Good morning, ladies and gentlemen, and welcome to the Loblaw Companies Limited first quarter 2022 results conference call. At this time, all lines are in a listen-only mode, and following the presentation, we will conduct a question-and-answer session. If you have previously pressed star one to ask a question prior to this announcement, please press star one again. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, Wednesday, May 4th, 2022, and I would now like to turn the conference over to Mr. Roy MacDonald, Vice President of Investor Relations. Please go ahead, sir.
Great. Thanks very much, Michelle, and good morning, everybody. Welcome to the Loblaw Companies Limited first quarter 2022 results conference call. As usual, I'm joined here this morning by Galen Weston, our Chairman and President, and by Richard Dufresne, our Chief Financial Officer. Before we begin the call, I wanna remind you that today's discussion will include forward-looking statements, which may include, but are not limited to, statements with respect to Loblaw's anticipated future results and the impact of the COVID-19 pandemic. These statements are based on assumptions and reflect management's current expectations. As such, are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations. These risks and uncertainties are discussed in the company's materials filed with the Canadian Securities Administrators. Any forward-looking statements speak only as of the date they're made.
The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than what's required by law. Also, certain non-GAAP financial measures may be discussed or referred to today. Please refer to our annual report and the other materials filed with the Canadian Securities Administrators for reconciliation of each of these measures to the most directly comparable GAAP financial measure. With that, I will turn the call over to Richard.
Thank you, Roy, and good morning, everyone. The first quarter of 2022 saw continued strong performance across our business, continuing on our momentum from 2021. We delivered solid sales performance coupled with stability in our gross margin. We continued to focus on market share and our pricing position and carefully manage our expenses, all part of our focus on retail excellence. We started the quarter in lockdowns. As restrictions eased, consumer behavior shifted as people began to gather, return to the office, and travel again. Inflation accelerated in the quarter, which accelerated the shift to discount in food retail. Our mix of assets across food and drug retail, along with our strong e-commerce and loyalty offerings, helped us deliver strong results in this evolving environment.
Given that we are now cycling two years of the pandemic, we will focus on comparisons to prior year in providing insight to our performance and will no longer share two-year average data points as comparisons. We're pleased to report strong and steady results in the first quarter. On a consolidated basis, revenue grew by 3.3%, adjusted EBITDA increased by 10.3%, and adjusted earnings per share grew by 20.4% to CAD 1.36 a share. In the quarter, both our food and drug retail businesses contributed to our performance. In drug retail, absolute sales increased 5.4%, while same-store sales increased by 5.2%, lapping a decline of 1.7%. Front store same-store sales grew by 3.6%.
As we moved past the initial lockdowns early in the quarter, we began to experience acceleration in sales growth in our higher-margin categories, led by OTC and cosmetics. Pharmacy same-store sales grew 6.8%, once again driven by our COVID vaccine and testing services, which were not material in Q1 last year. In food retail, absolute sales increased 2.4% and same-store sales grew 2.1%. Performance in our discount banners strengthened, and for the first time since the pandemic began, we saw the sales mix between our discount and market businesses return to pre-pandemic levels as we exited the quarter. Although customer buying patterns shifted as restrictions loosened and inflation continued, our market banners remained strong and continued to perform well against our conventional grocery peers. In Q3 last year, we announced our network optimization initiative.
Over the last few weeks, three converted stores have been completed. We are pleased with their sales performance, which is running ahead of expectations. More conversions are on the way. Our omnichannel performance remained strong. Online sales decreased by 9.8%, lapping last year's 133% growth rate during a period with more stringent lockdown measures. We see volumes now leveling off after a peak of activity experienced in January this year through the latest series of lockdowns. Our digital businesses delivered CAD 3 billion in sales over the last 12 months, continuing to run well above pre-COVID levels. Our omnichannel network is well- positioned. We continue to enhance our customer shopping experience through our digital platform while offsetting its cost through optimizing operational efficiencies, deploying new technology, and refine our delivery offerings.
