Earnings Call: Q2 2021

Apr 21, 2021

Earnings release

Good morning and thank you for standing by. Welcome to the METRO Inc. Twenty twenty one Second Quarter Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to Sharon Kadoche, Manager, Investor Relations and Treasury. Thank you. Please go ahead. Thank you. Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our second quarter, which ended 03/13/2021. With me today is Mr. Eric LaFleche, President and Chief Executive Officer and Francois Thibault, Executive VP and Chief Financial Officer. During the call, we will present our second quarter results and comment on its highlights. We will then be happy to take your questions. Before we begin, I would like to remind you that we will use in today's discussion different statements that could be construed as forward looking information. In general, any statement which does not constitute a historical fact may be deemed as a forward looking statement. Expressions such as expect, intend or confident that, will and other similar expressions are generally indicative of forward looking statements. The forward looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy and our annual budget as well as our twenty twenty-twenty twenty one action plan. These forward looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks known and unknown as well as uncertainties that can cause the outcome to differ materially. A description of these risks, which could have an impact on these statements, could be found under the Risk Management section of our 2020 Annual Report. As with the preceding risks, the COVID-nineteen pandemic constitutes a risk that could have an impact on the business, operations, projects, synergies and performance of the company. We believe these statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward looking information except as required by applicable law. I will now turn the call over to Francois. Thank you, Sharon. Good morning, everyone. I hope everyone on the line is in good health. We started cycling the peak sales at the start of the pandemic last year in the latter part of our second quarter, especially in the last two weeks. Our second quarter sales totaled $4,200,000,000 versus $4,000,000,000 last year, an increase of 5.1%. Food same store sales grew by 5.5 for the quarter on top of 9.7% for the same quarter last year. Pharma same store sales were down 0.8%. Our gross margin stood at 20.2% of sales versus 19.7% for the same quarter last year. The increase in gross margin was mainly the result of a continued strong performance in our core food business. Operating expenses, including $29,000,000 of COVID-nineteen expenses, represented 10.7% of sales versus 10.3% last year, a ratio that was positively impacted by the fact that we experienced a strong surge in sales in the last two weeks of the quarter last year due to the pandemic, but with no incremental COVID-nineteen related expenses. Our teams continue to do a great job at finding ways to mitigate part of the increase in operating expenses. The $29,000,000 in quota expenses include $8,000,000 of gift cards that we're giving to frontline employees. EBITDA for the quarter totaled $396,100,000 that's an increase of 5.9% versus last year and represented 9.4 of sales, the same margin as last year. Adjusted net earnings were $194,700,000 compared to $182,800,000 last year, an increase of 6.5%. Our adjusted net earnings per share were zero seven eight dollars up 8.2% versus last year adjusted EPS of $0.72 And again, earnings in the second quarter last year were favorably impacted by a surge in sales due to the pandemic with no incremental COVID-nineteen related expenses. Our capital expenditures for the second quarter totaled $119,600,000 versus $95,100,000 last As expected, higher CapEx is mainly the result of some carryforward projects that got delayed last year due to the pandemic, namely our Ontario Automated DC. At the retail level, for the first half of this fiscal year, we opened one store, an Adonis in Quebec City, relocated another one and carried out major renovations in seven stores, representing a net increase of 56,000 square feet or 0.2% of our food retail network. Following the end of the quarter, we opened two new stores, one Metroplus in Trebeau, Quebec and one Food Basics in Curtis, Ontario. Investments in technology at the store level are also ongoing. We now have about two sixty stores with self checkouts, and we're planning on adding another 90 this fiscal year. Also, we now have about 120 stores equipped with electronic shelf labels, and we're targeting another 90 by year end. Under our current normal course issuer bid program, we have repurchased between November twenty five of last year and April two of this year four point two five million shares for a total consideration of $238,900,000 representing an average share price of $56.21 I'd like to close my remarks by reaffirming that our financial position remains solid. That's it for me. I'll now turn it over to Eric. Thank you, Francois, and good morning, everyone. We had very solid results in the second quarter, delivering sales growth of 5.1%, EBITDA growth of 5.9% and adjusted EPS growth of 8.3% in what can only be described as a challenging operating environment. Our teams continue to demonstrate great dedication and resilience to serve our communities. I'm grateful for their hard work and following the most recent government measures, we announced last week that all our frontline employees would receive a third gift card bonus in May in recognition of their commitment, whether they are in a lockdown region or not. We continue to apply the most rigorous safety protocols