Welcome to The North West Company Inc. second quarter results conference call. I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead.
Hello, good morning, and thank you, and welcome to The North West Company second quarter conference call. I'm joined here today by John King, our Chief Financial Officer, and Amanda Sutton, our VP of Legal and Corporate Secretary. I'm going to start the meeting by asking Amanda to read our disclosure statement.
Thank you, Dan. Before we begin, I remind you that certain information presented today may constitute forward-looking statements. Such statements reflect North West's current expectations, estimates, projections, and assumptions. These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements. For additional information on these risks, please see North West's Annual Information Form and its MD&A under the heading Risk Factors. Back to you, Dan.
Thanks, Amanda. For today's call, I'll start by providing a brief overview of our second quarter results and then transition to talk about our company's outlook and journey ahead. Okay, starting with the consolidated sales, we had a 6.8% increase in the quarter. Canadian operations spearheaded performance, driven by same-store sales and a strong performance in the airline. These results offset softer performance in our international operations, particularly in general merchandise sales, where inflationary pressures and lower government income support continued to result in a shift in customer spending towards essentials. More importantly, on top of sales growth, we're starting to see more torque in gross profit dollars as a result of a 128 basis point increase in our gross profit rate compared to last year.
The increase in gross profit rate was due to changes in sales blend and a higher pass-through of cost inflation in retail prices compared to last year. As I have commented in the past, we continue to monitor and adjust our retail prices using a balanced approach. That is, always with our customers' reality and wallet in mind, while striving to maintain as low as possible negative impacts to margin and volumes. Additionally, we had a higher margin revenue mix on the airline as we continue to capture more third-party cargo and charter revenue on top of freighter servicing our stores. Another factor that affected our results in the quarter was the impact of wildfires in northern Canada. As I mentioned on the call last quarter, wildfires had a devastating impact on the community of Fox Lake.
With this also included, actually, the destruction of our store. Thankfully, our associates in the community were evacuated safely, and this, because the fire, we did incur a CAD 3.7 million expense in the quarter related to the write-off of our store assets. Excluding this write-off and the effects of share-based compensation, expenses increased 7.9% and was mainly driven by inflationary cost pressures, the impact of new stores, and foreign exchange on international operating expenses. Overall, the impact of these factors resulted in strong results in the quarter, with net earnings increasing CAD 5.7 million or 17.5% compared to last year. Okay, let me unpack this and provide additional context. So starting with Canada, sales in Canada, which, these increased in total by 7.4%, and we're up 7.2% on a same-store basis. Food sales increased 6.3%, and general merchandise and other sales increased 9.8%.
We attribute these results to three factors: inflation remains high, government income support payments increased, and our good in-stock position obviously held us in good stead. The increase in government income support during the quarter was largely due to inflation relief payments from Indigenous Services Canada and the federal government, including us, of which was the grocery rebate that was issued back in early July. Our in-stock position is in good shape, and this enabled us to capture additional sales, particularly in Motorized, which was driven by same-store sales gains and the acquisition of Nickel City Motors in Thompson, Manitoba, in the back in the first quarter. The other key factor worth noting is that North Star Air had another strong quarter with both top-line and bottom-line growth, and this is driven with increases in third-party cargo contracts and higher charter passenger volumes.
Switching to international operations, total sales increased 2.1%, and we're up 1.3% on a same-store basis, as the impact of lower government income support payments continued to be a headwind similar to last quarter. As mentioned on our previous call, the SNAP or Food Stamp Payments in the U.S. have decreased considerably when compared to last year as we lap over the COVID-19 top-ups. As a reminder, during the pandemic, there were a large temporary increase in SNAP benefits, ranging from about $95 and up to the maximum benefits allotted per family. This increased SNAP benefit expired in February, which, combined with the impact of higher inflation, continues to negatively affect customer purchasing power and results in a shift in spending away from discretionary, discretionary items and into food. As a result, same-store sales increased 2.4%, while general merchandise same-store sales decreased 9%.
Our international operations teams are laser-focused on customer-driven actions to mitigate these challenges, including assortment challenges and targeted promotional activity. Now let me transition and expand on our gross profit results. We are seeing inflation and costs and cost of goods increases, although at a more moderate pace when compared to the previous quarters. However, we are very close to monitoring certain parts of the supply chain, where cost escalations happen on a vendor or carrier level. Our teams continue to prioritize operational excellence to help mitigate the impact of inflation as we work with suppliers and transportation partners to help minimize cost escalation affecting our gross profit rate.