In the quarter, we further expanded our local store-based offering, expanding PC Express delivery same-day service to over 300 stores. Retail gross margin in Q1 was 31.1%, up 80 basis points compared to last year. Drug retail led our margin expansion in the quarter. With its higher growth margin rate, growth in pharmacy services categories contributed to this expansion. COVID vaccines and testing led this growth, while we also saw traction, medication reviews, and prescribing services. Higher margin categories within front stores such as OTC and cosmetics continued their momentum, benefiting from customers who return to socializing and office-based work. Gross margin performance in food retail also improved slightly, reflecting our pricing and promotion strategies, which leverage our unique data set.
We now feel confident in our ability to scale up some of these strategies, allowing us to benefit both sales and margin. We are pleased with our growth performance for Q1 and our competitive positioning in the market. As the year unfolds, we are focused on delivering consistency in our growth margin performance and are confident in our ability to do so. Retail SG&A as a percentage of sales was 20.4%, an improvement of 10 basis points compared to last year. We lapped higher COVID costs in the prior year and continued to benefit from sales leverage and operating efficiency. This was partially offset by higher labor costs across the network, including the higher costs associated with the growth in pharmacy services.
Adjusted retail EBITDA increased by CAD 140 million or 12.2% in the quarter, yielding a margin of 10.7%. We were pleased with PC Financial's performance in the first quarter. Revenue was up CAD 21 million, driven by higher interchange and interest income, with a broad-based increase in customer spending. Contribution to adjusted EBITDA from the bank was strong, but decreased CAD 15 million year-over-year as we lapped last year's gain related to reversal in expected credit loss reserves. On a consolidated basis, adjusted EBITDA margin was 11% in the quarter, up 70 basis points compared to last year. In Q1, we repurchased CAD 148 million worth of common shares, representing 1.3 million shares. Maintaining our cadence of annual dividend increases, today we announce our eleventh consecutive annual increase, raising our quarterly dividend by 11%.
Looking ahead, macro factors continue to make forecasting challenging. In Q2, we expect eat-at-home trends to continue to taper. We expect inflation to remain elevated in the short term. However, inflation may moderate in the second half of the year as we begin to lap higher levels from the second half of 2021 and see the impact of actions taken by central banks. That said, there are broader macro and geopolitical factors that are outside of our control that impact the inflation landscape. While we continue to experience challenges within our supply chain, our in-stock position has improved, and we remain confident in our ability to navigate the situation. Our full-year outlook remains unchanged. I will now turn the call over to Galen.
Thank you, Richard, and good morning. I'm pleased with our performance in the quarter. With a backdrop of high inflation globally and the return of normal routines here at home, the breadth of our business and its range of well-defined value and services are resonating with consumers into 2022. Our drug segment stood out this quarter, driving a significant portion of our sales and gross margin growth. As consumer behavior normalized, customers returned to our Shoppers beauty counters, generating excellent results in our higher-margin categories like cosmetics. Cough and cold has strengthened significantly, prescription counts increased, and pharmacy services continued their multi-year expansion, a strong indication of the relationships patients continue to build with their pharmacists as convenient and trusted healthcare partners. A recent Leger survey named Shoppers Drug Mart the country's most reputable company, a great position when you're in the business of care.
Our food business continued to face global supply chain challenges and cost increases across the board, including for fuel, shipping, ingredients, and packaging. We're watching these structural pressures closely. At the moment, as Richard said, we see signs that inflation is moderating. However, external forces are significant and complex, making accurate predictions difficult. Within the current environment, all divisions are performing well. I'm particularly encouraged by our discount division, which represents 60% of our grocery sales. Our hard discount, No Frills, and Maxi stores are a bellwether for customers seeking value, and Q1 sales growth was strong. This is an indication of the Canadian consumers' steadily increasing focus on value. We see similar signs in the performance of our market-leading private label program.
