Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the Empire Company Limited first quarter 2023 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 the conference you require immediate assistance, please press star zero for the operator. A reminder that today's call is being recorded Thursday, September 15, 2022. And I would now like to turn the conference over to Katie Brine, Vice President, Treasury, Investor Relations, ESG Finance. Please go ahead, Katie.

Thank you, Michelle. Good afternoon and thank you all for joining us for our first 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 empirecove.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, Matt Rindell, Chief Financial Officer, Pierre Saint Laurent, Chief Operating Officer, and Michael Vells, Chief Development Officer. 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.

Thank you, Katie. Good morning, or afternoon, I guess, everyone. Turning to our business right away, fiscal 23 is off to a strong start. And this quarter we saw a return to positive same-store sales, significantly increased gross margin expansion, and we generated a great deal of excitement around the launch of ScenePlus in Atlantic Canada. Our full service and discount banners are performing well and we continue to be pleased with our performance in e-commerce. Our results this quarter reflect the strong momentum of our business and the ability of our team to consistently perform and deliver. I'm gonna keep my comments short and to the point as our first quarter results speak for themselves that this was a very clean quarter. Today I'll focus on three topics. Our Q1 results and key market trends, our recently launched loyalty program, SEEN+, and the release of our sustainable business report. First, our results and market trends. Our sales grew 4.1% this quarter. We achieved positive same-store sales growth of 0.4%, which was 260 basis points higher than last year and 280 basis points better than last quarter. It is fair to say that we are seeing some better same-store sales momentum as we begin fiscal 23. Same-store sales improved throughout the quarter and were much stronger once we no longer comped last year's COVID restrictions later in the quarter. We also saw customers continue to return to more pre-pandemic shopping behaviors, resulting in higher transaction counts and smaller but still strong basket sizes versus the prior year. As you would expect, the industry is seeing some shift to discount, some shift to discount. In our case, Freshco is performing very well and putting up the best results in its history. That being said, we are also pleased to see that our full-service stores are performing better than we had anticipated in this inflationary environment. They are now satisfying many needs of the value-seeking customer through strong promotions, better personalized offers, great quality of service, and an excellent assortment of own brand's products. In particular, our own brand's portfolio is on fire and delivering immense value to customers. And in Q1, our own brand sales increased 9.5% year over year. You can hear the Pictou County train going by if you listen carefully, I hope. Importantly, we are protecting our full service market share and seeing strong momentum across our banners. If we can perform at this level during an inflationary period, then we believe we are very well placed when inflation returns to more normal levels. And while it is too early to definitively say that inflation has peaked, we are seeing some encouraging signs, including the fact that the number and rate of cost increases from our suppliers is decreasing. Empire's gross margin was strong this quarter. Our gross margin rate, excluding fuel, grew by 63 basis points. These margins were achieved despite the inflationary pressures we faced. This is largely due to our Horizon initiatives with promotional optimization and own brands. The improvements in margin also reflect the enhanced discipline and new tools we built over the past five years through Sunrise and Horizon. With our strong sales and margin performance, we delivered EPS of 71 cents this quarter. With that, I'll now turn to our SIEM Plus launch. As you probably know, on August 11th, we launched our new ScenePlus loyalty program in Atlantic Canada. This was the culmination of a lot of hard work, and I am so impressed by the efforts of our leaders, but especially by our teammates in store to effectuate a near flawless implementation. Although we are only about 30 days into our decades-long journey, we could not be more pleased with the early traction. Our teams are now focused on preparing for the launch of SeamPlus in Western Canada next week. This is a great start, but we are in the early innings of our journey to thrill customers and unlock the power of personalization through loyalty. We knew that SeamPlus was a great loyalty program with strong recognition among Canadian consumers, and unsurprisingly, we've seen a lot of interest from potential new partners. We'll be choosy with any new partners. Their brand will have to strongly resonate with Canadian consumers. Now for our sustainable business report. In August, as part of our ESG efforts, we released our fiscal 22 report, which included our new climate action plan. This year, we set science-based emissions reductions targets in support of Canada's transition to a low-carbon economy. These targets are only one important way that we are progressing on our journey to be a leader in climate and ESG in Canada. ESG has been on our agenda for many years and we continue to make progress in areas such as removing plastics and waste from the business, expanding our efforts to cultivate an inclusive workplace for all, growing our community investments, and embedding sustainable business mandates within our performance management goals. While there's more to be done, our management team and the board are pleased with the commitments we've made to ESG and the progress made over the last few years. And with that, over to Matt.

