Conference. It's my pleasure to be joined on stage here by Mike Walsh, who has been the CEO of Leon's since 2021, and the first one whose name did not end in Leon. He's been with the company for almost a decade now, and with CFO Victor Diab as well, who's been with the company for coming on a year in the role. Thank you both for joining. Maybe just to start off, it's been a volatile few years, obviously, for the Canadian consumer between the period of high inflation, high interest rates, a languishing housing market, and now, of course, the emerging threat of tariffs. How have you kind of seen your customers' behavior evolving over the past couple of years, and what are you seeing more recently in response to tariffs?
Yeah, so first off, thanks for having us. I know you were saving the best to last, so thank you for that. I'll take you back to the pandemic, where freight rates were really expensive and we had really expensive furniture, which there was a lot of, consumers buying the product. When we got to 2022, mid-2022, we believed that in 2023 we had to reduce prices to be, to be able to play in the value proposition game. We basically freed up CAD 90 million of inventory in about four months so that we could buy less expensive inventory with freight rates coming down and would not be stuck with really expensive inventory. 2023 was kind of a bridge to get that inventory in.
Fast forward to 2024, and it's just a different narrative because then you had, you know, rail strikes and you had a postal strike, and then, you know, you're feeling really good about your business and your company, and then you get into 2025 and you have tariff threats. I think the consumers kind of had a cyclical way, but they don't forget what happened back during the pandemic. They're cautious, around spending money. We believe that given that we've been around for 116 years, as they're going to spend money, they're going to spend it with the brand they know and trust is going to be around for a long time. We're feeling really good about the business, but we also understand consumer sentiment is a challenge right now because it's a bit of the unknown.
You know, how is this tariff going to affect them? And frankly, we don't know. We don't even know what the tariffs are going to be. I think the biggest thing is the uncertainty of how long the tariffs would go.
For sure. How would you describe Leon's direct exposure to tariffs at this point based on your mix of imports? What are some of the actions that you're either taking today or are considering taking in the future to kind of mitigate and offset that?
Yeah, great question. We have about 15% of our inventory that comes from the U.S., and we've been spending the last couple of months. We've got great vendor partnerships, so we've been able to, you know, either the vendor's going to take the product and start producing it offshore, or we're going to get them to hold the inventory until we understand what the nature of the tariffs are. In some cases, we brought in more inventory early on because as they move production to offshore, we want to be able to have the inventory in there, in the barn to sell. There have been a number of different ways that we can combat that. We're feeling pretty good as what we know today. April 2, we really don't know what's going to happen then.
Is raising prices a tool in the toolkit? Is that something that's kind of a viable response, I guess, given the state of the Canadian consumer, or is there a different way to think about pricing?
Yeah, I think as a high-low retailer, it's paramount for us to continue to play in the value proposition game. We know that consumers are already uneasy as it relates to how the economy is feeling today. We'll still always play in that. We're working closely with our vendors to mitigate any kind of significant, significant price increase.
Okay. I guess, you know, a little bit on that subject, I think one thing that certainly stands out about Leon's is how stable the margin profile has been over time, even through periods of some pretty significant volatility, such as we've experienced in the last few years. What kind of capabilities and levers underpin that? I guess, how have you been so successful at managing your margins through periods of cost inflation?
Yeah, we've seen lots of inflationary costs across the entire P&L and I'll let Victor jump in. There are two words that we do use a lot around the office, discipline and focus. You have to really understand from a margin perspective, whether it's your supply chain, it's through ideation, it's through procurement, it's through delivery. It's not just from a margin perspective. We have a great focus on SG&A as well.
Yeah, I know for sure. Mike, Mike uses a key word, which is discipline. I think it's key because it's across a value chain. When you think about our merchandising team, you know, what they're really good at is blending a bit of art and science. They really know the price points they need to hit in the market. We reverse engineer what the cost structure needs to be from a product cost perspective. That starts a conversation with our suppliers. It kind of flows all the way through, you know, on the supply chain side, how we flow it, on the marketing side, how we promote it, understanding the elasticity with the customer. Something that's usually overlooked is our salespeople, who know what to focus on inside the store.
You know, we push them to sell what we have, and we push them to sell at a certain, you know, the products that generate higher margin profiles for us. It really does resonate across, across our value chain.
Right. In an industry that's still very fragmented and still, you know, has a lot of kind of smaller mom-and-pops, I mean, could you maybe speak a little bit to the importance of scale, as part of that conversation?