for our employees and customers. Food same store sales were up 5.5% in the quarter and 10.1% excluding the last two weeks when we saw the initial surge in sales last year at the start of the pandemic. We continue to gain market share and the market environment is very competitive as always. Our internal food basket inflation was 2%, down from 2.5% in the first quarter. Transaction count remained significantly down versus last year, but is again more than offset by the larger basket size. Promotional ratios trended up quarter over quarter, but are still below pre pandemic levels due mostly to the larger basket. Online grocery sales grew by 240% for the quarter versus one year ago. Volumes in our hub stores remain strong. We are on track to have 170 click and collect stores by the September. Our partnership with Corner Shop continues to grow and we recently added our Adonis banner to this same day delivery service. The Montreal dark store will open this summer as planned and provide us additional capacity. Finally, we will be expanding our online hub delivery home delivery service to the Ottawa market this summer with the opening of one hub store and several click and collect stores. Turning to pharmacy. Comparable sales were down 0.8% with prescription drugs up 4.2% and front end sales down 10.5%. The core Rx department remains very solid. However, as we indicated on our last call in January, the restrictions on the sale of non essential goods in Quebec for about six weeks combined with a much milder cold and flu season negatively impacted commercial sales in the second quarter. At the March, our affiliated pharmacists in Quebec started to administer COVID vaccines, albeit in very small quantities due to limited supply. Some four fifty of our pharmacies in Quebec and most of our pharmacies in Ontario and New Brunswick will participate in the vaccination effort and we are working closely with the authorities to accelerate the pace of vaccination as more supply becomes available in the coming weeks. The transfer of the Brunet pharmacies to the Coutu DC as well as the Metro and Super C stores for health and beauty products has started and will be completed in June. This is the last phase of our three year integration plan and we anticipate savings of about $10,000,000 next year in distribution and warehousing costs as we will operate in one facility. As you know, one of our strategic priorities is the modernization of our supply chain. In February, we started the operations in Phase one of our new semi automated Produce DC in Toronto. About two thirds of our stores are now supplied from this facility and the transfer will be completed in the next few weeks. Post ramp up, this new facility will provide increased capacity and better quality for our stores. It is always challenging to start a new DC, even more so during a pandemic, but our team is doing a good job to manage the expected transition costs. The new fully automated frozen DC is in the final stage of construction and systems will be commissioned over the next months in time for a January 2022 opening. Looking ahead, the recent lockdown measures in Ontario and parts of Quebec continue to favor food at home consumption. In Q3, we expect food sales to stay elevated compared to pre pandemic levels, but as we cycle the peak sales of the start of the pandemic, we expect comp sales to be negative for the quarter. In our pharmacy division, we expect continued growth from prescription drugs and subject to the evolution of the public health measures, we expect front end sales in the short term to compare favorably to last year given the serious restrictions to access to pharmacies that were in place during the first wave of the pandemic. So our priority remains the safety of our employees and customers, and we believe we are well positioned to continue to deliver value to our customers and shareholders. We will now take your questions. Your first question comes from Karen Short of Barclays. Please go ahead. Your line is open. Wondering if you could talk a little bit about how you're thinking about inflation as we go through the rest of the year? And then how you're just generally thinking about what the cadence of traffic versus basket may be as we get into the third and fourth quarter given that there's so much volatility in both of those numbers for the remainder of the calendar year? Thanks. Well, inflation expectations are again uncertain, but we had pretty muted inflation in the second quarter, down a bit from the first quarter like I said. We saw some inflation in produce. What's ahead of us will depend on a bunch of factors. On the grocery side, we understand that there are some cost increases being asked or coming due to production cost increases from our vendors. So there could be a bit of inflation on the grocery side. In the fresh departments, again, are many factors at play. FX, Canadian dollar is stronger this year versus last year that should help us a bit to offset some of the inflationary pressures. But net net, we don't expect to the inflation picture overall to change that much. The 1.5 to 2%, two point five % number is something that we think is realistic. But again, no crystal ball and it is volatile and it is uncertain. As far as traffic is concerned in our stores, traffic trends I said are down year over year. As we cycle the pandemic, we're going to be improving traffic trends, we're going to see the basket be more normal versus last year because it's COVID against COVID. So I think we need to look at it going forward on a two year basis and see what our growth is and we're confident that our sales will remain very strong versus 2019 on