Thanks, Michael. Good afternoon, everyone. I have some comments on our quarterly performance, voila, our balance sheet, and then we'll move to your questions. Firstly, our performance. So as Michael said, same-store sales was positive at 0.4%. We're particularly pleased with this result as we continue to comp COVID-elevated sales in the prior year for about one-half of the quarter. Our gross margin was 24.9%, which was 63 basis points higher than last year when you exclude fuel. As in prior quarters, this improvement is due to benefits from Project Horizon, particularly our promotional optimization tools and the continued strength of own brands through increased penetration and better costing. Gross margin, as you know, has been a key focus for us over the past five years, and initiatives implemented through both Sunrise and Horizon have enabled us to consistently and sustainably grow margin despite recent inflationary cost pressures. Our SG&A was 13 basis points lower than last year. This is largely due to improved sales leverage and lower COVID costs, partially offset by our continued expansion of Wallah, Farm Boy, and Discount in the West. Other income was $15 million lower than last year, mainly due to gains we had on lease terminations in fiscal 22, which did not repeat this year. Our effective tax rates was 25.6% in Q1 versus 24.5% in the prior year. The income tax rate for the quarter was lower than the statutory rate, primarily due to differing tax rates of various entities. For fiscal 23, excluding the effects of unusual transactions or differential tax rates on property sales, we're projecting that the effective income tax rate will be between 25 and 27%. On to Voila. We're very pleased with the performance of Voila. The capture of market share is in line with our expectations, and the key operational metrics such as net promoter score, on-time delivery, substitution rate, and labor efficiency are extremely strong. However, after the easing of COVID restrictions, e-commerce industry sales are slightly lower now. Based on our latest sales forecast, we believe Voila's dilution will be approximately the same as last year, And that includes the headwinds from higher fuel and labor costs that Voila is currently absorbing. We are and remain very confident in the long-term trajectory of our e-commerce business. And last but certainly not least, our balance sheet continues to benefit from strong cash flow generation that is enabling our capital allocation strategy. We continue to strategically allocate our free cash flow to deliver the largest impact to our business and our results. This quarter, we improved 22 stores through renovation, development, or conversion. We've repurchased approximately 3.1 million shares for consideration of $124 million so far in fiscal 23. And as we announced last quarter, we increased our dividend for the 27th consecutive year. So fiscal 23 is off to a strong start. We're in the final year of Horizon and we're still on track to hit all of our targets. But as we've noted before, Some of the key initiatives being executed in fiscal 23 will primarily generate benefits in fiscal 24 and beyond, and so we're even more excited about our post-horizon period. A good example is theme plus, where we'll see the benefits start in Q2 and then ramp up in Q3, Q4, and beyond as more Canadians see the great value that this program delivers. And with that, Katie, I'll hand the call back to you for questions.

Thank you, Matt. Michelle, you may open the line for questions at this time.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw, please press star followed by the number two. One moment, please, for your first question. Your first question will come from Irene Mattel, RBC Capital Markets. Please go ahead.

Thanks, and good morning, everyone. A couple of questions. So, first of all, on the promotional effectiveness, can you talk in particular about where you're seeing the benefits and how that plays into the current inflationary environment and your ability to really to drive basket with price-sensitive consumers?

Good question. We're leveraging the data through new tools, new algorithms we're using. So we have indicator very early when the promotion is effective or not based on customer behavior, customer demand, and profitability. So we have agility now to correct the course very, very quickly. So I think it's the main reason why we have been able to deliver that strong margin. and remain competitive and relevant at the same time. So the tool and the like thing Matt said, a very strong discipline in managing the promo mix with the people in merchandising.

