Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the EMPIRE second quarter 2021 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Thursday, December 10, 2020. I would now like to turn the conference over to Katie Brine, Director, Investor Relations. Please go ahead.

Thank you, Joanna. Good afternoon, and thank you all for joining us for our second quarter conference call. Today we will provide summary comments on our results, what we are seeing in the industry today, and then open the call for questions. This call is being recorded, and the audio recording will be available on the company's website at empireco.ca. There is a short summary document outlining the points of our quarter available on our website. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer, Michael Vells, Chief Financial Officer, and Pierre St. Laurent, Chief Operating Officer, Full Service. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors. I will now turn the call over to Michael Medline.

Thanks Katie and good afternoon everyone. I want to start today by recognizing the incredible efforts of our frontline teammates in our grocery stores, pharmacies and distribution centers. I am humbled every single day by their tireless efforts to maintain the heightened safety and sanitation protocols to keep our stores safe. Coming to work every day to serve Canadians. As this horrible pandemic continues and case counts continue to rise, we are all so thankful for their efforts. With that in mind, I'll focus on a few key topics today and update on COVID's impact in our stores, our performance this quarter, and some early updates on Project Horizon. First, COVID. Since we last spoke, the situation around COVID has continued to evolve with increased restrictions being imposed across the country. We're excited by news of potential vaccines, but recognize there's a long road ahead. All the trends we saw and foresaw in past quarters remain. I'll speak about this shortly, but first I want to address the actions we continue to take in our stores to protect our teammates and customers. Even through the summer when case counts declined, we did not let our guard down. Safety and sanitation in our stores continue to be our top priority. With the Canadian winter upon us, it's important that customers can visit our stores safely. With reduced capacity, we have prepared for potential lineups by repurposing our vestibules for indoor queues. In a small number of locations where we have seen significant queues, we're adding outdoor structural solutions and heaters to keep customers out of the elements. We are also rolling out innovative virtual queuing technology in certain locations, which allows customers to wait their turn to shop in the comfort of their vehicles. As we committed to earlier this year, When a region returns to a government mandated lockdown, closing non-essential businesses, we will compensate our frontline and distribution centre teammates for additional pressure they face. When the Manitoba and Ontario governments recently implemented new lockdown restrictions, it triggered our pre-set criteria in lockdown regions. We ensured our stores aligned with updated guidance, particularly capacity restraints and we implemented a temporary lockdown bonus for our frontline and distribution center teammates. I am so proud of our team who were prepared and responded quickly, seamlessly implementing the changes in our stores. Now an update on the trends we're seeing with COVID. Full service continues to outperform discount in our company and throughout the industry. We provide our customers with excellent value and our full service stores have the full breadth and depth of product offering. We believe many customers who switch channels during COVID have come to recognize that value and it will be a reason to continue shopping full service post-pandemic. And as we continue to invest in our value proposition, our industry is seeing material cost pressure on a select number of items. Lettuce and poultry are prime examples. Farmers and suppliers are incurring increased costs associated with poor weather, increased demand and supply chain challenges due to COVID. These are real, significant commodity increases which are being felt at the store. But outside of that, we are pushing back on price increases and continuing to provide excellent value to customers. Online grocery penetration remains elevated as customers become more comfortable with grocery delivery. Online grocery sales continue to grow in Canada, although, as we predicted in April, at a slower pace than when the pandemic began. Empire's e-commerce businesses grew 241% this quarter. As we see regions enter government-mandated lockdowns, combined with winter arriving, we are seeing e-commerce sales ramping up in the first part of Q3. We told you in July that we were accelerating the timing to build another two CFCs in Western Canada. and I am pleased to announce our third Voila! Customer Fulfillment Center in Calgary, Alberta, adjacent to our current Rocky View Distribution Center. This will be our first CFC in Western Canada and will service most of Alberta, including Edmonton. We expect this site to start delivering to customers in the first half of 2023, but we will serve the region earlier than that with OCADO's proven store pick solution. Crombie REIT will partner with us in the development of the CFC, similar to our Montreal CFC. And Mike will provide more details shortly. Now more about Empire's overall performance this quarter. Results continue to be strong. As in our last two quarters, we see customers shopping in a fundamentally different way due to COVID. We continue to see significantly elevated grocery sales and gains in Empire's national market share. Much of this is attributable to the safe shopping experience we have consistently delivered through COVID that our customers recognize and value. However, we have also made substantial improvements in our store operations, merchandising and marketing designed to thrill our customers through Project Sunrise and the beginnings of Project Horizon. We have a very strong team in place which is running our business better than ever before. We are confident, highly confident that we will sustain our success as the pandemic subsides. When we spoke in September, we said that same-store sales, excluding fuel at that time, were sticking with an average range of 8% to 10%. In the last month of Q2, we saw