that offering as Voila by Sobeys, and I'm just it's probably too early to tell yet, but I'm just wondering whether you foresee that Voila itself is actually going to provide some halo effect to the Sobeys stores, and then secondly, some enhancement or strengthening of the Sobeys name and the Sobeys brand? Yeah. I mean, it's it's a great question and and completely that is exactly what we did. I mean, we have you have a lot of you have a lot of choices when you're putting putting together a a new company. In this case, we we wanted to take advantage of a couple of things. We wanted to be clear that this was a new business that was ecommerce and was different. And I don't don't like it when people call it like this sobeys.com. I just don't like it. And I don't think it works that well. At the same time, we wanted customers because there's so much trust in the Sobeys name and and and that some of these ecommerce companies don't have a how do I say it nicely? Don't have a great supply of really quality food. We wanted people to know it came from Sobeys and and when we go to other markets from from that local market. But at the same time, we believe both could have a halo effect on the other. So you would trust Walla Lama because it was associated with Sobeys, which is has a very good strong brand connotation. And but that also, Wallet would put a halo effect. I mean, we've seen studies that show when you're great at ecommerce, the brand loyalty can be as high as 14 times as strong. It would put a halo effect on us especially because it is the best in the market that the customer service is second to none, and it's well, it's really cool. So that's the way we thought about it. Okay. Thank you. That's very helpful. Then in your opening remarks, you did talk about the renovations as being one of the key drivers to drive market share, and you noted that those are the highest return projects within the company. You I think you've mentioned that you've got 21 underway currently. Just curious, of those 21, are those geographically dispersed or geo geographically concentrated? They just thinking about how best to answer that. The the easy answer is that they're geographically geographically dispersed, Patricia. So over the Okay. Over the whole three years, we'll we'll really be covering the whole country. But, you know, in any in any one of the three years, we're probably a little more overemphasized towards one region just because of the way it works out. So for 2021, it it's across the entire country. Mhmm. Probably a little less so in Ontario, I think, in in this year and and a little more in in the East and the West, but but nothing, you know, nothing that I'd I'd point to as a as a very significant overweighting. Okay. Thanks. And the curbside pickup in Nova Scotia, can you two things. I when you were, in the opening remarks, talked about the curbside pickup in Nova Scotia, then you said you'll be then you'll be going out west. So I'm assuming that curbside pickup in Nova Scotia is being done because that's an a market where you'll never have the CFC, and the West is referring to you doing your b option, which is, you know, seating curbside pickup before you put in the d f CFC. Is that correct? And then secondly, how many locations are you doing it in Nova Scotia, and is it both in urban and, you know, more rural markets? Hi. It's, it's Michael. Yeah. Your your your your supposition is is is exactly in the right direction. And, we're not gonna divulge how many stories we're gonna put it in right now because we've just for competitive reasons, you know, why why help anyone, compete against us. But at the same time, we're looking at all sorts of range of of, stores that, I mean, right now, we're testing it in, you know, in a in an urban center in Halifax, and we're testing it in a less urban center in Pictou County. So, we think it has it it it has attributes, to Canadians in in in urban, suburban, and rural. Okay. That's very helpful. And my last question is just a a clarification. You talked about Farm Boy and how that their same store sales were, you know, down because of the removal of the food service, etcetera. But you said that their sales are now stronger than normal. I just wanna make sure that what you're saying is that Farm Boy is now seeing same store sales that are, you know, stronger than they've even had in their history? I I I don't know their whole history because I've only known it for a couple years. Well well, since you have Louis and Jeff will will chastise me if I try to guess, but I will say that in in our like, let me back up. These these they're used to very, very high same store sales. In fact, when we're doing our due diligence, Mike and I were looking at numbers and we had to do a little bit more due diligence. It was so good. And I'd say that they're doing even better now because of the changes they made in the store and because of, you know, the the awful pandemic we're going through. Mhmm. Okay. Thank you. Historically better as far as I know. Mike, what do you think? You're in accord? Yeah. I I mean, the I think the