That's great. Thank you. And if you think about sort of this journey along promotional effectiveness, how far along would you say you are in the process?

It's implemented since a couple of quarters already. We continue to work with the tools, improving our knowledge of it. Obviously, there's volatility. We need to fuel the engine with new data, new behaviors. As I said, we have information very quickly, more than when we had no AI to support our decision-making process. I suppose that the ramp-up is behind us, but Then the set of the toll will continue to generate incremental results over the time. I strongly believe in it.

That's great. Thank you. And on the private label, you mentioned that sales are up 9%, so obviously sales are growing more quickly than the average. Can you talk about which categories and where your private label penetration is today and what your updated targets might be?

Pierre is kind of shaking his head that he'd rather not. I wouldn't mind sharing it with you, I think, or some of the people on the call, but I'd rather not share it generally, I think.

Okay.

I think you understand everything.

I do. I do. Thank you. And then just finally one sort of one curiosity question, which, as I noticed in the presentation deck, that you're going to be fulfilling Gatineau, that Voila is going to be extended to Gatineau in Quebec City or is actually already. How are you fulfilling that? Because that's an awfully long ways away.

We have spoke already in place in Quebec City and a spoke in Ottawa. We'll have two spokes.

Understood.

Thank you. People on the line, because we use our own nomenclature, sometimes a spoke is basically a very pretty simple, low-cost, cross-docking facility for very low capital, but allows us to extend our reach and serve customers fresh in a good way. And by the way, if anyone ever wants to see what a spoke looks like, I'm sure we can arrange it. We're a CFC. Because we're now a little bit more open that we hope COVID is settling down a bit and people can come see this CSC and the spokes, and just go through Katie.

That's great. Thank you so much.

Thank you, Irene.

Your next question comes from Mark Petrie of CIBC. Please go ahead.

Yeah, good afternoon. I want to ask about the OPEX dollars, the increase accelerated in Q1 sort of from the trajectory we've seen the last few quarters. Can you just give us a sense of the relative drivers of that? I mean, is it just broad-based inflation across your business or are there some other specific pieces? And then also any comments with regards to your outlook and how you expect that to track over the rest of the year?

Sure, let me take that one. So SG&A, when you look at it from a dollar perspective, was certainly higher than last year. There's a few main drivers of those. Inflation's a part of it, but I wouldn't say it's the biggest piece of it. When we look at the year-on-year movement, it's really the investments that we've made in our broadly called Horizon initiatives. Let me give you more detail to that. The increases are coming from voila, from discount, from farm boy, from marketing timing, which I can share a little bit more information on, and depreciation. So, you know, those are all linked to our horizon strategy. As you know, we're increasing the stores. We're increasing our voila footprint. And on the capital side, as you know, we've increased our capital price. over the past few years and that inevitably leads to some increased depreciation. So those are the major drivers of the SG&A dollars. In terms of outlook, when we looked at it from a rate perspective, our rate was a little bit low in Q1, mainly because of the sales leverage from fuel sales. So if you're looking at it from a percentage perspective, it looks a little bit low. Dollar-wise, it's not seeing massively different numbers from that from the balance of the year.

Okay, I guess – yeah, that's helpful. I guess maybe just to sort of circle back then on – so the investments in Horizon are the key drivers of the dollar increase, but the dollar increase is also – sort of accelerating. So I guess, are those horizon investments accelerating and then sustaining? Or you alluded to some marketing and some timing there. So just trying to understand kind of how to think about it for the balance of the year on a year-over-year basis.

Yeah, I wouldn't say we're expecting it to accelerate. The marketing one in particular, so just to walk you guys through that. So Our marketing spending Q1 was higher than it was last year, and that was due to a timing issue last year. So we had the Olympics at the end of Q1, and our spend on the Olympics, so all the production work was done in the prior year, and then the actual airing was done towards the end of Q1 and into Q2. So that's the reason our spend was lower last year than it is this year. This year, that marketing spend is going to be broadly consistent, if not a little bit lower as we get into the second half of the year. So overall, I don't see a spike in SG&A. It's due to our investments, which have been relatively consistent under Horizon.