same-store sales accelerate, and we ended the quarter at 8.7%. We saw trips slowly increase through the quarter, and while basket sizes remained high, they were slightly less than last quarter. Pharmacy remained stable, and while fuel continues to be impacted by consumption, we see gradual improvement. We are now halfway through our third quarter. During the first five weeks of Q3, we have seen same-store sales excluding fuel continue to accelerate. For the quarter to date, ending last week, our same-store sales have averaged 11%. Our gross margin dollars were positively impacted by our increased sales. Our gross margin rate improved 30 basis points over the prior year and was consistent with our strong first quarter. The improvement in margin rate over last year continues to be largely due to our sales mix shifting toward our full service banners in addition to some early traction on horizon initiatives. EBITDA margin this quarter was flat to prior year at 7.4% and our EPS increased to 60 cents. A couple of non-obvious differences from last year affects the comparison. Last year had a few benefits that did not repeat this quarter. Most notably, Crombie REITs unusually large property disposal, approximately $0.06 per share after tax. Removing this item, EPS increased 17.6% over prior year and food retail net earnings actually increased 27.3% over prior year. Finally, I want to share some early progress on Project Horizon, our ambitious three-year strategy that we outlined during our last call. Despite the pandemic, our team recognizes we have a business to run and a strategy to execute. We are confident in the early progress we are making on our Horizon initiatives. This has taken some heavy lifting, but we are very happy with the performance. The team is meeting our very high expectations. I want to give an update on three of our important initiatives, winning Canadian grocery e-commerce, expanding Farm Boy and investing in our store network. Mike will give an update on our cost and margin initiatives. Today I will share some early operating metrics from Voila. We don't intend to share these every quarter, but want to provide a baseline today to give context on how strong the performance of Voila has been. When we partnered with Ocado, we knew we were getting the best grocery e-commerce technology. Accordingly, we set high targets for ourselves. I have been eager to share results since we launched, but we wanted to run the business for several months to confirm early trends. While initial sales and penetration have, in part, been bolstered by COVID, where we have truly been impressed is the customer satisfaction and our operational metrics. To date, our weekly on-time delivery score is 98.6%, beating our aggressive target of 95%. And our fulfillment, the percent of products ordered that are delivered is 99.6%, exceeding even our 98% target. These are best-in-world metrics. We are giving Canadians an e-commerce solution they can trust, will show up when expected, and will deliver the products they ordered. This type of service was not available in the greater Toronto area before Voila!, and as we predicted, customers are thrilled. Our net promoter score, I'm going to give it to you, is an extraordinary 87%. We continue to beat our industry best in class target score of 70%, 87%. We are seeing extremely high customer satisfaction and loyalty. This, along with positive word-of-mouth referrals and high, very high repeat rates, is translating to strong order volume growth. Early in Q3, we are seeing continued, compounded weekly growth as new customers discover Voila! and those who have tried us become repeat users. For those familiar with Ontario, Voila! now covers the Greater Toronto and Hamilton area and has recently extended to include Barrie and Guelph. There are over 100 Voila! delivery vehicles on the road, serving approximately 85% of the geography the CFC will ultimately deliver to. Customers can choose from a selection of approximately 17,000 products, and we continue to add products daily. Now, turning to Farm Boy. Since Q2, we have opened four stores and announced a fifth. Three locations opened in the GTA, including one at the old art shop building, at Yonge and Eglinton in Toronto, and we relocated the flagship store at Trainyards in Ottawa. This brings Farm Boy's total announced store count to 42 stores, with many more to come. The New Market, Art Shop, and Trainyard stores have extended footprints with larger center of store space to accommodate Farm Boy's exciting and innovative private label products. All new stores exceeded management's early forecast despite being opened during the pandemic. After the holidays, the Farm Boy team will open two more stores in January at Front and Bathurst in Toronto and in Waterloo. Front and Bathurst will have expanded grocery and hot food offerings in 38,000 square feet. Another conversion and new build are slotted to open early spring for a total of eight store openings in one fiscal year, a historic achievement for Farm Boy management. Also, over the course of Horizon, we plan to renovate approximately 30% of our Empire store network. This quarter, we renovated 18 locations across our network. We continue to develop our network of Fresco stores to achieve critical mass in Western Canada. There are now 22 Fresco stores open and operating in the West, and another eight in different stages of development. We track every renovation so we can adjust and learn constantly, and so far, we are very pleased Our renovation program is meeting its financial and strategic objectives. Last but not least, I want to take a moment to recognize two members of our team. Sandra Sanderson, Senior Vice President of Marketing, has been named CMA's Marketer of the Year in Canada. Congratulations, Sandra. And Pierre Saint Laurent, who's on the line with you today, our EVP and COO of full service, has been named one of Canada's 50 Best Executives in 2020 by the Globe and Mail's report on business. Very deserved. We are all very proud of Sandra's and Pierre's accomplishments. You know, the team at Empire continues to make important strides, moving toward our full sales and earnings potential. There is still significant room to grow, but our team is stronger than ever and dedicated to thrilling our customers and achieving our Project Horizon goals. Through these challenging times, we wish everyone a safe and happy holiday season. And with that, over to Mike.