After President's Choice, our No Name brand is the second largest in the country, and through the promise of excellent products at incredibly low prices, sales are at all-time highs. When combined with the over CAD 1 billion of savings we are on track to deliver to Canadians through our PC Optimum program, our consumers know they can count on us for the best value. Delivering value is core to our customers' purpose, our company's purpose of helping Canadians live life well. Equally important is our commitment to make a positive impact in the communities we serve. With that in mind, I'm delighted to announce the release of our 2021 ESG report, now online at loblaw.ca.
The report shares the details of our progress to date and our ambitious goals for the future on a wide range of environmental, social, and governance topics, with a particular focus on our two biggest internal priorities of advancing social equity and fighting climate change. This is an increasingly essential part of the shareholder value creation model for Loblaw as we work to marry strong financial performance with excellent ESG credentials. Thank you. I'll now open the call for questions.
Thank you, Galen. Michelle, if you'd please remind us how to line up for a question.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the one on your touchtone phone. If you would like to withdraw your question, please press star followed by the two. Please stand by one moment for your first question. Your first question comes from Michael Van Aelst of TD Securities. Please go ahead.
Hi, good morning. Very good quarter. You know, overall looks like I would have thought you were ahead of plan in Q1 after a strong result in the way you know you guys talked about your outlook for the year last quarter. I'm just curious as to, you know, why you felt that you couldn't increase your guidance for the year. Is this just, you know, cautious because of the uncertainty, or is there anything that's changed in the fundamentals that may also be slowing down the back part of the year?
Good, good morning, Michael. Yes, uncertainty as to the second half is definitely a factor. When you look at our performance last year, like, we delivered, like, increasingly improving result as the year progresses. When we look at where we are now versus our plan, like, we feel that our current outlook is correct. We will update it as the year progresses, but for now we feel good with what we have out there.
Okay. When we look at the gross margin improvement, it was quite impressive. Are you able to separate, you know, what was coming from mix improvement in your business and what was coming from retail excellence initiatives?
It's tough to do that. What we can easily separate is where, like, food versus drug. As we mentioned in our remarks, in this quarter, it was predominantly drug and driven mostly by pharmacy services, which last year were just beginning and whereas this year we're running strong. Those services have significantly higher margin than the rest of the business, and that was the big driver of our gross margin rate improvement. We did see some slight improvement in on food retail, but it was small compared to the overall increase.
Okay. When do you expect to start lapping the higher level of pharmacy services?
The best way to describe it, Michael, is that pharmacy services were increasing throughout last year. Every quarter we saw an increase. It's gonna be an increasing trend that we'll face as the year progress. The team has put together some good plans for that portion of the business for 2022.
Okay. All right, great. Just finally, you talked about, or we've seen prices, obviously significant price-cost inflation and price inflation being passed through. When you aside from the, you know, your actual food and cost of, you know, true cost of goods sold from your suppliers, how are you dealing with the higher cost of labor, of plastic bags, of, you know, things like that? How are you able to pass that along at all?
Those costs are obviously like throughout the business, but like they pale in comparison to the cost increase coming from on the goods for resale. Those are the ones we focus more on, and the rest, like, we're just managing. Like supply chain, as Galen was mentioning, is a good example where we've been doing a decent job in sort of trying to offset those internally.
Okay. All right. Thank you.
Your next question comes from Irene Nattel of RBC Capital Markets. Please go ahead.
Thanks, and good morning, everyone. Before I get to my question, just a quick follow-up from Mike's question. On the gross margin, the absolute level of gross margin in Q1 is higher than the average over 2021. Do you think that 31% level is sustainable?
Yes.
Thank you. That's very clear. Just so now if we could, just talk a little bit about consumer behavior. I think, you know, you said discount is now back, private label is now back. What are you seeing in terms of promotional sensitivity and ability to pass on? I will say that on the Maple Leaf call earlier this morning, Michael McCain noted that they are not seeing consumer resistance to price increases in the form of lower volumes when they do raise prices.