the food side. And then just to follow-up on the promotional environment. I guess what's your perspective in terms of how that environment will look as we're looking several, I guess, quarters down the road in terms of the competitive landscape broadly? I mean, obviously, all retailers know that the negative comps are a function of, I mean, obviously very, very unusual comparisons, but how do you frame that with respect to how the competitive environment may look in the next several quarters? Thanks. Well, again, we can't speak for others. I just said we are looking at our week to week sales, our market share every week and our sales versus two years ago. That's really the bottom line for us. The promotional environment, I said increased quarter over quarter. We expect that to continue and normalize. I think it's a very competitive market out there, always has been and we expect that will continue. If basket stays larger versus two years ago, I think that's helpful for the promo ratio in the sense that a fuller basket will have perhaps a smaller share of promotional items in it. So we're confident that we in a very competitive market with promotions increasing, we're confident that we can manage through that and deliver good value. Okay. Thank you. Thank you. Your next question comes from Kenric Tyge of HCD Capital Markets. Please go ahead. Your line is open. Thank you and good morning. Eric, I wonder if you could provide any insight on the makeup of your basket. I understand it's a larger basket, but if you could provide any insight in full service as to how consumers are shopping and perhaps whether they're filling their baskets by buying up or whether there's any material change in the basket composition? And second to that, have you seen any differences emerging between the basket in full service versus Quebec in Ontario versus Quebec as we sort of rolled through the pandemic? Well, the makeup of the basket, again, it's a larger basket and there's a higher food at home consumption. So clearly, protein, meat, fish remain up pretty substantially versus pre pandemic levels. So that continues in both of our conventional and discount banners, perhaps more so on the conventional side. In terms of promotional mix, I've spoken about that already. It's below pre pandemic, but inching up every quarter. It's a full basket. People are shopping around less and concentrating their purchases in fewer stores, one store or a couple of stores. So that makes up for a fuller basket that's representative of all the departments with the protein sector benefiting a little more. Thank you. And then just quickly switching to pharmacy. Obviously, of beauty and cosmetic sales a loss for the market. But as we look again, look forward, what levers do you believe you're able to pull in the Quebec market to either try and drive increased share or otherwise in that beauty and cosmetics space on any sort of normalization of behavior through the summer here? How do we think about the evolution of beauty and cosmetics? It's certainly a business that has been under marked pressure over the last year and trying to tease out how that could evolve and what levers you could pull to try and drive any sort of real recovery or acceleration through the back half? I think we're very well positioned with Jean Coutu and Brunet. We cover all of the Quebec market extremely well. Our market share in prescription drugs is strong and as well in HABA. Coutu has a strong promotional strategy. I think as more and more people get vaccinated, I think traffic to our pharmacies will improve. And I think with the strong merchandising and promotional program, we will be able to gain more sales than we have over the past twelve months where it's been challenging for pharmacy for sure. So as I said in my opening remarks, depending on how the sanitary measures and restrictions evolve, we expect that over time they will gradually be eased and removed eventually that will benefit our pharmacy network on the beauty and cosmetic side. So another lever is ecom. We're growing the ecom business on the pharmacy side gradually. We expect that to continue to grow. But the biggest strength, the competitive advantage is our retail network and our reach and our strong merchandising promotional program at Jean Coutu. Thank you and congrats on the results. I'll leave it there. You. Your next question comes from Michael Van Aelst of TD Securities. Please go ahead. Your line is open. Yes, thank you. Can you help us with understanding the compensation that pharmacists are getting for the vaccine administration? I don't have the specific dollar amount by heart. We could get back to you, but there is a negotiated fee that the Association of Pharmacists negotiated with the government. I think it's $17 or $20 in that range that the pharmacists will earn for vaccine administration. On the distribution side, because we are supplying the vaccines from our Jean Coutu warehouse in Varennes, so you will also make a small distribution fee that was negotiated with the government, the Ministry of Health. So this is not a huge moneymaker. It's a community drive to accelerate vaccination, but there is some competition. Okay. And that $17 to $20 kind of negotiated fee, is that over and above the costs or is that to cover some of the costs as well? The cost of the vaccine, there's no cost for the vaccine. No, sorry, like your PPE and things like that, the materials? Well, is to cover that their time and their expenses related to the vaccination efforts. But not the cost of vaccine. But not the cost of the vaccine. Okay, great. And then as you see we've been lapping COVID now for, I guess, several weeks