That said, we are starting to see more torque in our gross profit, driven by a 128 basis point increase in the gross profit rate as a result of the changes in sales blend that I mentioned previously, and a higher pass-through of inflationary cost increases, which is coming through in retail prices compared to last year. At this point, let me make a few remarks on inventory. Inflation continues to affect inventory levels. The impact of foreign exchange on the translation of international operations inventory is also a factor.
As I previously noted, we have a higher general merchandise inventory in Canada compared to last year, and it's mainly concentrated in motorsports, snow machines, ATVs, boats, and motors. This strong in-stock position helped drive sales during the quarter as demand shifted as a result of the increase in income support. Given the durability of these items and the relevance they have in the communities we serve, we expect to sell through these items. This strong in-stock position will also help meet expected increased consumer demand from Water Settlement Payments, which are anticipated to hit our markets later into this year, part of this year or early next year. In summary, we are adjusting our ordering where needed as we continue to calibrate our inventory levels based on current demand, with particular emphasis on our international banners, given the sales trends highlighted earlier. Okay, moving on to expenses.
Let me start by saying that for North West, cost control is our top priority, and we are making progress through our operational excellence focus to help offset inflationary cost pressures. That said, the increase in expenses in the quarter was largely driven by cost inflation on staff and utilities, and the new store expenses. The impact of foreign exchange rates on the translation of our international operations expenses was also a factor. Our focus on cost control is a key area as we continue to push as we look to drive more productivity and efficiency within our cost structure. This is a good time to talk about some of our strategic operational efficiencies initiatives and our journey ahead.
The executive team and all our leaders across this organization are laser-focused on reinforcing policies and procedures, both at store and corporate levels, to control expenses and enhance our productivity. As noted last quarter in my Q1 AGM remarks, we are excited about our journey ahead and our strategic direction. Our goal, drive meaningful productivity and efficiency gains for cost savings in order to reinvest for faster and more sustainable growth. We're optimizing margins and delivering, delivering meaningful ESG outcomes. We continue to identify opportunities to unlock value and drive bottom-line performance gains through our focus on operational excellence. For example, this includes initiatives concentrating on enhancing store labor planning across the network, optimizing our transport modes across land, air, and sea to mitigate freight cost increases, and reducing shrink and finding operating expense savings.
Additionally, we're making changes to our assortment, which will help drive volume in terms of higher demand and higher-margin items our customers want. To support these efforts, we are developing our analytical capabilities across the business to drive data-driven decision-making. In terms of the outlook for the remainder of the year, overall, we expect to have a more normalized gross profit rate as inflation starts to moderate and we lap the negative impact of the ramp-up in inflation on our gross profit rate last year. That said, there is uncertainty related to the economy and the impact of inflation, which may negatively impact sales blend and gross profit rates. In our international operations, we're up against the impact of a higher Permanent Fund Dividend in Alaska last year and the ongoing shift in consumer spending from discretionary items towards food.
In our Canadian operations, we are closely monitoring the impact of wildfires, which have resulted in the evacuation of some communities and supply chain disruption in other communities. On the upside, our strong in-stock position will help us meet the expected increase in our consumer demand resulting from the water settlement payments anticipated and issued, again, I say later this year or early 2024. So closing things off, I'd say here at North West, we're committed to making a positive impact on the communities that we serve. In spite of inflation, pandemic, wildfires, typhoons, and other externalities that may temporarily affect our business, our associates continue to rise to the challenge and deliver on our commitment to the communities we serve.
This unwavering commitment is seen throughout our company and is something that continues to make me proud of being part of this organization. With that, let me open it up for any questions that you might have.
Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please mute your answer before making your selection. If you have a question, please press star one on your device's keypad. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Michael Van Aelst, TD Securities. Please go ahead.
Hey, guys, it's Evan in for Mike.
Hi, Evan.
So just the first question, I guess on the sales mix. So you had pointed out to sales blend improvements in both Canada and international. Can you talk a bit about where the improvements are coming from in both divisions? ... particularly in international, where general merchandise sales decreased and food sales increased, and I would have thought that would have led to an unfavorable sales blend.
Okay. Evan, just to clarify your question, because I think you indicated that we had, we didn't actually—and you mentioned at the end. So we, our sales blend was actually positive in Canada with both food and general merchandise. But, in the international division, we actually had a reduction in our general merchandise sales, and it was still along the same trends of previous quarters, stronger in the, in the food categories.
