Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the Empire Third Quarter 2024 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 Thursday, March 14, 2024. I would now like to turn the conference over to Katie Bryan, VP of 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'll 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, Matt Rundell, Chief Financial Officer, Pierre St. Laurent, Chief Operating Officer, and Doug Nathanson, Chief Development Officer and General Counsel. 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 facts. I will now turn the call over to Michael Medline.

Thanks, Katie, and good afternoon, everyone. In Q3, we saw a continuation of the trends experienced in Q2 with some customers pulling back spending. as a result of continued economic uncertainty and pressure on Canadians' wallets. But when you peel the onion and work through some of the complexities, we delivered slightly better results than the prior quarter, with positive comps and strong margin control. This is a different empire company. We have built the capabilities, processes and disciplines to stay strong through tougher times. and we expect to deliver solid and sustainable results regardless of the macro environment as reflected in our Q3 performance. I'm going to focus on three topics today. Key market trends, including a brief update on our plans to help further stabilize food prices in Canada, our Q3 results, and an update on our strategic priorities. First, market trends. In Q3, we saw the challenging macroeconomic environment continue with interest rates remaining elevated, and low consumer confidence. While we were pleased to see food inflation decline by 130 basis points in January versus the prior month to reach its lowest level since August 2021, ultimately this offered little relief to struggling Canadians who are trepidatious about shelter costs amid overall cost of living challenges. Consumers are under pressure, and in this environment, providing value to customers and helping stabilize food prices is a top priority for Empire. We are seeing the number of supplier cost increase requests continue to trend down and suppliers are generally moving back to their more normal and expected approach of cost increase submissions. However, there are still sizable increases from select suppliers coming through that will inevitably impact the customer. This is largely driven by some commodities like sugar and cocoa continuing to be very volatile due to ongoing climate and geopolitical factors impacting global supply. But as I mentioned last quarter, we have strongly and successfully pushed back on unjustifiable increases and will continue to do so. When Empire finished its holiday price freeze in February, we doubled down on our promise to bring value to Canadians by launching a new 11-week program to lock or lower prices on approximately 1,000 essential items across our banners nationally. Almost one month in, we're pleased with how it's showing up in our stores and the traction it is gaining with customers. Turning to our results, I believe that our business performed a bit better in Q3 compared to the prior quarter, and let me explain why. Food retail is our primary focus. However, We often have a strong real estate element to our earnings, which acts as a complementary income stream. If you remove the other income and share of equity earnings, which is relatively stable on an annual basis but fluctuates quarter to quarter, our performance in Q3 was slightly stronger than Q2. There was also some noise in the quarter, such as the temporary strike at our bond distribution facility. Matt will make sense of all that for you in his remarks shortly. We continue to attract more customers to our stores with higher transaction counts, but we're seeing smaller baskets consistent with the industry. Our promotions are constantly improving and are attractive to our customers while still protecting our margins. Moving to financials, our sales excluding fuel grew by 1.3% this quarter, with same-store sales of 1.9%. We see the same store sales gap between full service and discount channels at Empire and in the industry at large gradually disappearing and expect this trend to continue. We've been expecting, as you know, the gap between full service and discount to shrink as inflation falls. But even we were surprised by the magnitude of the gap closing this much this quarter. Wallah also continues to grow with sales up over 15% this quarter compared to last year. SG&A also remains under control and in line with our expectations. While the SG&A rate is higher than we would like, this is a function of the current sales environment. We are actively making decisions to cut overhead in our business. Matt will go into more depth on this in a couple of minutes. Overall, we delivered an adjusted EPS of 62 cents this quarter, And now on to our strategic priorities. When we announced our long-term goal to grow adjusted earnings per share by eight to 11%, one of the key pillars to achieve this ambition was a focus on efficiency and cost control. As we announced in Q1, we have been making organizational changes to optimize our structure and reduce costs. This backstage initiative is largely complete with the full run rates cost savings to be realized in fiscal 2025. Beyond the cost benefits of this program, I am very pleased with the structure of our teams and the critical talent changes we have made to ensure we are better positioned to execute on our strategy and deliver strong results. This quarter, we also entered into an agreement to purchase a sizable plot of land in Montreal, which remains subject to due diligence. Securing this land was highly strategic, and for the time being, we will land bank it until we decide whether and when to proceed with site development. The opportunity for such a valuable and well-situated piece of land does not come around often. This may increase our capex spend from $775 million to approximately $885 million this year for this one-time purchase. And now for an update on some of our key customer and sales driving initiatives. Voila continues to gain momentum at each of the three CFCs, with fulfillment rates of 99.5%, a broad assortment offering, and excellence in fresh, with customers claiming the produce is delivered as well as if they picked it themselves. It's no surprise that we see the total number of orders increasing with strong customer retention rates. This continues to be the best grocery e-commerce solution in Canada. customers continue to give us strong NPS scores quarter after quarter. In fact, the highest I've seen in my time in retail. And as a reminder, our average basket size on Voila is over three times the size of a full-service store basket, so these are highly valuable customers. ScenePlus also continues its strong progress this quarter, and we surpassed 15 million members, a 50% increase since ScenePlus launched at Empire. ScenePlus is now in over 70% of Canadian households, with over 2,000 ScenePlus card swipes every minute, and a redemption every two seconds. The end of this month marks the first full year of ScenePlus being launched at Empire Banners across Canada, and while we've seen so much growth, this is, of course, just the beginning. We are now rapidly turning our efforts toward personalization to develop a more robust and customized loyalty program. In our topic, we haven't spoken about much publicly is our new central kitchen, often referred to as a commissary. First, we'll be opening in Calgary in the first half of F25. In partnership with Crombie Reef, we have built a state-of-the-art facility that will service Alberta and surrounding provinces, bringing an elevated curation of ready-to-cook, ready-to-heat, ready-to-eat meals into our stores. This concept has been developed within our merchandising team, leveraging expertise from Farm Boy, Thrifty Foods, and our internal team to create an offer that will be fresh, delicious, and market-leading. We will gradually introduce products from a central kitchen to our store network to provide greater consistency, expanded variety, fresher products, better forecasting, better flexibility, less food waste, and reduced costs for items produced in a highly food-safe facility. This opening in Calgary is just the beginning, and I look forward to sharing more soon. Before I hand it over to Matt, one last thing. Just over five years ago, we purchased Farm Boy, which has been a fantastic deal and partnership for us, both financially and strategically. A small group of key Farm Boy senior management held on to a piece of the company at the time of purchase, and in February, as had always been planned, we acquired the remaining 12%. Key management remains at Farm Boy, and we continue to share and benefit from the learnings from them. We are thrilled with what Farm Boy has accomplished in the last five years, growing from 26 locations to 48, with the newest store in Oshawa opening today. And with that, over to Matt.