Yeah. I sort of picked my words carefully. You know, we are seeing a steady shift, you know, towards consumer sensitivity around value as opposed to, you know, a dramatic left turn. It's been building now for a number of quarters. You know, we see the strong signals, as we mentioned, in our discount business, and then also even within our market division business, you know, increased interest in things like No Name private label.
So t hat translates also into increased promotional sensitivity. I think, you know, what you're trying to get at is we're kind of back to normal, or call it back to pre-COVID, you know, price sensitivity, promotional sensitivity. We're not yet seeing that, you know, that expected shift that comes when you have plus 6% inflation for, you know, month after month. We think that's an indication of the consumer having more money, you know, in their wallets, still, than they would have had pre-COVID levels. We're watching it very carefully because prices are continuing to grow. Consumer behavior is shifting. You know, it's the usual things, smaller pack sizes, sensitivity to higher, you know, price points, all of that stuff.
It's an indication that if inflation doesn't begin to moderate because of some of these external forces that we've been talking about, you know, it's gonna increasingly become a concern. The reason that we emphasize, you know, the strength of our discount business, you know, is a reminder that during COVID, it was a headwind for us. During an inflationary period, we see it as a tailwind. No Name, you know, is the unsung control brand that we have inside our portfolio. We've done a lot of work on that over the last number of years and are really encouraged by what we're seeing from the customer in terms of their enthusiasm for that product.
Thanks. That's very helpful, and I guess we're all shopping like mothers now. Just switching or actually just following up on that. You know, you've got a lot of data in PC Financial around broader consumer spending. Any color that you can share with us from that perspective, in terms of just what you're seeing?
Well, we look at it very carefully. I wanna be careful, you know, here. It gives us an extra sort of layer of visibility, you know, into consumer behavior. It's one of the data sources that gives us some incremental degree of confidence around the strength of the consumer balance sheet. The strength of the PC Optimum balance sheet or the PC Financial balance sheet is very good. You know, that suggests that the consumer is in reasonably good shape. You can see that, you know, in what you're hearing from the big banks, you know, as well.
That's great. Finally, last one from me. You guys mentioned improving sales of cosmetics. Do you have a sense of in aggregate, where cosmetic sales are today relative to pre-pandemic?
Oh, that's a good question. I mean, they're still growing, you know, fast. I don't know if they're all the way back, you know, to pre-pandemic levels, but if they're not there yet, they will be very soon based on the rates of growth, you know, of course, subject to a change in consumer behavior. I don't wanna understate either the strength that we are seeing in OTC. I think there have been a few headlines in the paper over the last few weeks about the flu being back. Certainly seems to be the case when we look at OTC. Also, people who are managing COVID on the milder side, you know, are also, you know, diving back into all of the cold medicines as well.
Those are really the two places that we've seen a very marked shift in sales growth in the last quarter.
That's great. Thank you.
Your next question comes from Mark Petrie, CIBC. Please go ahead.
Yeah, thanks. Good morning. Just with regards to your efforts on promo optimization, I think you basically said it's now embedded in the organization, and you're sort of at a run rate on that. Is that a fair summary?
Well, call it the first phase, you know, which is a very small number of tools that we developed during the pandemic and have now been deploying at scale. One of those internally we call the Hero Engine, which is a promotional algorithm that drives incremental sales through loyalty. Then there are a set of tools that are being used to pick items and to pick promotional prices, you know, with the same kinds of incremental objectives. Yeah, that's ramping up. I'd say that those tools are being deployed at scale now.
You know, we have a world-class analytics team who is working on the next two or three tools at the moment, and those tools are primarily focused around increasingly intelligent audience building. You know, imagine identifying particular audiences with particular propensity, you know, to want to buy certain things or to be responsive to certain, you know, kinds of messages or promotions. That is kind of the next phase. When you ask Richard, the question, you know, what do we see in terms of margin expansion potential over time? One of the reasons for our, you know, optimism is the depth of opportunity that we're scratching the surface on in terms of that analytical database.