Thank you, Michael. Good afternoon, everyone. As we progress through our third quarter of fiscal 2021, as Michael said, we're seeing different sales trends than when we spoke to you last September. With the increased restrictions across the country, same-store sales, excluding fuel, have increased. And so far in our quarter, have averaged 11%, with a range of 8% to 13% over those five weeks ended December 5th. Basket sizes are increasing while customer visits are decreasing as people reduce the number of shops per week. With our recently instituted lockdown bonus now in effect for Manitoba and certain regions in Ontario, and assuming they continue for the entire quarter, we estimate that the combined cost could be up to $5 million per quarter. Including this lockdown bonus estimate, under current circumstances, We expect we will continue to incur approximately $15 to $20 million in SG&A expenses per quarter related to the increased cost of maintaining sanitization and safety measures and other COVID expenditures. This quarter, there were some significant items in SG&A which resulted in our SG&A as a percentage of sales being the same as last year. Not all of these items, however, will occur in the future to the same degree. First, accounting accruals for our store, distribution center, and backstage teammate compensation will higher this quarter. Second, Wallop banner now has its full back office SG&A and supply chain costs reflected in SG&A. Third, COVID costs, as we mentioned, are an increase from last year. And finally, the right of use asset depreciation under IFRS 16 is higher than last year. This right of use asset depreciation combined with finance costs would previously have been reflected as occupancy costs in RSG 9. Overall, IFRS 16 continues to have a minimal impact on earnings per share. For the first half of the year, the effect of the IFRS 16 standard change was a dilutive earnings effect of about one cent. Earnings per share this quarter included five cents per share of Wallah dilution compared to one cent last year. This is the first full quarter delivered to customers, and we're very pleased with the consistent compounded week-over-the-week growth we're seeing since launch. We continue to expect dilution of approximately 20 cents per share for fiscal 2021, and of course, are hopeful of improving somewhat on that number in the second half, depending on the rate of sales growth. The effective tax rate for the quarter was 26.5% in line with the statutory rate. Executing the effect of any unusual transactions or different tax rates on property sales. We estimate that the effective income tax rate for fiscal 2021 will be between 26 and 28%. Equity earnings decreased year over year principally as a result of decreased equity earnings from Crombie REIT. As Michael mentioned, this was largely due to a prior year gain in Crombie on the disposal of a parcel of assets, which positively impacted our EPS comparison last year by $0.06 after tax. Overall, I'd note that Crumby's results have been outstanding, comparative to many others through the pandemic. Cash flow generation continues to be strong. This has enabled debt repayments of over $525 million during and after our quarter end that has fully retired two debt facilities. Additionally, we began repurchasing shares in October, and as of this week, we have repurchased approximately 810,000 shares for consideration of $29.4 million. We will continue to repurchase shares through the remainder of the year, taking into account market conditions. Project Horizon is now into its second quarter. We've had some delays in a few initiatives as we invested in additional costs to keep our teammates and customers safe. As COVID starts to dissipate, we'll see these costs reduce. Margin rates have expanded, part of this due to sales mix, but also due to early wins on high-rise initiatives. This quarter, we've had some early wins from our promotional optimization programs and our investments in advanced analytics to help drive a compelling customer value proposition. We continue to feel very positive and encouraged by the value that our small team of data engineers is providing to our merchandising group. We also continue to see efficiencies and cost reductions from our strategic sourcing program. Lastly, on Voila, we announced our third CFC in Calgary, Alberta today. We have partnered with Crombie and similar to the Montreal CFC, Crombie will build the site to our specifications and we will lease it from them. The CFC will be slightly smaller than both the GTA and Montreal CFCs as it serves a smaller population in Alberta. Crombie will purchase the land and the cost to build the CFC will be split between Crombie and Empire. We have not as yet fully finalized the total cost of the facility or the Crombie-Empire split and should be able to provide more specific updates on this in our third quarter. We're now halfway through fiscal 2021. The team's working hard keeping stores safe and progressing project horizon. There's much to see in the back half And we look forward to continued progression of our results. With that, please have a safe and happy holiday season. And Katie, I'll hand the call back to you for questions.

Great. Thank you, Mike. Joanna, you may open the line for questions at this time.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Karen Short at Barclays. Please go ahead.

Hi, good afternoon. This is actually Renato Basanta on for Karen. Thanks for taking our questions. So my first question is on e-commerce, and thanks for all that detail you've already given with respect to Wallah. But just curious if you could provide some color around who the customer is, who you're gaining online, maybe how that customer stacks up against your traditional customer with respect to demographics or shopping patterns or any other notable differences. Any color there would be helpful.

Mike, why don't you start, and I doubt you'll miss anything, but if you do, I'll chime in.

Thanks, Rinaldo. Good question. So the customers that we're targeting for Voila! are full shop customers, so our intention is to capture as much of a weekly shop as possible. So it's busy families and families filling up their full shop for the week. And that is reflected in basket sizes. The basket size for us is very significant and we're not targeting the smaller high velocity same day shop online order that some of us might be. I'd say the demographics are split right across the board. We're not a premium service. Our prices are very consistent to grocery stores. Our promotions, while different online, are also targeting value. And so we're not targeting any specific demographic. We are delivering both downtown to dense high-rise condos, to suburban shoppers and families. And the consistent feedback has been that people are very comfortable with the assortment, they like the value, and they really like the fact that they can do a high, high percentage of their grocery shop from home.