Thank you, Michael. Good afternoon, everyone. I'll provide some additional details on our Q3 results before moving on to your questions. We delivered adjusted EPS of 62 cents in Q3 compared to 64 cents last year. Our results this year were adversely impacted by the strike at our distribution center in Vaughan, Ontario, which ended on January 13th, and also by the sale of our Western fuel business back in Q1. These two issues combined for a negative impact of approximately 2 cents. Our performance was slightly better than Q2. While our earnings per share of 62 cents was lower than the 71 cents we delivered in Q2, this is mainly due to the timing of real estate earnings in other income and share of equity earnings. As I've explained before, this complementary income stream is a sustainable and an ongoing piece of our business. Now, while our annual real estate earnings is stable on a year-to-year basis, the nature of this income is bumpy, which causes some volatility in our quarterly results. If you exclude our real estate earnings, which were significantly higher in Q2 than Q3, our adjusted earnings per share was approximately two cents higher than Q2. We delivered same-store sales, excluding fuel, of 1.9%. Our sales performance was largely in line with Q2, as we continued to see tight consumer spending, given the uncertain macroeconomic backdrop, namely elevated interest rates and rising household expenses. Even if food inflation continues to stabilize, it will take some time for consumer preferences to normalize. During these tough times, our key focus has been to protect the fundamentals of the business, to proactively take costs out, and to continue to deliver value to shareholders, all while continuing to invest in the long-term future of the company. You can see that in each line of the P&L, as I'll now explain. Our gross margin rate, excluding fuel, grew by 90 basis points versus last year. While approximately one-third of the expansion is due to comping the cybersecurity event last year, the remainder of the impurement was largely due to lower distribution costs driven mostly by efficiencies in supply chain, amongst other smaller initiatives. When we look at SG&A, While our dollar spend was 66 million higher than last year, we are on track with our plans for the year. This increase was mostly related to planned investments in business expansion and our growth initiatives, but was also impacted by inflationary cost increases, such as higher retail labor costs, and was partially offset by a decrease in compensation accruals. As in prior quarters, our SG&A rate increased versus last year, due to our SG&A spend outpacing sales growth as we continue to invest in the future. Our SG&A rate was 23.5% in Q3, which was about 90 basis points higher than last year. But excluding one-time restructuring costs and the cybersecurity adjustment, our SG&A rate was 23.2%. But we are not simply waiting for a more favorable economic environment to improve our sales and then proactively take costs out and were making good progress. After excluding restructuring costs and other one-time items, our SG&A dollars were slightly lower than Q2 as we began to see some of the benefits from our restructuring initiatives and our work on non-MERCH procurement. Now, one quarter doesn't make a trend. and the pace of benefits may not be in a straight line, but we will continue to work at mitigating inflationary cost pressures through driving efficiency and cost effectiveness throughout our business, mainly through our initiatives in non-merch procurement, supply chain, and our organizational restructuring. Looking forward to Q4, we anticipate a very similar quarter to Q3. While it's good to see inflation continuing to come down, We need to see interest rates start to come down as well. This will help improve consumer sentiment and eventually drive a more normalized consumer behavior. In the meantime, we will continue to invest in our future, protect the fundamentals, and proactively reduce costs. Now let me turn to the balance sheet, which remains very solid. In fact, our funded debt to adjusted EBITDA ratio improved from 3.1 times last year to 3.0 times this year. We delivered free cash flow of 349 million in Q3, which is our strongest free cash flow performance since Q3 of fiscal 22. This strong cash flow generation enables the continued, but controlled, investment in CapEx, as well as our share buyback program. In Q3, our CapEx totaled 156 million, mainly from store renovations, constructions of new stores, investments in advanced analytics and technology streams, and our Voila! CFCs. We also entered into an agreement to purchase a parcel of land in Montreal. This is a one-off strategic purchase which, if successful, would occur in Q4 and increase our expected fiscal 24 capex from approximately $775 million to $885 million. With regard to our share buybacks, we are well on track. of 400 million. As of this week, we've repurchased approximately 9.5 million shares for a total consideration of 340 million. Finally, let me take you through the items we excluded from our adjusted results in Q3. There's nothing new versus prior courses. Firstly, we excluded restructuring expenses of 18.8 million after tax, or 8 cents of earnings per share. Year to date, we've incurred 38.3 million after tax, and we do anticipate incurring some additional costs in Q4. We also excluded a very small amount related to the cybersecurity event. As a reminder, our insurance claims are quite complex, but we do continue to expect further recoveries in Q4. These two adjusted reconcile our reported earnings per share of 54 cents to our adjusted earnings per share And with that, I'll hand the call back to Casey for your questions.