Okay, that's helpful. Thank you. I guess on a related topic, just with regards to margins, I wanted to ask about sort of procurement more broadly. I know this is an area of focus for Robert, and, you know, you've made some changes. Can you just talk about that work? What's the impact of it today? What are your sort of expectations, or how does this play out in terms of, you know, second half of the year and into 2023?
Yeah. So the principal adjustment that we've made is we now have a central procurement team that consolidates you know, the buy and the negotiation you know with our vendors. It's a small team, but it's also you know a very capable team. I think we spoke last quarter about the way that team evaluates the impact of cost inflation on the cost of goods. It allows us, you know, to negotiate with our vendor base, we believe, with an elevated level of precision. We've talked about this before about putting through real justifiable cost increases but being very careful about accepting cost increases that are not you know truly justified.
That is, you know, one of the big areas of focus of the team right now. You know, the second is, you know, developing really intelligent strategies by category to make sure that, you know, we have the right cost, you know, across the board, in key items. There are techniques that we're using. We're probably through two or three of the big categories right now, and we're encouraged by the results that we're seeing.
Okay. Just switching to e-commerce. I just wanted to ask about sort of the margin impact of that business. As sales come off or, you know, sort of normalize as in a more normal sort of shopping environment, are you right-sizing capacity, specifically in food? Are you able to scale costs to the slower demand?
Yes, absolutely. I mean, we have a certain fixed cost base, you know, inside our picking network across all of our stores. I think Richard has commented before, you know, at peak sales, you know, we do get a certain amount of leverage on those fixed costs. As the sales come down, you know, that leverage compresses a little bit. But that's being offset, you know, by all the incremental work that we're doing on pick efficiency, on pick up efficiency and then ultimately on the efficiency of our, the relationship that we have with our delivery partners. These things are mixing out, you know, in the short term.
I think we've also shared that over time we expect to see potentially incremental investments in different forms of automation. You know, we see an increasing opportunity to offset you know, that kind of diluted margin through our media business and monetizing eyeballs on our digital properties. You know, we see the heavy investment period you know, and therefore the heavy impact on our gross margin you know, is largely behind us.
Yeah, Mark, like the-
Right.
We know very well the net drag or the impact of fixed costs and the infrastructure we have. That's a number we track very carefully. Year-over-year now, like, the incremental impact is not that material. It's something that we can manage quite effectively.
Thanks for that. I'll pass the line.
Your next question comes from Patricia Baker of Scotiabank. Please go ahead.
Yeah, thank you very much for taking my questions. First, just to follow up to an earlier discussion on the gross margin and the impact of Shoppers on the front store. The way that you've discussed it, would it be fair to assume that the OTC, the order of magnitude of impact, is that OTC was a greater contributor than cosmetics to the improvement in front store gross margin in Q1?
I actually don't know the answer to that question, to be honest, Patricia. I think the biggest.
Okay.
The biggest driver on gross margin is essentially like COVID services. That is the biggest contributor.
Okay. My actual question is, in Q4 and again in Q1, you indicated that your basket inflation was greater than CPI, and the CPI in both cases was quite high, 7.5% in Q1. Can you just talk about the dynamic there? You know, why your basket is higher and how much of the product cost inflation are you passing through?
Yeah, Patricia. Like for us, what's most important is our pricing position versus our peer. That's what we track very well. As to how it affects inflation and how others talk about inflation, very tough for us to compare. If we feel good about our pricing position, if we feel good about our share position, that's how we manage our business.
Okay. I'm not sure that I really understood your answer.
I think like we're not trying to manage our business to an inflation number. We are trying to manage our business as to where we are priced versus our competition. If we have good pricing levels versus our peers and everybody is living the same inflation as us, everybody is dealing with these cost increases. If we can maintain good pricing position, that's how we satisfy ourselves that we're well-positioned versus our peers.