I think that was very good, obviously. But the only thing I'd add is statistics today show almost no cannibalization of our own business and our own stores. which is what we expected and said, but we're seeing that as well. So it's either right on or better on every number than what we expected and very, very pleased.

Okay, that's helpful. And then just wondering if you can speak to what actual sales penetration has been for e-commerce in Ontario or I guess for whatever the actual region is that your Wallah CFC covers. And then any color you can provide on utilization of that facility, sort of where you are now and how that continues to ramp, that would be helpful.

Yeah, I mean, I'll take the first one and then Mike will take the second one. But on the first one, I mean, I don't have it in front of me. I don't have all the numbers for the entire province and the whole industry. I think it's quite clear that we're probably growing at the highest pace because we're because we put voila in this period, but I'd have to get back to you. So Katie, she'll get back to you on what we have. Some of it is public, and so we'll be able to share that. Mike?

From a capacity perspective, we're not disclosing usage of capacity at this point. It's early days, though. And as we said before, we think it's going to take at least two years to fill or at least to add capacity to the facility to the point that we start becoming profitable. And so we're going to spend the next two years filling capacity. And at this point, we're not tracking the percentage of utilization. But it's very, very early days. So I think it'd be safe to say that we've barely made a dent at this point in the full capacity of the CFC. Thank you.

Okay, thanks. And then last one, just curious if you can speak to the performance gap between conventional and discount and how that's sort of trended versus 1Q. And then specifically, any color around the margin in the discount business would also be helpful. Thank you.

Okay, so Mike will either answer or not answer your second question. I'll answer the first one. From an overall industry perspective, full service banners saw significant gains in COVID. And as I said, the ability to do that one-stop shop, the fact that we were able to make customers very safe and comfortable. Over the summer, we saw discounts gradually start to come back a bit. And then we saw full-service takeoffs again. I think that there's a, you know, it'll be, we'll have to see later on how much of this will stick, but some will stick. This has been a real boon for full service over discount. We also have discount banners, and we're proud of how they're doing. But the full service in our company and in almost every region, and certainly national, is a big difference between full service and discount. So that's what we're seeing, and we've seen that we've consistently been growing market share.

Sure, and then the question on the margins, as you know, the gross margin on discount is structurally lower than full service. But I think maybe, and correct me if I'm wrong, I think what you're asking for is how comfortable are we with the margins compared to last year in each of those businesses? The short answer is we're happy with margins in both businesses. We're seeing, as we said, in our press release, very stable margins. Our margins actually in the West in our discount business are improving, as we said they would, from the early starts as many of those stores are now mature. We're seeing improvements in our gross margins as we settle into a cadence and also become more effective and efficient with our labor utilization. So very comfortable with the margins of both businesses at this point.

That's great. Thanks for the call, and best of luck. Okay. No problem.

The next question comes from Mark Patri at CIBC World Markets. Please go ahead.

Hey, good afternoon. You spoke about this at a high level, but I'm interested to hear your commentary around how consumer behavior has evolved with the latest round of lockdowns, but specifically inside the store. So perhaps you could contrast it with sort of earlier in the pandemic, but kind of curious where you've seen growth, underperformance, And I guess two areas I'm specifically interested in would be prepared food and private label.

Great question. Pierre is going to take it. Yes, obviously we're still seeing very different behavior than pre-COVID. We have very strong sales in grocery because people doing their full shop in our stores. So that's a much higher growth than we were used to see in our store. So the ratio between non-Fresh and Fresh is a bit different than it was last year. In Fresh, because we have been extremely focused on safety during COVID, we closed our service counters to keep our teammates safe. We reopened it this summer. And since we reopened it, obviously we're seeing positive trends in the deli, bakery and HMR remain extremely strong in meat and seafood, but still at the peak of the pandemic, obviously HMR was very soft, but we're gaining customers back in these departments gradually every week, but we're still lower than we were last year or pre-COVID. So grocery is very strong. in fresh meat, seafood very strong, and we're gradually recovering in HMR, bakery, and deli. So that's the situation now.

And Pierre, could you just talk about the private label business, or maybe it's for Michael or Mike, but the private label business, obviously there's a lot of moving parts there. You guys are in the midst of a pretty significant relaunch on that program, and it's a core part of what you're trying to do in Horizon. but also just consumer preferences have shifted through the pandemic. Just wondering how you sort of slide through all that and how the private label rollout or renewal is going for you guys.

Good question. We knew private label was a huge opportunity for us coast to coast. We gained more in private label than the industry pre-COVID. And as you can imagine, during COVID, we gained even more because people are looking at private table more than ever. So we were in good shape before COVID, and now we're doing extremely well. Like you saw, we did the rebrand last year. We did a really efficient rebrand. A marketing campaign this fall in September, we've got very good results with. So, and we have a very strong plan. We identified that opportunity a couple of years ago. In Horizon, it's a key initiative for us, in Horizon, our ambitious Horizon initiative. So now, the thing we're doing is we have a very disciplined approach, category by category, like we did with Category Recept, it was a very successful program for us, and we're doing exactly the same thing with Private Table. So we want to make sure that we have a very strong strategy, category by category, with our new brand and a strong support from marketing. So we have an ambitious target in Private Table, and so far we're pleased with progress, and we – We will continue to work on this. So, yes, you saw the same thing than our customers saw, and we're pleased with the results so far, but we have a very disciplined approach in private label. So we need to make sure that it matters in every category, and it's exactly what the team is doing.