Great. Thank you, Matt. 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 George Dumais at Scotiabank. Please go ahead.

Yeah, good afternoon, guys. Matt, you mentioned Q4 is looking a lot like this quarter. Was that comment directed maybe on the same store sales as well? And I think, Michael, you mentioned that you were surprised by the magnitude of the narrowing gap between full serve and discount. Has that held up? And can you maybe talk a little bit about that as well? Thanks.

I mean, I obviously loathe to talk about the quarter we're currently in because that would not be right, and Matt will say what he can say, so I'm not going to comment any more other than I think people did not expect, and I think Pierre expected. He was pretty optimistic that that gap would close between discount and full service more than anybody else was, and probably in the industry or even at our table. We'll see how it's going to fluctuate a little bit as we see it over the next quarters, but I think... the days of discount greatly outperforming full service are coming to an end. I think, you know, at some point you'll see a flip. That's our belief, and we'll see if that happens. I don't think you were talking about it.

Yeah, and I'll just talk about the Q4. So, yeah, when we say we're looking at consistency, we're talking about the full net result of the P&L. So there will be some movement in sales and in gross margin. There always is. But when we say consistency, we're looking really at adjusted earnings per share. And yeah, our performance has really been quite consistent between Q3, Q2, and Q4.

Okay. Thanks. And excluding the impact of the comping the cyber event and mix, it looks like gross margins still kind of tracking ahead of our 10 to 20 basis points that you've previously talked about. Just wondering maybe, What drove that, and is there a line of sight for how long we should expect that expansion to go on for?