Okay, thank you.
Patricia, maybe just if we go back a few quarters, you know, one of the things that we talked about as part of the retail excellence program was, you know, we got in here, and we saw what looked very much to us like over-investments in certain regions, in certain categories, in certain types of programs. Part of what's happening right now is that we're adjusting, you know, that base. I think one of the terms that
Okay.
This is used often around the merchant table, you know, we're getting out of what we call low-calorie sales, things that just were simply not giving us, you know, value for money. It would stand to reason that there might be, you know, a temporary difference between us and others, you know, in terms of the relative growth of the basket. Having said that, Richard's point is the most important one, you know, which is we're managing our competitive position not through inflation, but through our relative price position and the effectiveness of our programs, and ultimately our market share performance.
Okay, that makes sense. What you're talking about, Galen, here is kind of recovery from, you know, a past bad pricing position.
Yeah, that's certainly one of the forces out there. I wouldn't want you to think it was the only one.
No, no.
Because as you optimize your promotional effectiveness, you know, you're essentially spending less, you know, to get the equivalent value in the minds of the consumer. That will also lead, you know, to potentially, you know, incremental inflation in your measure, without deteriorating your customer value prop, if that makes sense.
No, it makes a lot of sense. Thank you for that.
Your next question comes from Chris Li of Desjardins Securities. Please go ahead.
Hi, good morning. I was wondering if you can give us a sense of the magnitude of the outperformance of the discount banner versus market during the quarter.
It's one is accelerating, and the other one is slowing a bit. Sorry, Chris.
Okay. No, no worries. I try. Maybe can I just ask, like, with the same-store sales and the market division at least positive during the quarter?
For which one?
Uh, for, uh- The market division.
Market position was slightly negative.
Was slightly negative. Okay. Okay, that's helpful. Then in terms of just maybe a quick one on the food gross margin, I was wondering specifically as you see an acceleration from market to discount, and I'm, my sense is, I could be wrong, that the gross margin for the market division is generally higher than discount. Is there a bit of a negative shift impact on margin as discount becomes grows faster?
Yes. Mathematically, yes. Like, but the shift, like, is not material. So, all in all, it's not a material impact.
Okay. Maybe a quick one on private label. I know in the past, I think you've disclosed that the own brand penetration was around sort of 30% in the food segment. I was wondering, has that percentage gone up in recent months? Maybe secondly, you know, how is Loblaw capitalizing on the strong demand for private label to drive growth, but more importantly, to try to further improve the margin profile over the longer term for the private label portfolio?
Yes. Yes, private label penetration is up. You know, it is growing notably faster than our non-private label, you know, products and programs. Of course, the design of you know, a private label product takes into account deliberately the margin structure. You know, it's about penny profit. You wanna earn more penny profit when you sell a control brand product than you earn when you sell a national brand product. That means the margin needs to be significantly higher. That's how the program is engineered.
Okay. Your penetration, is it still around 30%?
Well, it's grown. You know, it's not 40%.
Okay. That's helpful. Maybe just a couple of quick ones just on the front store for Shoppers. Yeah, it's helpful that Omicron obviously had a bit of impact in the early part of the quarter. I guess my question is, within your categories where there may be more sensitive to food inflation, like the food products that you sell at Shoppers, is that particular category, are you seeing more sensitivity in terms of maybe people not buying as much because of high inflation, or is the convenience proposition of Shoppers more than offsetting that trade-down?
Yeah, I mean, look, the starting point is that, the Shoppers Drug Mart food proposition is not price-led, it's convenience-led. The assortment is designed that way, the promotional programs are designed that way, and the pricing is designed that way. Having said that, you know, you certainly have to keep a watchful eye on, you know, what could be perceived as insult pricing on the shelf. You know, that's something that the merchandising teams in Shoppers Drug Mart are very focused on. But it's not the primary driver of business there.