or a month or so from a year ago. And I know that the traffic is still below pre pandemic levels, but are you seeing consumers getting more comfortable with coming back into the store versus where they were three, four quarters ago at the start of the pandemic? And are they does that mean if that's the case, does that mean that they would be doing a little bit more of the cherry picking and willing to go to more than one store similar to what they were pre pandemic? Or are we not there yet? I don't think we're there yet. People I think we saw over the first part of the second quarter traffic trends versus the previous year, somewhat better than in the first quarter. And then more restrictions came down, lockdown measures. So it's very volatile and uncertain. So I would say that the level of comfort has not materially changed. And certainly, in the last couple of weeks, its level of comfort is more challenging as more measures are adopted and cases climb. So it's I wouldn't call it more comfortable in the shopping around. So I think we're still in a world where people are concentrating their purchases with their main store. I think the key is establishing trust. I think we have done a great job over the last fourteen months to secure the trust of our customers with rigorous controls, protocols, greeters in every store, extra sanitation. So I think that served us well. We're getting good customer feedback from that in our surveys. So I think we're in a good position to continue to serve our communities and keep them comfortable in our stores as much as we can. Okay. Thank you. And then finally, just a question on your operating expenses. For the first three quarters or so of the pandemic, it seemed like you were excluding COVID costs, you're kind of flat to down a little bit year over year. And then now we've seen a return to growth in operating expenses in this quarter. Are there certain main categories of spending that is coming back at a quicker pace now? Michael, I think we're back excluding the COVID expenses, you're back to a more normal ratio. We're at 10.7% this quarter versus 10.3% last year. But last year, as we said, there's a lot of extra sales due to the beginning of pandemic with no related COVID expenses. So that 10.3% compared obviously, was affected favorably. So if you remove those COVID expenses, the increase year over year is under 2%. So I think that's normal trend year over year, giving the environment we're in. Okay. So none of the like the advertising expenses or other like SG and A or I guess travel is not back yet, but none of the other expenses are coming back yet in any particular? No, there's nothing unusual. Pretty when you remove the specific I mean, obviously, the bulk of the increase is in wages and then you have some in maintenance, you have some in supplies for the masks, the gloves, etcetera. You remove that, the lines of operating expenses are pretty much in line except, of course, travel is not as high as it was, but it was never a big expense to begin with in our company. All right. Thank you very much. Your next question comes from Irene Nattel of RBC Capital Markets. Please go ahead. Your line is open. Thanks and good morning gentlemen. Just want to continue the discussion a little bit about e commerce. We saw a not surprising uptick in e commerce sequentially in Q2. Wondering what you were seeing just in terms of timing and how it might have related to lockdowns? And sort of what types of behavior you saw in Quebec during the early lockdowns that may or may not be may or may not be seeing now in Ontario, sorry. There's no change in behavior of customers in the quarter versus previous quarters. I think the big difference in the uptick in our e com volume is our added capacity. So there is effectively two hub stores extra this quarter versus the same quarter last year. We added one in Toronto and we had just started one in Quebec City A Year ago. So effectively, there were two more hub stores selling in Q2 versus Q2 last year. The COVID not COVID, but the Corner Shop partnership continues to grow nicely. So we're getting good growth there in both of our markets. So those are the large contributors to the increase in our ecom volume. Click and collect stores are being deployed. We're about we have about 45 done as of today. We are on track, we hope to get to 170 by the end of our fiscal year. So that again will add more capacity. So it's more a question of capacity. In terms of bookings and trying to get your order delivered in the next day or so, I think it's a lot better than it was a year ago. Our systems are better. Our capacity to serve is a lot better. So we're not at full capacity. There are some windows, delivery windows that are open midweek. At the peak of the pandemic, completely full as you remember. So we're not there, but we're seeing very strong or good solid sales from our hub stores that remains. But the growth is what I just explained. That's great. Thanks, Eric. And what has been the early consumer response to the Click and Collect? It's not overwhelming. It's ramping up. It's I think there is a demand for that. Certainly, in some more I should say, lesser density smaller markets, we expect that there will be some demand for that service. So we're managing through that store by store. Some of our affiliates in Quebec are participating. The volume is not high. But again, it's work in progress and ramping up nicely, contributing to the overall online sales number that we report. But the majority of our sales remain in our hubs and delivery service and corner shop. That's great. Thanks, Eric. And I know you don't give channel performance, but from your