Yeah, for sure. Scale is really important for us because, you know, our scale allows us to buy at a very reasonable cost and allows us to be very price competitive. I think our scale across the country, when you think about, you know, our expertise sourcing from a sourcing perspective, and also, you know, when you think about our scale on the SG&A side, our ability to hire talent and attract talent from a distribution and supply chain perspective. I think scale is really important for us, and it's a competitive advantage. For us, what we look at and what we're paying attention to, obviously, you know, when you look at inflation, inflation impacts everybody in the market.
For us, it's staying ahead of the competition in terms of absorbing some of that cost increase and not passing all of it to the customer, because we know when we're feeling it, the rest of our industry is feeling it. That's when, you know, we're able to gain market share because of some of those advantages.
Right. How do you think about the balance between kind of defending your margins and supporting top-line growth to the extent that those two things sometimes come into conflict with one another?
That's a great question. I think it depends in what type of economy you're in. In good times, you can balance taking top-line and growing your margin. In challenging times, you know, it's really a balance of the sweet spot as a high-low retailer about how do you continue to provide value for the Canadian consumer, but also drive it profitably.
Okay, this is a question that those of you who've been here all day have heard Mark ask about a thousand different ways, but I'm going to ask it to you anyways. There does seem to be an emerging trend around Canadian consumers gravitating towards Canadian products and Canadian brands in this kind of environment. Is that, are you seeing any signs of that within your stores? That may be, you know, something that could be an opportunity for Leon's and The Brick, given the Canadian heritage of those brands. Is there anything that you're doing from a marketing or a branding perspective to try to seize on that moment?
Yeah, we've heard a lot about, you know, the Canadian approach, and we buy a lot of product in Canada. And so, you know, we're leveraging all of our assets to be able to call out that we have Canadian product, but what's more Canadian tie than a 116-year-old company that started in Welland, Ontario, and is a very iconic retailer in Canada?
That employs 8,000 Canadians, so.
It's me. Another topical subject here in Canada, of course, is immigration and population growth, which has certainly been a tailwind for Canadian retailers, particularly over the last few years, but has started to slow down and has slated to continue doing so. What kind of impact might that have on Leon's business, and how are you thinking about that phenomenon generally?
I think how I would answer the question is around, we're really more focused on the 29-40-year-old household formation. Whether it's from an assortment planning, bringing in baby, patio, small appliances, barbecues, and then it's a marketing perspective. You know, our partnership with MLSE gets a lot of younger eyeballs, whether it's through the Raptors or the Leafs. Our focus is really on household formation than it is a specific demographic.
Okay. I want to maybe turn now to the company's real estate strategy. In the last couple of years, you've announced plans to IPO a REIT and develop a parcel of land around your headquarters here in Toronto. Maybe just as a starting point, could you kind of just give us a high-level overview of the real estate assets within Leon's and why that's something you're talking about?
We own 5.6 million sq ft of buildings that sit on top of 430 acres of land across the country. It is a very good mix of both retail and warehouse or industrial. We are pretty excited about that, and we think there is huge value in, at the end of the day, we really believe we either do not get value for our land or we do not get value for our retail business. By unearthing that value, we think it is going to be great for our shareholders. I think just to update you on where we are, there are 40 acres of land at the 400/401. If you drive past there, you will see farmland and our office. We are continuing to work on the secondary planning phase.
The project's been approved for regeneration, which allows you to look at houses, and we're hoping to be able to do 4.6 million sq ft of GFA, which is gross floor area. We're very excited about that.
All right. I think there were some other parcels of land that could kind of potentially be part of a future development pipeline as well, in addition to the one at 400/401. Could you speak to those a little bit?
I'll speak to the one specifically in Mississauga. If you're driving down the 401, you'll see a Leon's on the left-hand side or the south side, which is a store that has a distribution or a warehouse store. Because it's an industrial node, if we wanted to, we can take the retail, move it into more of a retail node, and then determine what the highest and the best use of the land is, and then redo it.
Yeah, we have a ton of those opportunities. I mean, when you think about, again, especially on the Leon's side, we have 22 delivery- type stores. As we think about our centralized distribution strategy, and basically, you know, going from 22 warehouses to something a lot smaller, like maybe one or two DCs, that's going to free up a lot of real estate. It's going to either free up real estate where we can completely, at times in the Mississauga example, we can even move the retail store, move it to more of a retail node and kind of redevelop that whole area to something more industrial around highest and best use. In some examples, what we could do is just invest a bit in that warehouse space and lease it out to third-party tenants and bring that incremental revenue back into LFL.