Okay, that's helpful. My last question, maybe just a quick one on financial services. The allowance rate, it has been relatively stable. I was wondering, what is your outlook for the second half of the year if we do get into a slowdown situation?
I think that business should continue to do well. The noise that we've been experiencing has to do with the movements and the expected credit losses reserves. If you look at the core performance of the business, we're starting to see spend go up again, which is very good for us. Interestingly, Galen Weston was touching on that earlier, like payment rate, which is the rate at which people pay down their balance on their credit card, continues to be exceedingly high, which is an indicator to us that people still have money in their pockets. We're monitoring this very carefully as an indicator of the health of the Canadian consumer.
Okay, that makes sense. Thanks very much, and all the best.
Thank you.
Your next question comes from Kenric Tyghe of ATB Capital Markets. Please go ahead.
Thank you, and good morning. Could you speak to how the online business performed perhaps relative to your expectations? Secondly, how has sort of the changing face of the consumer, the changing pressures that consumers are perhaps facing, impacting consumer behavior around online. Is there a marked shift in how consumers are shopping online? Any insight there would be really useful.
No marked shift that is a function of inflation, if that's really at the heart of your question. You know, we are seeing, you know, opportunity to drive online grocery penetration in our discount businesses, you know. Largely because there's been a shift of consumers in general, you know, to that space, and we wanna make sure that for customers who wanna buy discounts online, that they have you know, the best possible access to that solution. Otherwise, you know, this is, it's still by and large, a less price-sensitive shopper. I think we've commented in the past that the margin mix is better online. That contributes you know, as part of the offset for the incremental cost.
We are still seeing, you know, significant growth in our proprietary delivery channel, which Richard mentioned we've been rolling out, which has a fee associated with it, which again suggests people are prepared to pay for that convenience. When it comes to a market like, you know, the GTA, you know, we would have penetration levels that are running well above, you know, the numbers that we reported today on average for the country.
Thank you, Galen. If I could just switch to, you know, capital allocation and capital allocation priorities. In the context of the changed world in which we live, and perhaps some of those changes proving a little more permanent than some might have expected a couple of years ago, has any of this impacted your thinking by way of capital allocation priorities or perhaps necessitating a rebalancing of those priorities? Any insight you could provide there as well would be appreciated.
I think the insight is no. You know, no fundamental change. You know, we're still, you know, aggressively investing in upgrading our supply chain distribution systems, adding automation. You know, these were all decisions that were part of, you know, our strategy over the last couple of years and, you know, we're beginning to, you know, to do more of that. Then, you know, yes, we've seen a bit of a pullback in e-commerce, and we've seen lots of robust strength in our store networks. This is all within the framework, you know, that we laid out twelve months ago. No meaningful change in capital allocation approach.
Great. Thank you. I'll leave it there.
Your next question comes from Vishal Shreedhar of National Bank. Please go ahead.
Hi. Thanks for taking my question. With regard to pharmacy services, I was hoping you could give us some perspective on the size of that business. Once upon a time, you know, I understood it was a pretty small business, but now it seems to be having a meaningful impact on gross margin.
Yeah. I won't tell you the exact size, but yes, it grew significantly during COVID and it's now an important part of our strategy going forward. Last year was a record performance for that business, and so Shoppers worked hard last year to put together plans to be able to continue to maintain and ultimately continue growing that business. There's definitely portions of it that'll be cyclical and that'll go away. We do feel good about the plans that we've put in place this year to be able to continue to have that business perform well going forward.
You know, just to add to that, Vishal, I think what COVID has done, you know, both for the Canadian consumer and then also for the public healthcare system is it's really helped everybody understand the complementary role that the pharmacist and the pharmacy can play in kind of basic healthcare delivery. Vaccinations and COVID tests are just examples. Med reviews, you know, hypertension, you know, prescriptions, all these things are growing and important parts of the whole healthcare network. We see medium-term the opportunity to grow services through our pharmacies, you know, well in excess of the peak that we had in COVID this year.