And are you able to quantify where you're at today in terms of penetration and how that might have changed from a year ago and then where you're headed?

It's varied by provinces. I don't have a number in front of me, but we're gaining percentage and share of private penetration rate. We were lower than the industry, but we're catching up. But I'm not a big fan of just talking about penetration rate. The most important for us is make sure that private label is playing a specific role in every single category. In some categories, it gives nothing adding private label. In some other category, it's more relevant than others. So penetration is one thing, but purpose of every single product in every single category, it's the indicator we're looking at.

Okay. I'll pass the line, but thank you for all your comments. And if I don't get back on, all the best over the holidays.

The next question comes from Peter Sklar at BMO Capital Markets. Please go ahead.

Good afternoon. Sorry, back to Voila, just one question there. Mike, you had said that you anticipate it'll take two years to achieve capacity, which is, I think, consistent with what you've been saying before. And how do we think about capacity? Is capacity, like, do you think about it in terms of orders per week? And I think you've mentioned in the past, I think you mentioned that capacity is, 60,000 orders per week. Is that the way to think about it?

So, yeah, so we're not disclosing our capacity metrics. And, you know, our disclosure has been that it would take us, you know, that we should expect earnings dilution for two years, at least as we ramp up the capacity in the facilities. after two years, there's still more capacity left. So we wouldn't be at full capacity after two years. So we anticipate a rapid build, but that's a very large facility, and it's going to service the entirety of the GTA. So it'll certainly take more than two years to get to capacity, but we'll have overcome significant amounts of the fixed cost curve by the end of the two years.

Okay. And Two questions. Is all the capacity, sorry, is all the capital in place now, or are you going to be adding capital incrementally? And then also, do you expect that the dilution will be less in year two than it is in year one?

So we're not going to speculate on that. We'd like to see a little more about our rates of growth and margins. So, you know, I think I think we're going to hold that for a subsequent disclosure. But, you know, we've been – I think we've been consistent in saying that, you know, that $0.20 is a number we're comfortable with for this year. We'd like to see if we can improve on it, but it's going to be pretty close to that. And the second year, you know, we'd hope would be somewhat better. But, again, we're still working up a pretty significant fixed cost curve and – And, you know, we'd hope to do better, but at this point we're not counting on it.

Okay. Mike, capital in the CSE1, extra capital that Peter was asking about. I think, Peter, you were asking that, right?

Yes.

Yeah, thanks, Mike.

Yeah. So we're investing in – sorry, I just answered the one question. We're investing in incremental spokes, Peter, to service – you know, the entire of the GDA more efficiently. And those do add some measure of capital in our numbers for this year and next, but it is relatively immaterial compared to the size of the cost of the CFC. As the capacity ramps up, we do pay incremental capacity fees to OCADO, but those are expense, so they're not capital. And we will lease more vehicles for delivery. So the only real increment in capital for the CFC would be the spokes that we're building. But as I said, they're relatively immaterial compared to the big distributions warehouse.

Okay. And at Ocado, I'm sure you know this, that they've had trouble with their app and their app has been down. I'm not too sure if it's, due to they don't have the capacity or if they have technology issues, but I'm just wondering, has that, the issues that they have with their apps, with their app, I'm sure that you're licensing a lot of the technology behind the app. Has that affected your app at all?

Well, I think what we're seeing in the UK, and I don't want to speak for them, obviously, they run their business, but For sure, they have some very significant order volumes. And as a more mature business, they're working all the time to improve bottlenecks and try and handle the increased order capacity. So I think a lot of the press we're seeing is just the inability to take on that much volume. Certainly from our perspective, it's not an issue about scalability with the app that we're using. It's working very well for us. We did have the advantage of observing what was happening in the UK and other places as the first wave came in. And so we were able, with their help actually, we were able to install some queuing technology on our website in case we needed it. As it turned out, we didn't. But those are some of the changes they had to make to handle the press of new volumes. to their website. Actually, we benefited from that because we were able to install and invest in that after they did. We're not seeing any issues with the software. It's very scalable, running fine, and I'm very happy with it, actually.

Lastly, I just wanted to ask you about the strong November that you're seeing with the 11% comp. I'm just wondering if Michael, I'd like to hear you reflect a little bit on that, on what you think is happening. Are you having a particularly strong promotional calendar, or is it just consumers are shopping early for Christmas, so they're stretching it out? I'd be really interested to hear your thinking on this.