There are examples like that all over our network.
Okay. Yeah, I want to, I want to come back to, to some of what you guys have been doing on the, on the distribution side of things. I guess just, just sticking on the, the REIT subject for a little bit, I mean, this is certainly something that surfacing the value of the, the real estate is something that the company's been talking about for some time. I guess, why do you feel that now is kind of the, the right time to, to be leaning into those plans? And what kind of gives you confidence that the REIT IPO will ultimately go through?
I think number one is we believe our, you know, share value is underpriced. When we think unlocking the real estate will have tremendous benefit for our company as well as our shareholders. I think in 2013, when we bought The Brick, we needed a number of years to realize the synergies of The Brick. Then we started to do the regeneration zoning for the main parcel of land. We're not real estate developers. We wanted to get that down a period of time and then figure out how to get a REIT off the ground so that we could have the professionals inside the REIT helping us identify what the development capabilities are of our land, what's the highest and the best use of the land. Both of those worlds start to converge.
Yeah, I really think that's an important point. I think, you know, obviously surfacing the value. We talked a bit about centralized distribution and the potential synergy there with the REIT on monetizing some of that real estate. The talent piece is really key. Bringing that external talent in, that's 100% focused on unlocking value from real estate. Obviously, we're 100% focused on driving the retail business. Bringing that complementary skill set from the outside will be super beneficial to driving that value.
Right. Could you maybe just speak a little bit to, I mean, you mentioned obviously you're not real estate developers. Can you maybe just speak to, you know, some of the partnerships you plan to kind of engage in to help both with the development process and then ultimately with the management of a REIT going forward?
Yeah, we haven't determined the construct yet, but I'll give you a couple of examples. Delta, British Columbia, we partnered with the Beedie Group to build a distribution center. Then we partnered with a company called Qualico in Edmonton, and we just opened up a brand new DC in Edmonton, which is going to be the home of The Brick's new head office. You know, when we get down to the path where we're starting to come out of the secondary planning process specifically for that property, we'll partner with a developer that really knows development that we can figure out a construct to a deal that makes sense for both of us.
Okay. Victor, you alluded to this a minute or so ago, but I, I, a big focus for the company since acquiring The Brick about a decade ago has been centralizing and consolidating the distribution infrastructure that you have. Could we maybe just double-click on that for a second and kind of bring us up to speed on what's been done so far and what is still left to do?
Sure. Yeah, I said we started in Delta, British Columbia. It was the first time we actually took Leon's and The Brick inventory, put it in the same building, delivered by one set of drivers. Today you could have a Brick truck and a Leon's truck going to the same neighborhood, which centralized distribution will help with. We believe that there's, you know, we'll realize some potential as it relates to SG&A. We've done Halifax. We've just opened Edmonton, biggest unlock being Ontario. Leon's started out by buying big parcels of land in the middle of nowhere, building a big store, building a big warehouse, which was a great way to start the company. Today, if you were doing it, you'd probably build fewer delivery stores, probably a larger DC.
The Brick has a hub- and- spoke model, which is truly that. We are going to try and mimic that, but the synergies around having one truck delivering for all of our banners makes a lot of sense. Secondly to that, that is kind of the big rock. There are a bunch of little rocks around how can we leverage our current owned asset or leased assets. Currently today, The Brick leverages the Winnipeg distribution center for Leon's. Appliance Canada leverages all of the DCs that we have. Appliance Canada wants to get into BC. Instead of just having them do a store alone, we are actually putting them in our Leon's store and doing a store within a store. There is a centralized distribution. How do we realize any gains as it relates to, you know, a more regional place between the banners?
A lot of people ask us, Ty, what impact do you expect to see in SG&A? The reality is, you know, in all of these examples that Mike pointed out, we are already seeing impact in SG&A. You know, when you think about all of the inflation we've absorbed around minimum wage, around property taxes, things like recycling fees and stewardship fees, the way we've been able to offset it marginally is through a lot of these examples where, you know, we're thinking outside the box. We're trying to leverage our assets. Let's move The Brick into a Leon's shared service. Let's move Appliance Canada into a Brick DC. All of those are moving the needle on SG&A. We're bending the cost curve.