Okay, helpful.

And I wanted to ask about Volat and the change in sort of commentary with regard to dilution and also break even for the Toronto CFC. So I appreciate volume, you know, is the main driver here and it's not sort of the specific performance of the business or the facility, but based, so maybe two questions, I guess, based on your growth assumptions that you have in place now, what do you think is a realistic timeline for the Toronto CFC to reach positive EBITDA? And then with regards to the ramp up of the Montreal facility and Perhaps some comments about that and your expectations for that facility relative to what's happening in Toronto, just given the different dynamics.

Okay. All right. So there's a lot in there. So let's take them one by one. Just to give you some extra color then on the change in our projection. So I think it's pretty broadly been publicized that the total e-commerce growth grocery industry is a little bit lower, certainly when you compare versus that very high spike in COVID tonnage last year. And, of course, there's also the summer season. So the total pie is a little bit smaller. Our share of that pie is good, but the total pie is smaller. So when we project our sales, our sales for the year look like they'll be lower. Of course, that translates down to dilution, hence why we were super transparent in saying that our dilution will be approximately the same as last year. That being said, that dilution includes the impact of fuel, the impact of labor that obviously our business is incurring this year. We remain very confident about Voila. This is a timing issue. We're super happy with the metrics, the way it's performing, so this is not a long-term problem with the business. Your second question was about the time period to break even, and will we break even towards the end of the third year of operations, which is what we said before. Look, it's a good question, and if we have a slightly lower sales number. Will that break-even point move slightly into year four? Yeah, probably. I think that's a reasonable conclusion. But like I said, we're talking about a few months based on timing, and at the end of the day, we don't know exactly. The final question was on the Montreal ramp-up. So that ramp-up has gone very well. We're very happy with that. As you would expect in any transition like that, you're always concerned that you're going to lose your existing customer base. It wasn't perfect, but it was very good. And we're really moving on a good pace now in that Montreal CFC. Momentum is heading in the right direction. All our metrics are very strong. Basket size is very strong. So, yeah, we're really happy with that.

Okay. Appreciate all the comments and all the best.

Your next question comes from Patricia Baker of Scotiabank. Please go ahead.

Good afternoon, everyone. I have a few questions. Michael, thank you for giving us the data on the OwnGrants performance in the quarter up 9.5%. I just want to square that 9.5% trend with the 0.4% same-store sales. presumably the own brands was accretive to margin, but of course it does hurt your retailers. So if we try to look at this on a different basis, and instead of looking at that same store sales, with that high growth in the private label, would it be fair to say that units would be up more than the 0.4% on a year-over-year basis?

All in, I don't think... it's affect our top line sales because it's highly relevant right now. So with all the product we introduce through category rebuild, so I don't think it's affecting our top line. And as you said, I think it's highly accredited for us. The margin rate in our own brand is way higher than our average in margin. And yeah, so the growth is huge. The growth continue, it's accredited in margin, it's relevant for customer. So I don't think it's, that's because the redeployment is over, but I don't think it has an impact on the top line all in. So you're looking at it as a basket. Yeah, we introduced a lot of good format on their own brand products are highly efficient right now. We've seen big growth on new product introduction. we're really pleased with the work done by the team over the last couple of years to rebuild the brand and to rebuild every single category plan with our own brands.

Okay. So let me ask it a slightly different way. So that nine and a half percent growth in private label or own brand. So does that reflect, does that reflect new customers coming to private label? Does it reflect customers, you know, shifting from national brands, which on average have a higher average retail price, right? And shifting to private label, which would have an implication for your basket dollars.

It's mostly a shift from national brand too.

Okay.