Yeah, thanks for that question. Yeah, as we've said before, my expectation and what we strive for is that ongoing 10 to 20 basis points of long-term expansion. So our view hasn't changed on that. Q3, frankly, exceeded our expectations a little bit. I don't think we should assume that that increase will be sustainable long-term. For the quarter itself, we had an 87 basis points improvement in margin. And we know that about a third of that came from the cybersecurity, though. For the rest, the biggest component was efficiencies in supply chain. But then there was a whole series of other smaller benefits to gross margin in the quarter, like space productivity, for example, which really drove that improvement. But like I said, going forward, we strive for that 10 to 20 basis points.

Yeah, it's Michael here. I'll just emphasize one point. That improvement in gross margin is not a result in any way of raising prices. It was all our productivity.

Okay, thanks for that. Just one last one, if I may. I know you guys have this 9% to 11% target. I know it's longer term. But as we think about fiscal 25, is it fair to assume that the current macro conditions are likely to get in the way of us kind of delivering that level of growth.

I've given up trying to predict macroeconomic trends a long time ago, and probably everyone should, but no, we're not stepping away from that long-term ambition, and we are cautiously optimistic in terms of where we're headed. I think there's two things that are going to be catalysts for us. One is, and we're not insanely optimistic here all the time, but we do think that at some point interest rates are going to start to fall. We don't think the first fall of interest rates is going to spur everyone on, but as consumers see interest rates start to fall and they get some sort of confidence, that's going to be great for us. That's just obvious. The second is that we're not waiting for that. We're not standing still. We've got a lot of improvement coming in our business, and we're getting, I think, tough times. They're an opportunity to make yourself a lot tougher, and we've gotten tougher. We're tougher on the business. We're more demanding, more accountable, greater velocity, and we're taking costs out where they need to be taken out for the Canadian consumer and for our company.

Okay. Thanks for your comments. Good luck.

Thank you. Thanks for the question, Jerome.

Thank you. Next question comes from Irene Nettel at RBC Capital Markets. Please go ahead.

Thanks, and good morning, everyone. Really appreciate all the comments so far. Can you talk about what you're seeing around promotional intensity in the basket and also private label and just, you know, other types of consumer trade-down behavior within channels?

Pretty consistent with previous quarter. So, promo intensity remain the same. Promote penetration is always something we're looking for. People are looking for deals. I don't see more intensity. I think people are looking for deals. Promote penetration is still high, but we're managing our promo mix really well. Yes, we continue to see higher penetration in private label. It's a great value for customer. They discovered that more and more, and they're using it more and more to manage their budget. So no big change compared to previous quarter. From Open Nutrition's eye, utilization of own brands and private labels is still good and growing, which is good news for us because it's really well managed by merchandising team. But no big change compared to previous quarter.

That's helpful, thank you. And then I was really interested in the comments about the commissary opening in Calgary. Can you give us a little bit more detail around the kinds of products that we should suggest, or we should expect, rather, how we should think about the rollout and when we might see it in other regions?

We keep the surprise for our customers. It's a nice surprise. But basically... We learned from our past experience with our friends at Farm Boy and Thrifty Foods having Central Kitchen since many, many years. We're having great results with those products. So I think the goal is to bring new products for customers that the customer cannot find somewhere else, well manufactured in a safety environment. The frequency of delivery will be amazing for store, will simplify their life. That will help them to manage retail labor at store level as well. So great consistency, great assortment on a very efficient manner in a safe environment. Basically, it's what we're trying to achieve with Central Kitchen.

And any idea when we might expect it in the other regions?

Absolutely. It's a national strategy. More to come, but the first... We are already having Central Kitchen at Farm Boy in both Ottawa and Toronto. We're having Central Kitchen in Vancouver Island for our 50th banner. That will be another one, but it's our plan to continue to expand that strategy over time.

That's great. Thank you.

Thank you. Next question comes from Mark Petrie at CIBC. Please go ahead.

Yeah, good afternoon. I first just wanted to follow up on the comments with regard to the supply chain and the benefits that you saw in Q3. Could you just expand a little bit on what was driving that exactly? And if that's something I know you expect sort of more normal 10 to 20 basis point type margin leverage over time, but does that supply chain work stuff that has sort of run its course or does that still have legs in your business?