Well, thank you. Thanks for giving me the opportunity to actually answer that question, because I think sometimes COVID overshadows everything. and is overshadowing, which maybe is great. We're going under the radar right now, the unbelievably much better merge operations and marketing that we have going on across Empire Company in all of our banners, all of our banners. Having said that, I think that some of the increases are as we saw fear grow of this terrible virus We can see it in our sales, and they don't only manifest themselves in completely locked down regions, that Canadians watch the news and they feel for each other, and that you can watch the National every night or whatever you watch, CTV, and you can see how people are very, very concerned right now for their safety and for their family's safety. It's that combination, I think, of better execution by us and by, unfortunately, fear of COVID that is spurring on what we're seeing now. Having said that, I do not think that we're, I do not see this as a overly promotional atmosphere or that we didn't go chasing any sales. That, you know, it's always competitive, but we're sticking to our game plan here on that. So it's not I wouldn't say it's being driven by a higher promotional intensity.

Okay. Thanks for your comments. That's all I have.

Your next question comes from Irene Natel at RBC Capital Markets. Please go ahead.

Thanks, and good afternoon, everyone. I just want to beat the e-commerce cost drum just a bit more. Because one of the things that I'm thinking about is, okay, you know, we talked a great deal about year one and year two, but as we get into year three and the Montreal CFC opens, and then we add on Calgary, and in the interim we've got the curbside delivery, just wondering how we should be thinking about the cost cadence. And is the 20 cents sort of the fully loaded number each year for the next few years, or can it be higher? Can it be... How should we be thinking about that?

Thanks, Irene. Nice, easy question. Thanks, Mike. So you're correct that as Montreal goes live, for sure, it's the same dynamic about needing to add volume to get up the cost curve. Having said that, we are transferring across a fairly significant number of customers that already exist through IGA.bac, which is helpful. And then when we start up in Calgary, same thing, high fixed costs, and you're starting with low volume. So each of those following CFCs are going to be diluted as they start up. But having said that, at the same time, to your point, Toronto, for example, will be coming off the ramp up the fixed cost curve and the variable earnings will become more and more significant. What we did say when we started here is that we felt that our ramp up and the way we were going to build our e-commerce business was going to be very manageable from a cash flow perspective and from an income statement perspective. We weren't going to ask our shareholders to endure significant reductions in our earnings to fund an e-commerce startup. We still feel that way, and we're still very confident that we can manage our annual income statements in a way that's, you know, A, responsible, and secondly, in total, through the horizon timeframe, is still going to deliver, you know, a double-digit, earnings per share increases every year. So, you know, I think that would probably lead you, Irene, to the conclusion that, you know, whether it's 20 cents or slightly more, slightly less, we're going to try and manage, you know, very closely to a fairly consistent income statement, and we wouldn't anticipate or expect material changes or material negative changes as a result of bringing the next two CFCs up because we are managing to bring them up at the same time as the early ones go profitable.

That's really helpful. Thank you very much, Mike. And then just sort of thinking through the near term with the rolling COVID shutdowns and the challenges of managing lower store traffic, even as we're probably going to have higher demand over the Christmas period. How are you thinking? I mean, you talked a little bit about some of the initiatives that you're putting in place. How should we be thinking about that? How are you thinking about tonnage growth as we come through this?

Pierre and I are looking at each other to see who could best answer this. So I've decided Pierre can best answer this.

Thank you, Michael. Thank you, Pierre.

It's a multifaceted question, right? So it's interesting.

But so far, so good, I would say. We early implemented maximum customer in our store across the country. Even with these metrics that we defined store by store based on square footage and cashier, and specifically out in every single store. It was not a number for every single store. It was really done store by store based on their own capacity. So it's already in place. Obviously in Alberta at 15%, we need to revise some of these metrics, but it won't affect a lot of store. And like Michael said in his introduction, We already have solution, physical solution with infrastructures and virtual queuing will be very helpful if it's required. So no, we're not seeing, and we have less transactions. So when we have less transaction, it's good for the efficiency in store than when we have multiple transactions. The challenge is to exit customer. It's not when they're inside the store. So we're not seeing big issue with that. We're ready to serve customer. I don't feel nervous about that.

That's really helpful. Thank you. And as a customer, I thank you for the option of being able to sit in my car and not freeze. And just thinking about, I know it's a very near-term question, but just thinking about Christmas itself, how are you changing it all the way in which you're stocking the stores, just in anticipation of a greater number of smaller gatherings and possibly higher sell-through of more premium products?

That's an interesting question. Every time we're facing an holiday, so we had that question for Labor Day, we had that question for Thanksgiving, And honestly, we were positively surprised of sales in all of these events because interior people are not all together and there's no big family dinner. But in sales, we did much better. Even in Halloween, our sell-through was higher than last year, which is interesting. So I think people will just start do their shopping earlier. And the good news is all our stores are ready across the country since October 31st. And I think if you walk our store across the country, you will see all good merchandising in place. We're ready for stock-up. Based on what we observed in the previous holidays, I think we'll be surprisingly impressed by sales again. I hope. We're ready. But I think people will have more frequent good dinner than just a big one.