message is that their, you know, their their business has been reconfigured to some extent in their in their service department, and they've they've reacted well to to adverse circumstances in those parts of the store, you know, extremely well. And and and and the sales have the sales have come up materially in in the first quarter. I think that's really the message as a result of all of these efforts. Well done. Thank you. Well done to Jeff and JL and their teams. Yeah. Thank you. The next question comes from Vishal Shreedhar from National Bank. Please go ahead. Hi. Thanks for taking my questions. Michael, I know you're very focused on return on capital. And when the Farm Boy acquisition was announced initially, there was some surprise that the actual multiple number. Just wondering as you reflect back on Farm Boy, if that acquisition is hitting your hurdle rate. No, I was wrong. It's much better than I thought it would be this acquisition. So we hadn't planned for the sort of success or growth or even the conversions we're seeing where we're seeing that. So it's performing on all levels much better. At the time, you know, people ask why'd you pay that multiple, and we said it was because it was worth it. And and it's even more worth it as we look back over whatever it's been, a year and a half, two years, whatever it is now, that we've been partnered with, with, with Farm Boy. So very, very, very pleased. Okay. And, and I know that Farm Boy merchandise is being offered by Voila, but, has has any of their, thoughts regarding merchandising, has any of that percolated back into the Sobeys network? And are you seeing any of these, kind of reverse synergies, flow across the rest of network? Great question. I I I was I was speaking to someone here the other day, and I said, I think I think not know, I I I think we're getting the financial and strategic returns, but I don't even know how to quantify what bringing great merchants with new ideas brings to a a larger organization with more scale that's open to those ideas. And probably the proudest I've been in terms of of the team other than COVID is how Pierre Saint Laurent, our COO, Mike Vetten, who runs Discount, and Sarah Joyce, who who who who runs Voila. Hello? Please stand by. Hello, operator? Can you hear? Hello? Is Michelle back on? Michelle, are you back on? I am. Great. Luckily, our our store systems are better than this phone I'm using. So I'm back on. Mike can nod if I'm back on. Yeah. You're good. Good. So, where what I was talking about was that in areas where did you hear me talk about Sorry. It just cut out again. I I know you said something, but I missed it. What we're doing is I'm I'm very proud of what we're doing, and we're bringing in all the expertise from in areas like private label, in produce, in merchandising, in customer service, and it's helping us across discount, full service, and and in in ecommerce. So very, very pleased see what you would call reverse We never anticipated such a benefit, and it is it is difficult to quantify, but but very, very big. Okay. And just switching topics here. On Voila, I'm not sure you're able to provide us with specific detail, but even high level detail on basket size, margin, composition, promo intensity. Any any of that color is in line with what you thought, and maybe if you can reference your store network and how it compares. Sure. As I as I mentioned, we're we're not gonna be providing specific statistics because it is competitive. But, yeah, some of the things that you point out. So, you know, where you know, how we're doing on our on our basket size, for example, compared to our expectations. Our basket size is significantly greater than the minimum basket we require on the site and is probably just a snick short of where we expect it to be at this point. The reason for that is that because of the supply chain challenges some of our suppliers had, we started off with a smaller assortment, which we've been adding to materially over the every week since we started. And so that, just by mathematics, drives a slightly smaller basket size, but but we've been very, very happy to see that it's only slightly smaller. So as we get to our full assortment, we expect that to be to be a very positive number. In terms of all of our other statistics like drops per van, customer retention rate, the repeatability, the frequency of reordering, all of those statistics are either running at or ahead of our expectations at this point. Okay. And maybe I'll risk asking another question here just on in terms of voila. Is there is there is the amount of two hour orders, let's say, is that in line with what you thought it would be? And it's a rather small percentage, and the vast majority has have twenty four hour orders. Is that a fair way of thinking about it? Could you could you help me with, what what did you say two hour or twenty four hour orders? Yeah. I said short dated two hour orders, let's say. Is that a small percentage of the orders? And then the twenty four hour window for an order, is that, like, the vast bulk of the orders? Yeah. So so