Okay.
So it's-
Uh, thanks.
Yeah.
Have you seen, like, within food, an improved sales blend, the same thing within general merchandise?
Okay, I would say, you know what? In Canada, we did see some more favorable food blend improvements just for the reasons that I mentioned just recently or just earlier. But in the international division, I would say it was pretty consistent with previous quarters.
Okay, great. Thanks. And then on the grocery rebate, what would be your estimate of what it contributed to same-store sales in Canada in the quarter?
You know what? We don't typically venture into that because it's pretty hard to track. But we do know that it was one of the contributing factors to provide the positive impact for some of our sales momentum shift.
Do you think that people had time to spend it all in the quarter, or will there be something back from that in the next quarter?
No, I don't think they spent it all, Evan. I think they've still got some that we're seeing kind of trickle on into this quarter as well.
Okay. So next, I just want to dig in a little bit on the gross margin rate. So in the fourth quarter of 2021, you had a gross margin rate of 31.9%, and at that time, I think you believed that, you know, it was roughly the right level long term, given your balanced approach. And then, you know, throughout 2022, each quarter, you're basically, you know, around that level, plus or minus ten basis points or so. And then now you just reported 33.1%. So do you now believe that 31.9% is too low, based on your current approach? And if so, what has changed?
Okay, so just to kind of circle back to your comment, I think in. So let's talk to, speak to Q1. We anticipate we felt that it was, we were too low. So our efforts were to obviously try to improve mix and find different ways in which where we could bring it up. Where we're, where we're at right now, we're, we're hoping that we can maintain. So I would say this is probably more in the realm of normal than an expectation than would have been last quarter.
Okay. So, yeah, just to reconcile that with some of your comments in the outlook statement, you point to, you know, inflationary cost pressures in the near term. So based on that comment, you're still expecting gross margins to be at roughly the current level, you know, assuming no further ramp up in inflation? Would that be fair to say?
I think that's a pretty good summary. Yeah, I think it's a good summary. Like, this is our expectation. This, our efforts are put towards trying to maintain this. However, you know, it's a volatile, kind of, industry and economic environment currently. So we anticipate and are using our best efforts in order to maintain it. But there, there is some, you know, there has been and is known to be different, inflationary pressures that come up.
The one that we're probably keeping an eye on fairly closely is, not as much as in the freight on the air, on the ground and on the sea, but more so and in the air. So we see there's been some cost, there's been some cost inflation and some cost pressures in that area, but we're doing our best to try and mitigate those the best we can. So to answer your question, our efforts are in line to try and stabilize this rate that we're at right now.
Okay, great. And then, I guess one last question. So in terms of the wildfires in the north, so as it stands now, assuming there's no further fires or evacuations, how much of an impact do you expect to see in Q3 profits? And other than the Fox Lake store-
Okay.
Is it all isolated in Q3, or is there anything beyond that?
Isolated, you mean in Q2? Or do you mean iso-
Uh.
Like you said, or is it... Yeah, is it isolated in Q2, or do I foresee it having further impact into Q3 and Q4? Is that your question?
Yeah. So, other than the Fox Lake store-
Yeah, gotcha.
You know, is the impact from the wildfires going to be isolated in Q3, or is it going to extend beyond, assuming that there's no further wildfires?
Okay. Yeah, I would say that that's an accurate comment, that it would be isolated-
Okay.
-in Q3.
Okay. And any rough estimate as to what the impact on profits would be in Q3?
No, not right now. No.
Okay. All right. Thanks so much, guys.
Okay. Thanks, Evan.
Thank you. Once again, please press star one on your device keypad if you have a question. Next question is from Kunaal Gidwani, from CIBC. Please go ahead.
Hi. Thanks for taking my question. I just wanted to follow up on your commentary where you discussed higher pass-throughs of inflationary costs in the quarter, and I wanted to know if you would be able to discuss that in a little bit more detail. Specifically, is this a reflection of your competitors taking price or your own work around price optimization, or a bit of both? Thank you.
I think that's very astute. You're right. It's a bit of both. The pressures, as you know, have been high, and our competitors are definitely taking more of the cost increases, as well as some of our internal efforts to try and mitigate the impact on our customers. That's correct.
Okay, that's great. Thank you. I'll pass it on.
Thanks.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to you, Mr. McConnell.
Okay. Well, thank you very much, operator, and I think with that, we'll conclude the call.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.