overall commentary, with consumers still consolidating their shopping, is it fair to say that conventional remains robust as a channel? For sure. Yes, conventional is strong in both of our markets. We're pleased with our discount performance also. But yes, conventional is still growing ahead of discount. That's great. And one final question, if I may. I just want to come back to the promotional intensity. You noticed that there was an uptick sequentially in, I guess, the penetration of conventional promotional items in a basket. But what about sort of, I guess, the how hot like the promotions are? Are you seeing other players in the market step it up a little bit or consistent? I said in my opening remarks, it's very competitive, always has been. There are weeks where we see some aggressive promotional items. It's happened before it. We saw some of that in Q2. We are competitive ourselves. So yes, some weeks are hot. But overall, I would think it's pretty consistent. That's great. Thank you. Your next question comes from Marc Petrie of CIBC. Please go ahead. Your line is open. Yeah, good morning. Just a follow-up on a couple of the topics you've already discussed. I wanted to ask about sales mix versus the pandemic impacted period last year. Obviously, you've adjusted your stores and the offering given the changes in restrictions and customer preferences. But I'm wondering what you're seeing in categories like prepared food versus last year as well as something like private label penetration. So thank you. So preferred food has been in decline ever since the start of the pandemic in our conventional stores. The good news is it's improving. It has improved over the last couple of quarters. We're not back to pre pandemic levels. A lot of our prepared food is sold through urban stores and urban stores are under pressure for the obvious reasons of no office workers, no students, university students. So we have several of those stores that are affected. In our more suburban stores, prepared foods are selling pretty well. The chicken pizza programs, those are still always very strong. But the overall prepared foods sales are still down versus pre pandemic, although improving. Private label continues to penetrate really well. I think it's really strong throughout the pandemic and continues to be strong. So our penetration of private label continues to grow in both dry grocery as well as in the perishables. So that's very good performance. So there's less pantry loading going on right now versus a year ago. You all remember the first few weeks of the pandemic last year, there was a lot of loading, stockpiling, grocery especially. So we're not seeing that as we cycle the pandemic, but we're pleased with our sales. Yes. Okay, great. And then on online, I understand you have more capacity, that's a key driver of the growth. But maybe versus Q3 of last year, when you put up a similar growth rate, I guess, it fair to say that more of the growth right now is sort of in the number of transactions, whereas last year, maybe it was more basket size or transaction size? Somewhat, yes. We have more customers because we have more up stores, more capacity. The basket size remains very healthy in online, might be down somewhat from the peak of the pandemic, but it's still a strong basket, a full basket. So it's mostly a number of transactions, number of customers. Okay. And so then in the with the acceleration in the online sales versus Q1 or Q4, do you have a sense of how many of these sales are sort of new to the metro network or if this is more people sort of substituting from the stores? So consistent to what we've said before, we're attracting mostly new incremental business. There is for sure some cannibalization from existing Metro customers. But what we see from the loyalty data that we have is we're getting a higher share of the wallet of existing customers who are shopping both in store and online. So I think that's number one. We're attracting some new customers to the Metro banner with our online offer and our service. So that's new business. And yes, there is some transfer from brick and mortar to online. But overall, it's an incremental contribution to sales. Okay. Appreciate that. And then just last one, I guess, probably for Francois. Could you just with regards to the investment in the distribution network, you guys have said that you expect to generate your targeted rate of return on that investment. Could you just give us a clearer sense of the timing of that? And is that return generated entirely in labor savings? Or what else are you including in that analysis and those assumptions? Well, it's a long term project. Obviously, the return is on several years. This is built for capacity for the foreseeable future. So it's not you don't achieve it day one, but you achieve it over a period of time. The bulk of the saving is, as you point out, it's mostly labor, reduction in labor, operating expense, but there's also some benefits in terms of in store servicing and optimizing of transportation costs and so forth, but the bulk is in lower operating expenses, labor. And down the road, we expect with those new DCs that are automated, semi automated that we will be able to reduce cost at store level. Receiving in the stores, planned labor around those reception, I think it's going to be It will be an improvement versus today. So we're not quantifying that, but it's going be part of the picture to get the return that we are hoping to get. Okay. I appreciate the color. Thanks a lot. Your next question comes from Vishal Shreedhar of National Bank. Please go ahead. Your line is open. Hi. Thanks for taking my questions. Just