that that's not that's really not how the system is designed to operate or how we measure it. You know, you you get to select a delivery slot, and depending on when you order, that delivery slot, you know, depending on where you when you order and where you're at, that delivery slot could be same day, but it is more generally, likely to be next day. But, you know, we have some customers who know, who start ordering early in the week, say, on a Monday or Tuesday because and they want a delivery slot on the Thursday or the Friday or the Saturday. And so they all adjust and and and work on their order all week. So it it it really does vary, you know, right across the gamut. And, you know, it's way, way too early to to be able to say where that's gonna fall out in total in terms of, you know, you know, how how far ahead customers will will place their delivery slots. It's very much an extra customer choice. A customer decides when they want it delivered, and that's when they get it. Can't do that two hour turnaround, for example. That's not how we configured. I mean, we're configured to capture your entire weekly shop and deliver it to you in good order and in good time. For the color. Thank you. The next question comes from Irene Mettel from RBC Capital Markets. Please go ahead. Thanks and good afternoon everyone. I'd like to talk a little bit more if you don't mind around the changes the store layout changes, the category, and and I and and how that ties in with private label and also what your objectives are are with private label and how much you're you are taking that Farm Boy private label and incorporating it into what you're planning on doing. Hello? Please stand by while we reconnect. Yep. Irene, it's Mike. So Hi, Mike. Yeah. Yeah. No problem. So so we've we're not gonna we're not gonna spend a lot of time talking about details just because it's competitively level sensitive, but but I you know, I'll give you a bit of color for it. So so, obviously, we're you know, you know, we're we've taken the Farm Boy private label. We we've got it on the WALA site, both Farm Boy and WALA. Super excited about that. It's doing very well. But beyond that, there's some obvious synergies in in in in taking the the thought leadership and and what the the Farm Boy team has done in terms of building a really premium and very successful private label business. And we have active and very collaborative conversations between our private label team here and theirs. And we've recently moved that into a higher gear, and we've made that a little more formal. So there's much more and more integration of I'd say more of the creative and innovation side at this point in terms of putting a program together for both companies' private label. They've benefited from our scale, and we're benefiting from their experience. That's great. That's very helpful. And as you think about the category resets or, you know, the the early thoughts around it, is there anything that you can share with us around thoughts with respect to to store layout and and where we should expect to see the changes and, you know, how extensive all of this may be. Yeah. It's Michael. I I you know, obviously, yeah, I'm not gonna share the details of it. And it it depends on which stores and what we're trying to accomplish, but I I think we have to be cognizant that we not disrupt the customer while we're putting this through. So we have sort of the plans that are are first of all, go stage by stage, and then, and then don't all occur at the, at the same time. So, that's what we're, that's what we're up against here. And, and, you know, and I think some people, you know, they think that when we use data, we we just use data and it's some algorithm that tells us what to do. Data helps smart merchants and smart operators make smart decisions. And and, you know, you don't data's not gonna help a bad operator and and and and and a good operator using the right data, we're seeing, makes just better decisions because they can't see all the permutations and the billions and billions of different data points. So what we're seeing, and and I think it's not stressed enough in this industry, is not data nor or and or people. It's data and people. And that the best results we're seeing, and they're very good, are when we have our great merchants working with that data and being given the tools to do their job properly. That's great. Thank you. And then, a question, if I might, around sort of competitive intensity is as we're seeing traffic slowly, ever so slowly, come come back a little bit, Are you seeing anyone sort of getting their elbows out trying to maybe get a little bit more aggressive to take advantage of that? I think it's I think it's different pattern now. We're we're coming back in a new normal. So I think during the pandemic, as we said, the promo mix has been different. Basket size was bigger, and so the the the ratio of promotion was lower. So now with with the new normal, we're seeing every player coming back in a in a pre COVID mode. So, yes, we're seeing more promotional intensity than we saw