Empire Company Limited

Good morning, ladies and gentlemen, and welcome to the Empire Third Quarter 2021 conference call. At this time, our 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 Wednesday, March 10, 2021. 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 third quarter conference call. Today, we will provide summary comments on our results 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 Saint 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. Good afternoon, everyone. I'll keep my comments short today. I don't need to say much about our third quarter results. They stand for themselves. However, I do think many people are sorely underestimating how much stronger our business is now, regardless of any COVID benefits. Today, I want to focus on our performance this quarter, including early results from Verizon and an update on e-commerce. Before I get into our results, I would like to cover three very important things. First, I want to reiterate how proud I am of our frontline and back office teammates. They have continued to serve our customers every day through this pandemic. COVID has unfortunately become our new normal, but we remain more vigilant than ever in keeping our customers and teammates safe. Second, in recognition of Black History Month in February and the recent International Women's Day, I want to take a moment to reflect on these important annual celebrations. Remembering and celebrating the people and events in black history is important and necessary. We must address and rectify long-term institutional bias and racism. We are engaging with marginalized teammates, listening, learning, and taking action to address anti-black racism and advance on a culture of inclusion. Our partnership with the Black North Initiative remains very important to us. It is a guidepost for our actions. While there has been some meaningful progress on advancing women in the workplace, there is still so much to be done. For us, progression and representation of women continues to be a key focus. It is embedded in our leadership selection and development processes, which is making a real difference. For example, store-level programs have led to increases in women in historically male-dominated roles. At Empire, we don't limit our diversity, equity, and inclusion growth journey to a single month or day. It's ongoing. I'm so proud of our DE&I team and all our teammates who are supporting our DE&I growth journey. Now on to our third quarter results. We are extremely pleased with our performance this quarter. We're delivering on both our top and bottom lines. We have a strong balance sheet and have continued to strengthen it through the last year and even through the pandemic. With more demands than ever on our team, we are seeing the real start of financial benefits from Project Horizon. Sales were up 12% this quarter, with same-store sales up 10.7%. We continue to see substantial gains in our national market share and market share growth in every region of the country as our sales growth outpaces competitors. There are a few reasons sales remain elevated and our market share continues to grow. One, the latest COVID lockdown did bring a surge of sales in certain regions when initially announced. Two, the strong improvements in our store operations and merchandising have enhanced our winning customer value proposition. Three, our strategic investments, including Farm Boy, Fresco, and Voila, as well as our store renovation program, are outperforming. We are very proud of these investments. And lastly, this quarter encompasses our busiest time of the year, the holiday season. Our team delivered strong results outperforming the market in this important period. Our gross margin dollars were positively impacted by increased sales. But in addition, gross margin rate was 25.7%, up a truly impressive 134 basis points over last year. This strong improvement in margin is in large part due to early Project Horizon results. This includes tremendous progress we've made with our promotional optimization program. The program is powered by collaboration between our merchants and our advanced analytics team. Together, they have designed new processes and tools to improve promotional planning. And already, this program is embedded in the day-to-day business of our merchandising organization. However, algorithms alone do not make the best decisions and are no substitute for good judgment. Together, our great merchants equipped with improved data form a powerful combination that is driving our compelling customer value proposition. A smaller portion of the margin improvement comes from continued sales mix shift toward our full service banners. I believe our strong margin performance this quarter shows that you don't need to send unilateral letters to your suppliers to do well in this business. We try to treat our supplier partners with respect, and transparency. We believe this values-driven approach garners better results for both sides. This doesn't mean we're not tough. We are, but we negotiate the right way. I am extremely proud of our merchants who put these values into practice every day. Now, Mike will speak more on SD&A in a moment, but I would like to highlight how we have kept our commitment to offer our frontline and distribution center teammates a lockdown bonus, even while much of the industry did not do so. To us, it was certainly the right thing to do. In Q3, this investment was $9 million. Our initial estimate of up to $5 million only included Manitoba and select regions of Ontario. In Q4, based on current estimates, we expect the lockdown bonus to be up to $4 million. Next, a few updates on e-commerce. It has been another impressive quarter for our e-commerce business as we continue to hear how much customers love Wallah. This quarter, Empire's e-commerce businesses grew 315% over last year. With the continued expansion of Voila!, arrival of winter and further lockdowns, we saw an impressive increase over the second quarter as well. Today, I can share updated projections on the financial impact of Voila!. As we previously publicly disclosed, our expectation was that Voila! would dilute EPS in fiscal 2021 by 20 cents. However, we now expect our team will over-deliver on this estimate with full-year EPS dilution of $0.18 in fiscal 2021. Our initial $0.20 estimate did not include the full cost per store pick, but the revised estimate of $0.18 actually does, so it's even better than it looks. This reduced dilution is a direct result of the team's outstanding efforts to ramp up the business quickly to meet customer demand while maintaining cost discipline. As we have said in the past, Voila is a strategic, long-term investment. Our partnership with Ocado provides us with the best and most customer-friendly grocery e-commerce platform on earth. While we are seeing dilution now, this investment will pay off. When we achieve scale, we expect to have the most profitable approach to grocery e-commerce in Canada, and it will be exclusive to us. To wrap up, I would like to highlight how we have continuously We need them. Our results prove this time and time again. Our team is working hard to drive our core business and to execute our strategic growth agenda. We will review our first full year horizon in June. For now, while we are only nine months into our three-year growth strategy, we already have material benefits kicking in. With two years still to go, we are highly optimistic. People sometimes forget that our operational and merchandising execution is so much better than it used to be. We've proved what we can do by delivering sunrise on time and exceeding targets. We continue to prove this with our strategic investments like Wola and Farm Boy, both of which are outperforming. There is a reason we are outperforming the competition, and it ain't all COVID.