But once again, I think our transaction count is very healthy. Okay. So I think with new product introduction, new format, I think it's highly relevant. It's difficult to associate that to new customer, but clearly it's a shift like trading down in protein, stocking up on promotion. It's the customer behavior we're seeing right now. So shifting from national brand to one brand is a trend that we're seeing and that will continue, I think. But it's good for us and it's good for customers.

So everybody's happy. Okay, that sounds good, Pierre. So I'm going to ask about something that we never, I don't think it's been a long time since it's been discussed on an Empire Conference call, and that is what sort of trends are you seeing with your drugstore business? You've got, you know, a total of about 400 drugstores across the country. So are you seeing any interesting trends there over the course of the last several quarters?

Yeah, it's Michael. Thanks for the question, Patricia. Sometimes people underestimate the size of our pharmacy business because we So much of it is contained in our stores, especially in Western Canada. And we also have a lot in standalone stores. And I would say that obviously those stores are, the store in store and also the stores themselves are performing extremely well. And the way we don't really break them out because we think they're, especially when they're in the store, are so... are so good for the customer and that we see stronger sales normally in stores that have pharmacy. And because we don't break it out, nobody sees how strong that Western Pharmacy business is. But I would say very healthy, like everyone else is reporting in their pharmacy business. Always some areas to improve, and we're looking for those. But we're seeing really good growth.

Okay, thank you. Thank you for that. Michael, okay. You mentioned in your remarks that, you know, the supplier discussions are changing and you're not getting as much in the way of asks for cost increases. When did you first start to see that and how comfortable are you that we really are going to see that abate and it will be positive for the business?

We're more confident than we're not at this point, but, you know, we're not – There's a lot of things going on globally that we can't control. And I would say that we started to become a little more confident on that about three or four weeks ago.

Okay. And I'm going to ask one last question. And that is just on this all discussion and the other questions previously that were asked on the e-commerce trends. And, you know, it's perfectly understandable why the industry is down currently. Do you have anything your own views or broad views out there about what the longer term trends are for online grocery delivery in the Canadian marketplace. I'm not talking about the next year or the next quarter, but longer term.

As usual, this time of year, we're working on setting our plans for the coming year and years. And we're going to see, I mean, anyone who thinks this is not going to grow over time is putting their head in the sand. It may grow at different pace. It may grow as demographics change, but we're going to see a very healthy and large e-commerce business in this country, which is why we're so committed to it. While at the same time, we know that in the next few years, most of our business and our profits will come from our from our stores. So nothing has changed our view that the world is moving ahead or that e-commerce does not involve grocery in Canada.

Okay. Thank you very much for that, Michael.

Thanks. Thank you.

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

Hi, thanks for taking my questions. Once upon a time, Michael, Empire's business was more bifurcated and the Quebec region tended to react more quickly to all these quick rapid changes in consumer demand in the market and how the consumer's behaving. So just wondering now, when you look at this business, is it more uniform in terms of how it's responding to these rapid changes changes in consumer demand. I'm talking about the increased price sensitivity and increased demand for value.

I don't want Pierre to answer this because it will sound too egomaniacal, so I won't let him. I'm not sure about once and upon a time, but I can tell you that when I joined the company, Quebec was extremely strong, great at executing, and so was English Canada. We had to We had to organize ourselves better and lead it better. It wasn't because we weren't good at it. I would say now that we don't, less and less we think of them as different regions. Obviously EJI is a very strong brand and we have incredible dealers there. But you can tell from the way that we've organized ourselves and the leaders that we have who are from all over Canada that we are now taking best practices from all over. And I would say, if I could speak for you Pierre, for things you've learned that you didn't know either when you were in Quebec and that there's best practices. But I can see that our incredible Quebec business is, that the influence of that is helping us across the country. And some of that is in terms of knowledge and practice and execution, and some of it's just choice and leaders. And tools. And the tools, yeah. It's the same one across the country. Yeah, it's the same tools and many of the same leaders. So, yeah, I'm proud of that. I think that instead of everybody just sticking to their territories and competing against each other all the time, that we have a company now that is national in breadth and national in culture, and obviously we get better results from that. Great question.