Interestingly, we're seeing demand for smaller turkeys outpacing normal demand for larger turkeys. which means people are planning on smaller events, and we saw that at Thanksgiving to a large extent. And so there's some shifts like that that we see, but overall in terms of tonnage and some of the other metrics they would look at, I think Pierre is absolutely right, that people need something to celebrate, and they're going to do it a different way, but they're going to celebrate safely, hopefully. But still, we have a lot to be grateful for still, I guess.

Absolutely. Thanks. I'll get back in the queue, but thank you and happy holidays and stay safe.

Thanks, everybody.

Your next question comes from Vishal Sridhar from National Bank. Please go ahead.

Hi. Thanks for taking my questions, and I guess I'll just continue the trend about asking on voila. And so, obviously... and management is very happy with the growth numbers that were indicated. And I was wondering if you had a sense of what's driving the growth this early, or at least if you can prioritize it for me. Is it the high net promoter score? Is it your SKU additions? Is it marketing, operational improvement? Is there something that stands out?

So the question is, like, why are we seeing such good results right away?

Yeah, exactly.

I think it's a multitude of things, some of which you talked about. I think that when you look at, well, I was going to do great whether there was a coronavirus or no coronavirus because it's, as I like to say, it's the best mousetrap. It's the best in the world. And so people are going to figure that out. Unfortunately, there was a virus and more people wanted to shop online and tried it. initially, and then once they try it, they become hooked. I think the fact that it is robot-picked has helped us, not just from an efficiency, but because it feels and is safer. But at the end of the day, the net promoter score, which is kind of an amalgamation of everything, is because People do not have access to a reliable service that treats the customer with respect. And I've got to also give credit to the amazing men and women who drive the trucks and deliver the products. They are even more popular than our cute little robots. They are phenomenal, and they're passionate because they believe in in what they're doing, and the level of service is extremely high. So I'd say that the OCADO system is the best in the world, but the way that we put that in and the decisions we made in terms of how we price competitively, how we have the best delivery price, how our teammates are friendly and passionate and safe And how we market and go to market. It's all those things together. So it's not just the system, it's the business as well as the system.

Okay, thank you for that. And maybe just switching topics here a little bit. Stock markets have started to look to a day when COVID-19 is behind us. Presumably at that time, restaurants, travel will start coming back and that might place a little bit of pressure on grocery demand. Is there anything, you know, looking in the future, is there anything that a grocer can do with costs, merchandising, marketing, data analytics, so on and so forth, to keep customers excited and coming back during that time period?

Yeah, it's called Project Horizon and all the things we're doing. But I'd say let me go back on that one, which is, you know, hope to God that everything comes back to – to normal and that restaurants start being frequented and that Canadians can get back. We were doing just fine, thank you very much, at Empire Company without any pandemic. And this is no fun for us. We're glad we're an essential service. We're proud of our competitors and the whole industry, to be honest with you, but we're especially proud of how we've performed and kept our values. but I think that we'll be able to show how far we've come even more when the pandemic's over. There will be some lasting changes in customer behavior, but we'll also be rolling into Project Horizon and some of the other operational improvements we're putting in place right now. So can't wait for it to be over and can't wait for you to see what kind of company we are when this is over.

Okay, and I think you may have touched on this, but just one of your peers commented on the price competitiveness of the industry and suggested that discount might be heating up a little bit, wondering what you're seeing on your side.

Yeah, it's always a competitive marketplace. We're not seeing any difference today than we have historically seen at all.

Okay, thanks for that, Colin.

The next question comes from Patricia Baker at Scotiabank. Please go ahead. Good afternoon, everyone.

Thanks for taking my questions. Michael, you indicated that despite COVID, the company's very, very focused on Project Horizon and you're pleased with how that's progressing. In one of the elements of Project Horizon, of course, is the store renovations. You noticed that you did 18 stores in the quarter. Can you just provide us with an overview of what specifically the renovation projects encompass? What are the elements so that we can have a kind of a visualization of how the stores are different?

Great. I'll turn it to Mike, and then if he has anything to add, he'll add it.

Wonderful.

Sure. We're running a little out of time, and I think we're going to go a bit over in case, you know, try and see if we can cover all the questions. So I'll try not to have my habitual long answer here. The short answer is all the renovations are different. We've actually split them into four tiers, tier one, two, three, four renovation. Tier one would be a complete rework of the store. Both the facade, the interior, the fixtures, fittings, a whole bunch of maintenance. Those are beautiful stores that are either looking particularly tired or in high-growth areas where we believe that that extensive a renovation will pay back and return the IRR to us, all the way down to a Tier 4 renovation, which is still fairly expensive. It's not just a coat of paint. It focuses on the facade, focuses on the common areas that customers value, the fixture changes, et cetera. So what I'm trying to say is it's not a one-size-fits-all. What is, however, consistent about them is that we've done a lot of work on our banner brands and our strategies and our go-to-market positioning. And on every one of the renovations, you'll see new elevations on our storefronts. It'll be consistent with the colors and the look and the modern projection of the new Safeway brand or the new Sobeys look and feel that we've rolled out in every market. Same with Foodland, a very successful banner for us. We really, really like that banner, mostly rural, but very successful, motivated group of franchisees, and we're putting quite a bit of money into Foodland franchises as well. So I'm not sure if that answers your question, Patricia.