on real estate, wondering what your perspective is as you chat with landlords. Do you perceive better availability of real estate, more favorable terms as you renew? And what should we expect for real estate growth going forward? Is that kind of like a 0.5% growth number kind of a good target? So we are always looking to develop and open stores where it makes sense for us to grow our presence, grow our share, really market by market, banner by banner with full financial analysis to see that makes sense for us. So no change to our strategy. There are perhaps some opportunities, but not that many where we see a ton of real estate available for our supermarket format. In pharmacy, we cover the market pretty well. We're mostly focused on relocations, expansions on the pharmacy side. So I wouldn't call it a changed market for real estate because of the difficulties you read about commercial real estate in general. I think that grocery, pharmacy real estate is healthy and there are not that many new opportunities out there. So we are working hard to find good locations in markets where there's growth. So we opened Adonis in Quebec City in the quarter. It's off to a very good start, pleased with that. We just opened a food basics in Curtis outside of Oshawa. So and one affiliate of Mittel just north of Montreal opened another store for them. So there are a few stores planned every year in terms of square footage expansion, 0.5% to 1% is our regular number and that's what you should plan for. Okay. Thank you. And as a result of this pandemic, are you noticing a changed approach from the various governments with regards to how they view community pharmacy? I know in the past there were reforms implemented without much input from pharmacy. Do you perceive government viewing pharmacy in a different light now or is it too early to say? Well, I think the Quebec government adopted a law last year to allow more medical procedures to be performed by pharmacy. So I think the government has been on a track or a journey to have community pharmacies participate in the delivery of health services to unload the public system. So I think that's a positive feature or it's a positive event for our pharmacy business and our pharmacists, and that was started before the pandemic. I think influenza vaccination was one example. Now we're participating in the vaccination for COVID. So I think it's just reinforcing, I think, the government view that the pharmacies can play more of a role in the delivery of health services on the front lines. And I think they've proven that and will prove it during the vaccination for COVID. So I think the shift has started and it should just go forward a little more with the pandemic. Okay. And regarding your digital offer and your loyalty data, does Metro has Metro examined the opportunity to sell advertising or on your websites or provide your supplier partners with more advanced data analytics for a fee. Is that something that's on the radar that you're examining? Or is or you're pleased with your offer as it stands? So we've been providing data analytic services through our Dunhamby partnership for over ten years to our suppliers. So we've been at that, been doing that for quite a while. So we work with our vendors using the services of the data analysis that is provided by Dunhamby. So our merchandisers, the vendors both use this data to work on our promotional programs and be more efficient. So that's we've been at that and we have monetized that data in our relations with our suppliers. As far as advertising, not there yet. We're it's something we're going to be we are looking at and we'll see and we'll announce if and when we get there, we'll announce it. But it's something we're aware that very large retailers are doing in The U. S, especially. What's the opportunity for us to do it? It's something we're looking at. Thanks for the color. Your next question comes from Peter Sklar of BMO Capital Markets. Please go ahead. Your line is open. Good morning. Just a question first on your gross margin, which was up 50 basis points year over year. Do you think that improvement is largely mixed because you're kind of comping against the that week pantry loading last year where there would have been a lot of lower margin things like toilet paper and other supplies? Or do you think there's structural improvement that's ongoing in the gross margin? How would you think about that 50 basis points? Mix is a part of it. Conventional is strong, fresh departments, meat and produce are strong. So that's healthy for the gross margin. Prepared foods are down, which is a negative. But overall, the large basket size in all of our banners on the food side is contributing to a healthier margin. I think discipline in our merchandising is also a contributing factor. Hyde sales performance produces shrink in stores, which is also a contributing factor. So it's a mix very much related to a mix of contributing factors, very much related to our strong sales volume and good operations, good merchandising that's delivering this. So call it structural and think that may be a little pushing it. I think we're doing what we've always been doing with a higher sales number. Okay. Thank you. My next question is just on the COVID costs, you had kind of this quarter, the $21,000,000 of core costs plus the $8,000,000 of gift cards. So I think you the total COVID costs were $29,000,000 in the quarter. Like is that kind of what it's going to look like like through Q3, assuming the gift card cost is about the same? And then when we do get back to the new normal, that $21,000,000 core run rate that you have, does that how much do you think