Right. And on that point, just extending it, so you have these businesses, Frambois, Longo's, very entrepreneurial and historically had to be more dynamic to compete against the big guys. Wondering if those businesses are responding differently to these challenges and how they're addressing the consumer and if there are any conversations going back and forth to take back best practices.

The conversations daily, if not hourly, between the businesses are as these are stand alone, to some extent, businesses. We're partners with the Longo family and JL and Jeff York and others continue to retain equity ownership at Farm Boy. But, having said all that, I've never met two groups which are more willing to share best practices with each other and with the other Empire banners, and that whether it's in a private label or brand, or whether it's on supply chain, they're sharing back and forth. And I think that, I may say that obviously the Longo's and Farm Board acquisitions have been great, both financially and strategically, and have filled a hole in Ontario, but the learnings we've had by being open to learning from some real experts, especially in on the Fresh Buy and on the private label side have been incredible.

Okay, and that leads me to my question, which I think you've answered, is just given this shift, this incremental shift towards discount, management is still satisfied with the returns and hitting the thresholds that it aimed for with Farm Boy and Longos at this point?

Absolutely. Thank you very much.

Your next question comes from Michael Van Eyst of TD Securities. Please go ahead.

Hi, good afternoon. So you've covered a lot already, but I do have some questions on Horizon. And when you launched Horizon, much of the expected gains were predicated on market share improvements. And I'm wondering how, what one, is this, was this a combination of organic and acquisition market share gains that you're considering at the time? Because at this point, it doesn't seem like your organic growth has kept pace with your peers when you look back to the growth versus 2019, particularly during this period of high inflation.

A great question. And I'm looking over at Mike Bells, and I think we're trying to remember back, but I think it was all organic that we expected because you don't know what you're going to buy, and we didn't know we were going to have long goes in the fold. However, having said that, yeah, I think that when you look at it, and I'm always transparent, having had COVID and then gone through COVID and then a period of higher inflation, that the market share numbers are, when we look at them, they're not exactly what everyone thinks they are, just so you know, and we're more optimistic than we hear in other places. However, they're a little lower than we would expect for very obvious reasons that you pointed out, which we can look at it, I guess, half glass, half emptier. I'm often half glass full. And on the half glass, half glass, half full, if we're doing what we're doing in full service right now in this environment, I'd like to see it when there's not this kind of inflation. So, yeah, I think we've done – I mean, we're going to hit – these horizon targets is our forecast and our belief. And if we can go over them, we'll go over them, but we're gonna hit them like we promised. And you always do it a slightly maybe different way, and that's what good management does. So if market share is a tiny bit lower, we'll get it in margin or SG&A or somewhere else. But I think we're poised in our business to start getting some market share.

Okay, so that was actually the second part of the question and what the catalyst might be to start seeing a little bit faster growth in earnings as we get through the year because it's relatively modest in Q1 and you have to ramp it up a little bit to get to your target. So given inflation is still pretty high now and likely to stay high, even if it comes down a bit, it's likely to stay high for the next few quarters. It sounds like the catalyst might come a little bit more from margins than from the revenues.

No, I wouldn't say that. I'd say that you saw that a little bit. I mean, we have some pretty good momentum. We went from, if my memory is correct, minus 2.8 comps to plus 0.4% comps. And I would like to hope that we'll see accelerating comps to a certain extent throughout the year. Inflation... isn't the best thing for consumers. It's not the best thing for Empire Company. But boy, is our full service especially surprising us in terms of its resilience. So even with inflation continuing on, which is, you got to kind of look at it, even though I'm classed out full, we don't model it that way. And we have to model it as if inflation will go longer than we think or hope. In which case, we still think we should hit our horizon. We will hit our horizon. And if inflation ebbs, I think we'll see... better top line, but I don't, I think we'll have a good top line even in the face of inflation.

Okay, thank you.

And then, there is a... It's a hard time, right, Michael? We're right on, I feel like we're right on the precipice here of, you know, figuring this out, too. This is not only my opinion. Everyone seems to be nodding around the table, but it's, you know, these are hard calls, but I'm giving you my most transparent and open answer to what we're thinking.