No, it does, Mike. It's very helpful. And just what has been your experience with the three stores in the Nova Scotia market where you're doing the click and collect? And you indicated that you would be taking that to Alberta in advance of the CFC. Is that something that will roll out to Alberta this fiscal year or later?

Mike? So early days in Nova Scotia, there were pilots. So we're just bedding down our operational procedures and making sure that the front end works and the Okado software connections to our systems were properly built. So So having said that, you know, small beginning, but very, very pleased with the outcomes. Customers love it. They really like the alternative. You know, they're still in our stores, but also shopping online, which is clearly something we wanted to achieve. So we feel very good about it. We'll start, I think, next February, March, you know, rolling out in earnest across the other stores, and that would include OutWest.

Okay, excellent.

Thanks a lot, Mike. Your next question comes from Michael Van Eyst from TD Securities. Please go ahead.

Thank you. I'll try and keep them brief. I guess a quick one to start. The bonus accruals that you took in Q2, I believe you're catching up from Q1, if I'm correct. But are they going to continue at around, I guess, maybe half the pace in the second half of the year?

Hard to say, Michael. It depends on outcomes. It depends on results. But those costs are likely to be elevated for the rest of the year. But to your point, not at the same level. I can't say it'll be exactly half because we can't at this point fully understand exactly what our results will be. And these are required accounting accruals that we have to make. As most people understand, in fact, our last fiscal year, we ended up with one quarter's worth of COVID results. And as a result, our store associates and our distribution associates were paid incremental compensation as a result of that, in addition to the very significant hero pay that we paid a lot of people. But at the same time, we kept the, you know, the compensation for, you know, for management and back office people. You know, this year, you know, similar dynamics. And we're going to have to make those decisions, you know, at the end of the year. We only halfway through it. that we're going to be required under the terms of our plans to accrue these amounts all year, albeit, as you point out, at a lower level. And final compensation will depend on how well our people have done compared to their horizon objectives and how they perform throughout the year.

Okay, thank you. And then the net promoter score of, I think it was 87 that you quoted, where are you sourcing that from and how has that changed over the few months that you've been in operation.

Hi, it's Michael. That's our own internal, obviously, survey of our customers. They fill out survey forms with us all the time. We do that in all of our businesses. And how has it changed? It has not changed one iota from the first delivery onward. We are continuing, even as we expand and we have more deliveries, and we are seeing improvements consistently best I've ever seen, best in class net promoter scores.

Yeah.

All right.

And then just finally on the market share gains, I've asked this to the other guys as well, but everybody's claiming market share gains, but there's quite a bit different same-store sales performance from your media peers, Costco and others. So how do you measure this and who do you think you're taking it from?

Well, I'm not going to – we take it from third-party sources. This is not just – I wouldn't say anything that's not backed up, and Mike Vells and Pierre definitely would never do that either. So these are third-party sources. We're taking market share. I don't throw competitors under the bus.

No, but would you think you're taking it from, I don't want to have specific names, but do you think you're taking it from the larger players, from independents, other channels?

I think we're taking it from, if I look at the national results all over and there's different competitors in different regions, obviously, as you know, we're taking it from almost everyone, but we're taking more from some of the larger players.

All right, thank you.

If they are listening to this, you made me say that.

The next question comes from Chris Lee from Desjardins. Please go ahead.

Thanks for squeezing me in. Just a couple of quick ones. Maybe first for Michael, how is the private label performing on Voila? It seems like online is the channel that can really raise customer awareness of private label.

You're absolutely right. We're highlighting our Our compliments products, especially on Volant, it's got its own page, incredibly good traffic, great traction. You're absolutely right. And the other page that stands out is the Farm Boy page as well. So absolutely great penetration on private label, and it's a great way to expose our super and growing private label platform to more customers.

Okay, that's a tough one. And maybe one for Micah. As we look out the next few quarters, as you start to lap the positive margin impact from sales mix, do you believe margin will continue to grow as the horizon benefits start to accelerate so that you can achieve your goal of 100 basis point improvement by fiscal 2023? That's our plan. Okay, so you're still confident in that. And then in terms of the share buyback, do you have a target? I remember last time I think you did about $100 million. Are you targeting a similar level this time around?

Yeah, we're not going to put a target out there, same as we did last time. But what I can point out to you is that our current NCIB that we have filed, you know, depending on stock price, obviously, would enable us to purchase probably up to about $180 million. So that would be, again, depending on the stock price, would be a maximum allowable under the current NCIB. Great, thanks.

Merry Christmas and all the best next year.

Thanks, Chris. Same to you.

Thank you. That concludes today's question and answer session. I will now turn the call back over to Katie Bryan for closing comments.

Great. Thank you, Joanna. Ladies and gentlemen, we appreciate your continued interest in EMPIRE. If there are any unanswered questions, please contact me by phone or email. We look forward to having you join us for our third quarter fiscal 2021 conference call on March 10th. Talk soon.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.