Okay, that's helpful. In your plan, when you anticipate growing that services business, do you see the requirement for legislation change, or that's within the existing frameworks?
Yeah, it's within the existing framework, first and foremost. You know, there is not. The regulatory framework in each of the provinces is different. You know, in certain provinces where we can do more, you know, we're certainly building, you know, the evidentiary case, you know, for why some of these services should be expanded or allowed in other provinces. It's part of the normal course. We don't need some, you know, wide-ranging change to take place in order for us to fulfill our objectives, you know, but we'd certainly like to be able to do more in certain provinces.
Okay. In your remarks, I believe you mentioned, and I may have got this wrong, CAD 1 billion in savings associated with Optimum for the consumer. Was that a 2021 figure? And if so, do you have a year-over-year number that you can share with us?
That was a 2021 number. No, I don't have a year-over-year number to share with you.
Okay. Just on Friday, front end for Shoppers, a bit lighter than I would have expected, despite annualizing the negative 6% same-store sales growth last year. Wondering if that was an aberration just related to the, you know, ups and downs associated with COVID-19, or is there something else in there that I should consider?
Like, I think you're right. Like, when we started the year in lockdown, Shoppers businesses was negatively affected. It doesn't perform well under restrictions. As we go back to normal, we're starting to recover that, and we see that trend continuing going forward.
Thanks for the color.
Your next question comes from Peter Sklar of BMO. Please go ahead.
Hi. Good morning. Just a couple of questions here. One, like, with your e-commerce revenues down, you know, almost 10%, like, Richard, what's your thoughts? Like, bottom line, is that good for profitability? I would think it is because your margins are much better on an in-store sale versus a click-and-collect sale. And I guess it assumes that you're capturing that customer as the customer leaves e-commerce and goes to in-store. I think there has to be an assumption that you're capturing the customer rather than the customer going to a competitor. If that's the case, bottom line, has this been a profitable trend for you? Did that noticeably contribute to your grocery gross margin in the quarter?
What you say makes a lot of sense, but like, the impact of all of this is pretty marginal on our numbers. Because what happens is the biggest contributor to our cost in online is labor to pick in store. So that gets adjusted with the sales performance. So net-net, it doesn't really. It's not a big driver of our gross margin performance, the fact that the penetration levels went from X to Y, you know, in the last two quarters.
Okay. Just lastly, like, this is just kind of anecdotal, but as I look at your flyers, there just seems to be more, you know, more promotions in terms of PC Optimum rewards offered on these various promotions in the flyer. Am I just imagining things, or has there been a bit of change in strategy during the quarter?
You're right. You are seeing in certain places, I think maybe this week in particular, you know, a particular emphasis on PC Optimum. Think about this as not a fundamental strategic shift, but more a series of experiments, you know, to understand exactly, you know, how to optimize the use of PC Optimum across all of the various, you know, channels of delivering value to the consumer. The fact that you're seeing a bit more of it in our flyers is an indication of success, and trying to test how far we can take it. At this point, what you're seeing is some of what you're seeing are experiments.
Yeah. And the way you measure success, I assume, is you make an investment, which is the reward, and then you look at the incremental sales and the margins it generates and what's the return on that investment. Is that how you look at it, Galen?
That's right. We have a very effective measure, which we call ROS, you know, which is the return on sales metric. We measure every single you know promotion that way, particularly when it comes to those items that are part of the PC Optimum program, whether it's in store, in flyer, or through the app.
Okay. Thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one now. There are no further questions from the phone lines. I will turn the conference back over to Mr. McDonald for closing remarks.
Great. Thanks very much for your time, everybody. As always, if you have any follow-up questions, give me a shout, drop me an email. Mark your calendars for July 27th when we will be releasing our Q2 results. Thanks, and have a great day.
Ladies and gentlemen, this does conclude your conference for this morning. We would like to thank you for participating and ask that you please disconnect your lines.