during the pandemic, but I think we're coming back in a in a pre pandemic normal, I would say. And it's, September is a is a very odd time in merchandising, back to school. And but this year, it's, it's very different. It's it's not comparable with last year because there's a pandemic still there. But, yes, I think we're seeing people are more everybody adjusted their promotion, and now we're more back in new normal. So, yes, we're seeing a bit more promotional intensity in these days than we saw during the summer and during the pandemic. That's very helpful. Thank you. And just one final one, if I might. Are what kind of conversations are you having with suppliers around, you know, potential request for price increases as they themselves are facing higher operating costs. Okay. So so there's a there's a during a pandemic, we have been very, very we we took the hard line not increasing retail prices during the pandemic. And I think everybody had to focus on manufacturing and and and producing stuff and merchandise for filling the shelves, and it's what we focused on on both sides, our sensor supplier. We continue to I think everybody saw a growth. We're so we continue to to maintain that hard line are not increasing retail price at this time. So we same thing for the costing, except some commodity where we have to play with the market conditions, so like meat and produce. But, it's where we are. In terms of relationship with supplier, I think we we stay true to our value at Sobeys. I think we have a strong partnership with supplier. We're addressing issue supplier by supplier, category by category, and we we discussing with them. We're negotiating with them like we did in the past, and I think we have strong collaboration with them, and it's how we want to be going forward. And that's that's a great answer. And the only thing I would add here is that I think that the relatively relatively stronger Canadian dollars helps as well in some of these matters as well to keep down the cost to Canadian consumers and to for us to continue to put pressure on ourselves and others to make sure that that the the goods are are are are flowing at a at a competitive price. In produce. In produce. That's great. Thank you. Thank you. The next question comes from Michael Van Aelst from TD Securities. Please go ahead. Thank you. You've covered a lot already. I'll just touch on a few things. In in the past, you've given us some some insight on the pharmacy performance and and how that impacted same store sales. Can you give us an idea how that's trended, during the quarter and into q two? Sure. We because of some changes in some of the regulations in terms of how we were able to do scripts and and the the amount of the amount that we're able to fill through the pandemic, we did see some negative impact on on our pharmacy sales and our and our script counts. That has normalized much more. And our pharmacy business has returned to, I would say, more normalized levels. And we're comfortable we're very comfortable with our performance in the first quarter. Okay. Great. And I believe in the first quarter, you guys were forced to focus a little bit more on sorry, on the fourth quarter, you're focused or forced to focus more on supplying your own stores rather than, all your wholesale business. I'm wondering, it does seem like the wholesale business and wholesale volumes are back to normal levels. Is that accurate in Q1? Yeah. It's Michael. And, now we we we always because it's important to the Canadian consumer and because we have good great relationships with our wholesale customers, we were supplying them as at least as well as we're supplying ourselves. And and so as things return to what Pierre called, I guess, new normal, it it things slowly get better and better. You know, it's still not the same food supply chain given the, that it was before COVID, given, the the trauma to the, in terms of, factories and and and and processing plants not being able to put people close together to each other. And the fact that consumption in grocery stores is so much still elevating and will continue to be elevated. So there's still pressure on the system, but we, we we treat our wholesale customers, at least as as well as we treat ourselves. Okay. Good good question. The the ecommerce penetration, has clearly gone up in in Quebec and BC, but are you willing to give us an idea of roughly where that stands right now? We did say we yeah. If you wanna sorry. You go ahead, Mike. You were gonna say something? Sure. Michael, our our numbers through the the peak period in our existing ecommerce business were up seven to 10 times. So it was it was crazy numbers. And it's settling at roughly about three and a half times last year's levels now. So would that kind of put you in that 3% to 4% range in those markets? Yeah. I'm not sure. Want to try and give you a number without researching it, but it's certainly significantly higher than last year. Okay. Alright. Just finally, you you alluded to some increased competitive activity and discount. I I guess, on the success of the rollout of