that comes down by and how much carries on? So to your first question, Peter, we've announced a gift card, so you can assume it's going to be a similar amount, although the third quarter is four peers instead of three, so we have to factor that in. But the gift card itself will be the same amount. And then going forward, you're right, it's tough to say because it's unclear how many restrictions or how where that's going to develop restrictions. There will be some easing, but there be some cause that will stick for sure. Don't think greeters are going away anytime soon. Disinfecting and cleaning, that's going to remain. So it's very hard to say how much of that expense will come down, but it may be come down a little bit, but it's going to be in the short term, it's going to be similar to what we posted today. Okay. And then just lastly, I just have a question on Dark Store you're developing on the island. Is the business case around that for same day delivery or next day delivery or it's going to be a combination of both depending on when you receive the order? It's going to be both, but I would say the majority is going to be next day, but there will be some capacity for same day. So it's built for both and it's built mostly to add capacity and improve efficiencies by picking in one location only for online as opposed to have customers pick in the same store for their orders. So yes, it's built for both and it's going to be more efficient and add capacity. And under the current model where you're fulfilling delivery from stores, are most of those deliveries next day as well or do the stores have more capability to deliver same day? We have some capability to do same day. We're optimizing deliveries and fine tuning our systems and cut off times to be able to give same day. But the majority, as I said, of the sales are for the next day, but there is some capacity to do same day from our stores today. Your next question comes from Patricia Baker of Scotiabank. I just want to return to the topic of the automated DCs, Eric, and maybe share with us a little bit about the plans that you have for that changeover. How long you think it will take to fully transition or ramp up the DC? And will you be running the old DC in parallel? And if so, for how long? So as I said in my opening statement, Phase 1 Fresh is our DC facility in Toronto. It's the first phase of two phases for fresh and it starts with produce. We're transferring stores as we speak from the old facility, which is next literally next door to the new facility and that will be done over the next month or so. We're in the ramp up change management phase right now, not easy, but going getting through it as expected. So that's going to take a few more months. We're not going to be at peak productivity tomorrow, but we'll get there over the next few months, confident about that. Once we have transferred all the stores from the old facility to the new, we will demolish the old facility and make room for the Phase two of our fresh, which will be fully automated. And that's when eventually, in a couple of years, we will transfer meat and dairy from the facility that's not too far away from it at Dundas. It's a multiyear plan and we're going to do it gradually in phases. And we have the team, I think, in our logistics and distribution to manage through that. It's some heavy lifting for sure. We're going to get we're going to manage through it as we always have. So it started in produce and then next January, we will do the frozen facility, which is fully automated. That's finished basically construction is finished, but the systems are being commissioned and it takes a while with V Tron. And again, that will be a fully automated DC. So again, there will be some ramping up there. We expect that to be manageable, and we're going to absorb those costs as of our results going forward. And if there are periods that are tougher, will tell you, but I think we have a good plan to manage through this. Okay. Thank you. And then just in your remarks you talked about or I think it was Francois talked about investment and one area of investment was self serve checkouts. I think you said you have $260,000,000 now, 95,000,000 more to come in the remainder of the year. Can you share with us sort of the distribution of those? Are those primarily in the conventional banners? Or are we also seeing them in the discount? Well, we're doing it in both. So again, it's a store by store analysis where we think it pays off and where it accelerates service for customers, reduces hours for us and generates a good return by increasing service with the self checkouts. On the electronic shelf labels, we have focused a lot on discount to start to be more efficient on that side, but we are rolling them out to some conventional stores also, but it's been mostly on the discount side for shelf labels and it's on both sides. Okay. Thank you. Then just one final question. I'm just curious about the gift card and for employees and your experience there in terms of redemption. Is it pretty immediate and almost full redemption that you're seeing with those cards? Yes. Employees appreciate the gesture. They appreciate the recognition. And for sure, they are redeemed. It's not 100%, it's very close, and it doesn't take much time. Okay. Thank you. That's what I expected. Thanks. There are no further questions at this time. I'll turn the call over to Mr. Kagosh for closing remarks. Thank you all for your interest in Metro, and we will speak again soon to discuss our third quarter results on August 11. Thank you. And this concludes today's conference call. Thank you for participating. You may now disconnect.