I may appreciate that. And just there was an interesting comment on the gross margin improvement. And you said that part of it was related to banner mix. And normally we would kind of think the shift from conventional to discount would be negative. But then is it the shift within the conventional towards, say, a farm boy, for example, or a longo that is driving that banner mix improvement that you're talking about?

Well, there's a couple of things in there. When we look at that banner mix, we're really talking about, for example, long goes. We're talking about wholesale. We're talking about discount west. So that's kind of the banner mix we're talking about. So some of those sort of highly accretive business units are also growing, including Voila.

So the ship, the discounts, the shifted discount in the West is gross margin accretive for you?

Shift of mine, discount West, is accretive, yeah. Okay. Great. Thanks very much.

Your next question comes from Chris Lee of Desjardins. Please go ahead.

Good afternoon, everyone. Maybe just a quick question first on Volat. Do you think the high food inflation is the main reason for the lower than anticipated online sales? Obviously, in-store is a cheaper way to shop. And if so, do you believe those pressures that you're seeing are more transitory and online should grow again once inflation normalizes?

I don't think it's because inflation. It's more a seasonal thing and variation versus last year with restriction in place and inflation. The basket size is way higher in e-commerce. So people are looking for more than just discount. They're looking for convenience. They're looking for time. They're looking for assortment. So I don't think inflation has an impact on the sales trend. It's more the summer travel and the valuation versus last year with COVID restriction than anything else.

Okay and maybe just a follow-up on that yeah I guess I'm just trying to understand you know what changed in the last two or three months you know when you provided first your dilution guidance at the end of June and then with the update today you know what changed in the marketplace that would cause you to have lower than expected industry sales and the only thing I think of is because of high foot inflation that's sort of the big change in the last few months but I just want to understand better because it's only been two or three months and then you updated your dilution guidance.

There's a couple of things in there, Chris. First of all, the timing of when we've done the forecast. Obviously, that environment continues to be very dynamic in terms of how many people are shopping and how many Comfortable people are visiting a different number of stores, one of which would be e-commerce. So there's a couple of things in there. I wouldn't say it's inflation.

And I think we try to be pretty open. And right now it's pretty early in the year. And so we don't want to come to you late and go, oh, yeah, we hit it by a cent or we missed it by a cent and surprise you. So while we still don't absolutely know what it's going to be or if it's going to be the same or we know it's going to be approximately the same, So I think it's just better disclosure. And I don't like surprises late in the game. I'd rather give you a heads up. It's going to be very, very close. And I think that's just better so that we're all talking the same language.

I appreciate that.

And then maybe just a follow-up. Moving higher, persistently higher, a bit longer maybe than we had thought to sort of cause us to talk about it a bit more too.

I appreciate the transparency. Just a follow-up question on Michael's question about Horizon and your confidence in achieving those targets despite some of the near-term challenges. Can you drill down a little bit, just maybe elaborate, what other parts of your business can you lean on a bit harder to get some extra benefits so that you can achieve your earnings target for this year? Can you elaborate a little bit on specifically what you can do better or more aggressively?

Well, maybe I'll start and Michael can finish. I mean, honestly, I don't think it's the case of having to lean on any other pieces of the business. We have really good plans in place through our other initiatives that are producing some very, very strong results. You saw that in the margin performance. What we're talking about here is actually a very small movement in earnings per share in the scheme of things. Our plans that we have in place, we're very confident about. So I don't think it's a case of leaning on anything else. What we're doing by business unit is doing the right things. And I think maybe there's still upside in other initiatives, like, for example, SEEN, which launches well exceeded our expectations. So there may be some upside there. But I don't think it's a case of leaning on any individual business units. They're doing the right things, and that will get us there.