You're not going to see, you know, some people expect us to kind of go from this SG&A level with a significant drop. It's happening organically and over time. The biggest unlock is still Ontario. What you could, you know, what we all expect to see, obviously, when you have 22 warehouses with hourly labor across those 22, and then you consolidate that, you're going to have a lot of labor efficiencies there. We've already seen it in the micro examples we pointed out. Marginally and incrementally, we're going to see that as, you know, over the next number of years as we continue to shift into that strategy.
Could you just remind us what the timeline might look like for Ontario for that final piece?
Yeah, we're still, there's a lot of modeling that goes behind it, but I would say it's a multi, multi-year timeline. We expect to continue to get leverage over a multi-year timeframe. Again, you're not going to kind of go, you know, see SG&A go from here to here. It's going to gradually happen over time.
Okay. Can you maybe talk about the strategy around new stores, opening new stores and some of the new smaller formats that might be available to you now that you do not necessarily have to have a warehouse attached to the building, kind of related to the centralization of your distribution infrastructure that we have just been talking about?
Sure. I think Leon's is focused in BC and The Brick's focused on in, in Eastern Canada. One of the challenges in BC was, there's just not a lot of retail inventory available and the leasing costs in BC still remain very elevated. A few years ago, we still wanted to grow in BC. We opened up a 15,000 sq ft store in Coquitlam. We're very adamant about making money in our stores and not just opening them up to get top- line sales. The only way we could do it was try to take technology to bring an 80,000 sq ft assortment into a 15,000 sq ft store. The store made money in the first six months.
Now we know that we can, you know, pivot a little bit from trying to do 35,000 sq ft stores into much smaller areas if it makes sense and it's someplace we want to be. We typically, you know, we're more focused not necessarily on opening up a bunch of new stores unless it makes sense, but we optimize leases every month. When a lease comes up, we look at, is it the right size? Is it in the right location? Then we optimize lease on an ongoing basis.
As we also optimize sales per household in a trade area, we are very, very focused on metrics around productivity. You know, we use sales per household to kind of go, okay, are we getting the productivity we want out of a trade area? Do we have too much square footage? Do we have too little square footage? Can we leverage our online property a different way rather than simply go, okay, we need to add, we need to add stores? We look at productivity that way.
What is kind of the optimal trade area for a Leon's and a Brick store? If there is a significant difference between those two, that would be interesting to tease out as well.
It's pretty, it's pretty similar from a trade area perspective. I mean, you obviously, population, 100,000 or, you know, 25,000 plus trade areas will drive the size of a store that you open in a trade area. It depends on the competitive level in a trade area, which market you're in. It is not one size fits all. It really does vary across the network.
Yeah. The one thing we found about Coquitlam and what was really important to us for Coquitlam, it's actually called Furniture Alley. People come from lots of places in BC. They drive past the Leon's there and they go to Furniture Alley and they park their car and they go into this retailer, this retailer, this retailer, this retailer to make a purchase. To Vic's point, it's not a one size fits all. It's based on market.
Okay. I want to pivot to a couple questions around capital allocation. Leon's hasn't really done a major acquisition since The Brick in 2013. Is that something that you might kind of look to do again, in the relatively near term, step back into some M&A?
Yeah. I mean, from a capital allocation perspective, you know, we're always focused right now, you know, we're carrying excess cash because, you know, it's important to have liquidity in, in times of uncertainty. Generally our priorities is to invest in, in our core business, which we have been doing. We'd like to commit to a regular dividend, which increases, which we've done the last couple of years. Things like big projects, like centralized distribution, that will require capital and real estate development, like what we're doing in, in Welland, for example. Those will require capital from us. Obviously we'll look at potential M&A, and share buybacks. M&A, you, you know, we're not afraid. Obviously we've done a transformational acquisition with The Brick.
We're seeing more opportunities come our way, with the market softness, more people are coming to the table and we're looking at a lot more things. We're always looking at things every single day. Valuations are becoming more reasonable, but nothing is imminent, right? You know, the criteria that we look at from an M&A perspective is it's got to be a really strong, it's got to be a strong brand. It's got to have runway for growth. We got to be able to dovetail some of our ecosystem in there. When you think about our insurance, our warranty, we look at that as very synergistic for us. It's got to be, it's got to be accretive for us, right? It's tough to find those.
But, you know, when they come our way, we do look at them. There is nothing imminent to say. You know, obviously we just announced an NCIB program more to be opportunistic in the market like this, given the volatility we are seeing in our share price. You know, we are going to be opportunistic in terms of how we support that going forward. No hard commitment, but, you know, obviously it is there to give us optionality.