FreshCo, others aren't happy about giving up share. So how has that changed, during q one and into q two? And and are you are you I guess, how are you positioning yourself if this continues to ramp up? It's it's Michael, and, I wish I had Mike Benson on the phone because he he could be more articulated on this because he's on the ground fighting it. You know, it's it's it's what we expected. As Mike said, I think earlier, we expect people to try to retain market share even if it's fake market share just because we closed the Safeway. And then if there's a few months before we reopen the FreshCo, we've been highly successful in using basically the same game we usually do in in in in finding out there and being competitive and telling our story and and and marketing correctly. We believe that there's especially in the markets we've chosen to put in FreshCo, there is a very hungry competitor who wants to come to our stores. We believe that the smaller box, if I may say so, discount chain has a value and appeal to customers in the West like we always thought. And I think that we fulfill a need that we believe that we that we're we fill in Ontario and that FreshCo could when we were planning it. So, you know, it's, it's no more competitive. In fact, it's probably a little less competitive than it was when we first started opening these these stores because we're not going away. We're gonna keep opening them. And, we're gonna but, yeah, you gotta play your own game. You can't get thrown off your game. And the greatest compliment that you could ever be paid is when people start putting your flyer up in in in in their stores on the bulletin boards or online and start saying we'll match them. And I hope they continue to do that. I I love that kind of marketing. I can't we don't have enough marketing to pay for all that. So I love it, and Mike Benton loves it. Perfect. Thank you. Thank you. And the last question comes from Chris Li from Desjardins. Please go ahead. Thanks so much for squeezing me in. Just first, a quick one on Vola. Can you tell us how many SKUs is the CFCA able to fulfill currently? Yeah. I don't have the exact number as of the moment. We've said when we did discount that we're at well, sorry. When we announced Horizon, we said I think we're around we're around the the 15,000. We continue to add up SKUs as we speak. And we just put on recently a page on there. You can go on, and we highlight some of the new products. Those of you who are customers, and I know some of you are, because you told me, that, there that we wanna highlight because if you went on and you didn't find, I was gonna say the brand of the cheese, but then, you know, Horse and Cheese or whatever you wanna find, We when when we add it, we put it on there so you know it's new to to the product. So because we had you know, we we hurried to get this out there for Canadians during the, you know, the end of the heat of the pandemic, and now we're just adding SKU after SKU, on a daily basis. Okay. That that's helpful. And and, Michael, maybe just a highlight not gonna probably just as a as a as a nice warning because I'm probably not gonna it's I I don't want our competitors to know exactly the number of SKUs. They I guess they could go online and count them, but it would take a long time. But it's probably not in our I mean, we're gonna be bigger than everyone else in terms of SKU count and bigger than in any store. So I just don't want everybody to know every SKU we have. And Pierre is nodding, so he agrees. Yeah. That that's fair. And then maybe just a high level question. What are your thoughts generally on on subscription programs? As you know, you know, they're gaining popularity quite a bit in The US, but not as much here in Canada yet. Do you see them in Sobeys' future at some point? Yeah. I think, yeah, it's it's I mean, it's if it's good for the customer, it's good. But right now, we're not contemplating it right now. But if if we think it's an advantage, we can put online and and it's good for the customer and good for us, we'll do it. Okay. Great. My last question is That's good Yes. Thanks. And last question, just you know, Farm Boy obviously has been a good successful acquisition. I'm just wondering, are there other regional ones in Canada that are like them out there that would complement your strategy in the future? Wish we could buy more Farm Boy that are out there, but there doesn't seem to be any that are quite like that. So, you know, I haven't seen anything quite like Farmboy where it was it's such a great a great asset with great leaders and great great brand. Great. Well, thanks for your answers and best of luck. Thank you. Thank you. There are no further questions. I will now turn it back over for closing comments. Great. Thank you, Joanna. Ladies and gentlemen, we appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by phone or e mail. We look forward to having you join us for our second quarter fiscal twenty twenty one conference call on December 10. Talk soon. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines. Enjoy the rest of your day.