I think if I just say that we're more confident or optimistic in any of the businesses right now, we'd say that we've seen greater strength in Western Canada than we've ever seen before, I guess, in terms of underlying strength in the business. And very happy with the team at Fresco and how they're managing their business using all the levers at their disposal. And so I think that they're We're more confident in that business in Ontario, where most of the stores are, and in the West. So I think those would be two areas where I'd just say a little more confidence. But basically, we do what we say, right? And we execute the plan we had for Verizon. We execute on that plan. Michael asked a really good question. Sometimes it's a little more here or a little less there. But we don't, as I said last quarter, I think, we don't get off plan. by little things that would bother some, I think, bother some executive teams. And so we still have that confidence because we're running the business well, even in times when it's not that easy to do. So that's the best I think we can say.

Very helpful. And then the last question, just on ScenePlus, as that program is rolled out nationally early next year, do you expect to incur any sort of meaningful expenses that would have an impact on earnings? And then secondly, you know, realistically speaking, how long do you think it would take before you'll be able to leverage some of the data and personalized promotions to have an incremental impact on sales and earnings longer term?

So, yeah, it's a great question. So, first of all, no, it's not going to give us an incremental hit to earnings from an expense perspective. We have marketing budgets. We have flexibility where we can invest and where we don't. And obviously, seeing for us is a priority right now. But no, there'll be no unexpected or year-on-year aggravation in marketing.

And you'll take the second part. And then, yeah, you want to... Yeah, on the personalization part, which thank you for asking, but you need to really understand customers to really get the most out of personalization. Personalization has started. I would not say yet. It's from ScenePlus. in that program, but I wouldn't say it's material yet. It was too early.

Thanks a lot.

Your next question comes from Peter Escalar of BMO. Please go ahead.

Just one question. So the other day, I'm sure you saw that Okado discussed their retail sales decline. And, you know, they talked about it in terms of, you know, the impact of food inflation, the number of items in the basket, right down to house brands, you know, number of customer transactions. Dwayne, can you provide, you know, some flavor on Kato's 21% decline in revenue, you know, kind of talk about the moving parts sort of in the same context.

Yeah, I'm a, Michael, thanks for the question, Peter. I'm loathe to talk about other companies because I wouldn't want them talking about us. However, I think that, as you know, that Ocado had quite the – it was a great company, and they had quite the ride during COVID to supply UK households with product when no one else basically could. So I think they're coming off a bit of that. And, I mean, we don't – I mean, I don't – say a lot about it, but we haven't seen any material changes. We have a healthy basket size, which is not shrinking. We continue to gain customers on every metric we're improving that I can think of. You touched on some of them, Matt, in your script, but in terms of looking at all the numbers every week, I'm getting happier every week and send Sarah nicer notes every week. So, I mean, it's just a different fact situation. That's also a far more mature e-commerce environment industry in the UK be most mature and in the world. I mean, the amount of groceries and goods, especially in hard goods and soft goods sold is incredible. I don't want to, I'm a little dated on my statistics, but it's very, very high compared to Canada or anywhere else. So, very well-run company, good partners, and I don't think it's really applicable to our situation. But you'd have to ask them.

Yeah, well, I thought that the thing that was disconcerting in their disclosure is that their basket count, so number of items in the basket, was down 10%. Are you saying you're not seeing anything that severe?

So if you could italicize this and underline it, absolutely, we are not seeing that.

Okay, good to hear. That's all I have, Michael. Thanks.

Thanks, buddy. Good luck.

There are no further questions from the phone lines, so I would like to turn the conference back to Katie Brine for closing remarks.

This is not Katie. This is Michael. And I just want to say that this is Patricia's last call, we think, with us. And I hope it's the last call she has to do because it would be with us and it would be historic. But we wish Patricia all the best in retirement for everything she's done for the industry and how well respected she is. And we were sorry we couldn't be at her conference, but we had a board meeting. It should have been better scheduled by someone, either us or them. But, Patricia, well-respected, and thank you for everything you've done in this industry.

Great. Thank you, Michael. Thank you, Michelle. 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 our second quarter fiscal 2023 conference call on December 15th. Talk soon.

Ladies and gentlemen, this concludes your conference call for this afternoon. We would like to thank you all for your participation. You may now disconnect your lines.