It still has ways to go. I would say we're in the early innings of that. As we said before, during our sunrise and horizon periods, we really didn't touch supply chain. So that was one area of the business that we wanted to make absolutely sure we serviced our stores during that turnaround period. So now we get to look at supply chain in more detail. So the type of things we look at, you know, you're looking at optimizing your routes, your network, freight as a service, how we generate revenue. So it's all of those things. I would say we're at the early stages of that. So we'll continue to get some benefits moving forward. That's really the key things on supply chain. Great.

Okay, and I just wanted to clarify, my second question was just to clarify with regards to what you mean when you're talking about consistency on the bottom line. Are you talking about like the relative performance year over year kind of being consistent, you know, quarter to quarter or the absolute sort of dollar amount or penny amount or what do you mean exactly?

Yeah, we're mainly talking about the sequential performance of the business. So we took a really hard look at Q2 versus Q3 this year because last year was so distorted by the cybersecurity event. So we're very focused on what the current economic trend is with our consumers. So really looking at Q1 versus Q2 versus Q3 versus Q4 and onwards. So that's where we're seeing that consistency, Q2, Q3, Q4. I think that will manifest itself really in terms of adjusted EPS. But that's really where we see that consistency.

Okay. Thanks for all the comments. All the best.

Thanks, Mark.

Thank you. Next question comes from Michael Van Eyst from TD Cowan. Please go ahead.

Good afternoon and thank you. I wanted to ask you about some of the the OPEC savings that you're expecting from the transformation and the run rate you're talking about getting into fiscal 25. I don't know if you've quantified that. I don't seem to remember a number being provided. But first of all, can you quantify it? And then have we seen any of those in Q3 and will we see any of it in Q4?

Yes, we can quantify it, but we won't do that publicly. Did we see any of the benefits in Q3? Yes. So we're starting, and again, early innings is probably the best way to explain this. So in our efforts to reduce goods and offer resale, early innings, we started to see some benefits. And then with the organizational restructuring, same thing. So we executed those changes in the November, December, January timeframe, so we begin to see some of those benefits hit the P&L.

Okay, thank you. And then on Farm Boy with the managers, the key managers selling their minority stake, what's the plan for those managers to stick around? Are they committed to staying in the organization for any period of time?

Hi, it's Michael. How are you doing? Yeah, I mean, it's been such a good relationship, so that wasn't very difficult to do, to work out. Um, obviously, uh, we really wanted, uh, we have a great, uh, person running over there. Sean Linton is one of our best leaders, um, a strong leader on his own and a, and a protege of JL. So those two get along really well and they challenge each other in the business and it's, it's a wonderful combination. We're really, so Sean was one of the, uh, four, uh, senior leaders. He's sticking around and, um, and, um, as the president of Farm Boy. And then he reports to Jean-Louis, who's going to stay around for, I hope, for a very long time. And we have an agreement for him to stay around. And so Sean will report to him, and then Gilles will report to me, and we have a great relationship. Same time as well, Jeff York is going to be doing work for us, consulting work for us, because He's very, very strong on all sorts of areas. So basically we've kept, and the fourth who had shares, Donnie Melito, he retired, I don't know what, he retired recently, like a year ago. And so, and he was of that age and he'd been great too, but we've retained three of the four. And Farm Boy is still kicking it and they're doing fantastic. So, We just don't want any interruption over there. And I've got to also say that Jean-Louis has been instrumental, as has Jeff, in working across Empire on fresh, on commissary, on all sorts of things with us. And also working with Longo, and Longo's working with Farm Boy, and Longo's working with us. Those divisions just work perfectly in Empire, and they're bringing a lot of value that is beyond even the – the sales and profitability of their divisions. So I'm really happy that worked out. That's been one of, if not the best partnership I've ever seen. It's the Farm Boy Empire Partnership, and Longo's is heading in the same direction just two years later than the Farm Boy one.

Okay. All right. Thank you for that, Michael.

You can tell when you want it, but I get pretty excited when I talk about it. That's fine.

And then just finally, I wanted to... continue the questioning around the gross margin because it was such a strong number. And typically we don't see Q3 standing out so much from the rest of the year the way we just did. So I'm trying to understand the fact that it was such a strong number, yet you had a price freeze in that didn't seem to have much of an impact. And then on top of that, you're talking about not all of it being sustainable. or not necessarily building that in going forward. So, you know, how the supply chain benefits that you're getting, are you planning on reinvesting some of them into price? Or how do I, you know, square this all up?

Well, let me just clarify that we're always reinvesting in price, by the way. So what you're saying is net of reinvesting in price. But go ahead, Matt.