Okay. I know we're back. I know you've spoken before, just in terms of M&A about being more or less indifferent between a target in Canada or in the United States. Has that thinking changed at all given kind of some of the cross border and tariff related uncertainty?
No, I don't think so. I think it's just about the opportunity. I think, you know, all the noise in the U.S. at some point will dissipate. We're more looking at what the opportunity is from a long-term perspective.
Okay. Victor, you just touched on it a moment ago, but I'd like to expand a little bit on Leon's kind of unique set of capabilities around warranty financing and repair services. Can you maybe just highlight those a little bit and kind of how those distinguish you from the competitive landscape?
Sure. We started, you know, we have a federally regulated insurance company. Currently today we're doing credit insurance. We believe that, you know, how we went about doing it is we have an ecosystem. The bricks and mortar and the e-commerce is at the heart of it. You have an insurance business that provides credit insurance on financing. We started out doing just within our ecosystem and test and tune until we got it right. We're now in, we do about 50% of our insurance business outside of our ecosystem. It's a very profitable line of business for us. That has been very good. We continue to have an opportunity to increase our attachment rates or go to a different suite of offering. We could go to content insurance. We could do mortgage insurance. There is a huge opportunity there.
Our warranty business, we do all within our ecosystem. Forty percent of our 2 million customers take us up on warranty. We are starting to look at how we can take that outside of our ecosystem. You can touch on the Simply Secure.
You know, from an insurance perspective, obviously today we do credit insurance. You know, anytime a customer's financing the purchase of a couch for $1,000, we've got really good attachment rates on selling them insurance in case of job loss or a life event. We support it that way. We see a huge opportunity to continue to grow credit insurance within our network and outside, as Mike alluded to. You know, think about things like mortgage insurance or content insurance. We're starting to experiment with other categories, in terms of taking that business on the outside. We see tremendous runway for growth in the insurance business. What we love about it, obviously it's core to the ecosystem, but it's also high margin, right? It's high, high margin.
I think about it as great margin support that gives us flexibility on the retail side, and soft environments like this. It's really good margin support. It's great for us for a lot of reasons.
Okay, great. Maybe at a high level, Mike, could you speak to the philosophy behind keeping Leon's and The Brick as, as kind of, distinct entities or I think friendly competitors is the, the term you might've used before?
I go a little bit further than friendly competitors. They're fierce competitors. They hate each other. They really want to go to battle, each and every day, with The Brick. I think it's really important. Different marketing team, different merchandising team. I think we've seen with some other retailers and we saw it with a brand that we owned, or still own, which is United Furniture Warehouse. It started to blend, to look too much like The Brick. We ended up closing that brand. We've been very successful at growing both banners, with, you know, The Brick playing in a very value prop place. Leon's is a little bit above and Appliance Canada's pretty high end in the appliance space.
We think that keeping them separate and, you know, they have exclusive product for furniture and Leon's, you won't see the same product at The Brick. We believe that we want to keep them separate and not blend the two businesses together.
Okay, great. Maybe just a final question here. I know you guys don't give out formal guidance and I won't ask you to do so now, but maybe just discuss kind of where you think the pockets of risk and opportunity are, as you look out for the balance of this year, you know, both from a macro standpoint and from an executional one.
Yeah. I, you know, I think obviously the most important thing for us is consumer sentiment, right? We do feel like we're really well positioned from a value perspective. I think customers are still looking for value. At the same time, Mike touched on it upfront. You know, consumer sentiment's really important. Right now it's a bit, it's a bit shaky, given the uncertainty in the environment. You know, what we focus on is making sure that we're very well positioned for value and we're there for the customer where they need us. We're still seeing customers spend. Of course, you know, over the long term, if customer sentiment remains shaky and there's impacts to GDP and the macro economy, that does obviously impact us in some way, shape, or form.
What we've seen over the long run is, when the pie shrinks, ultimately our share grows and we come out even stronger. We're always positioning ourselves for that environment.
Okay. It's time. I think we'll end it there. Thanks, thanks to Mike and Victor. Appreciate that.
Thank you. Thanks for having us. Appreciate that.
Thanks. That's a wrap for the conference as well. I wanted to thank all of you for your attendance today. Thanks to all of the wonderful corporates for being here as well. There will be recordings available for most of the presentations that were given today. You can find those online for the next few weeks for those who'd like to listen again. Of course, if you do have any questions, feel free to reach out to Mark, myself, or your CIBC representative. Thank you.