Let me just clarify the comment about not being sustainable. So the changes that we're making are sustainable. What I was saying is not sustainable is this 87 basis points improvement in margin. So we should not expect to get that improvement of margin on a going forward basis. The sustainable piece is the 10 to 20 basis points that we're aspiring to on an ongoing basis. But the changes that we made during the quarter, the benefits that we captured from the supply chain initiatives, from space productivity, from the other initiatives that we have going on there, all of those are sustainable. There's none of those benefits that will disappear. So when you look at our gross margin rate, again, Q2 to Q3 to Q4, you can expect consistency in that margin, and we aspire to increase that gradually over time.

Okay, so that would point to some pretty significant increases in the first half of next year just to keep margins around this level.

Versus last year, yeah. I mean, the consistency of the margin is what we expect.

Okay, thank you very much.

Thanks, Bob.

Thank you. Next question comes from Vishal Sridhar from National Bank. Please go ahead.

Hi, thanks for taking my questions. I just wanted to get some context on the land purchase. Are you able to provide context on the future intended use of that land? It's unusual, at least in my recollection, for Empire to buy land and hold it. And if you're unable to provide context on the specific use, are you able to reveal how long you'll hold it as a non-producing asset?

Yeah, thanks, Vishal. It's Michael. Yeah, so it's not, yeah, we don't do it every day, but it's not unusual for us to get land for distribution centers or especially stores. We try not to do it too much because it puts capital, you know, it leaves capital there. Although, you know, buying this kind of real estate doesn't make me too nervous. The idea there was there was a piece of land that is perfectly situated and perfect size for our, you know, One of our best banners, the IJA banner, which we expect to continue to grow and continue to be a key piece of our sales and our profitability. And we could not – it was a – I wouldn't say once in a lifetime, but it's – you know, because there's always land. But it was a piece of land we could not let fall out of our hands. Now we still have due diligence coming up. We've got to close this. At the same time, we are not putting shovels in the ground right now. At the correct time in the next few years, we'll be assessing and probably go ahead with a state-of-the-art automated facility to take down costs when we're ready. when we think it's the right time in terms of the growth of VGA, but also in terms of our ability to – I don't like depreciation. I don't like spending capital. I like spending capital on stores. But at the right time, this is going to be a fantastic investment. But I wouldn't start putting it in your model for next year.

Is that fair enough? Thank you for that. And you were commenting on IGA. Once upon a time – I suspect there was a perception that Quebec was the main driver of empire in the business. Wondering if you could provide color on all the changes that you've implemented over the years, how that proportion of earnings has changed throughout the country and how IGA is defending against this current period of shift towards discounts.

Well, first of all, thank goodness the Sobeys purchased the stores of VCI way back. It's an unbelievable asset, and it's not one of our best assets. And we have a great market share in Quebec, and it's a huge driver of our success and will continue to be so. But I'll ask Pierre to talk about sort of what's going on and how he's seeing it in Quebec.

The business remains extremely strong. We have a strong franchising network over there. We're in full service in Quebec, so yes, they have some headwinds, but generally speaking, the profitability remains extremely strong. Store level, same thing. There's nothing to be worried about. We have very strong engagement from dealers, so the business continues to be very strong. Of course, like everybody else, we're growing faster in discount, so discount is adding stronger sales, but overall, we're very pleased with The performance in Quebec, there's nothing broken and continue to perform very well.

Okay, and maybe on the back of that, you can just comment on real estate growth and percentage real estate growth and how we should think about it over the next couple of years. What banners are you focused on growing and what rates should we expect real estate to grow?

I think we've said on our capital allocation strategy moving forward that We like that. Again, I keep using the word consistent, but a consistent amount of capital investment. We will always allocate a big piece of that to the stores, both through renovations and for new stores. So we have already said that we will continue to grow our Freshco banner in Ontario and in the West, where it makes sense. We'll continue to grow Farm Boy. We'll continue to grow Longo's. And we'll continue to grow IGA and Toby's, where it makes sense. So we haven't given specific numbers on new stores, but it is definitely our intention to continue to grow that store base.

Okay. So should we expect net real estate growth for Empire in the years ahead in terms of square footage?

Oh, yeah. Yes, for sure. But, I mean, I'll just put a little color on it. It has to be – I mean, we are becoming draconian with – projects we're doing. We are not taking lower returns. We are not pleased with the increase in construction costs at all. Well, everyone, especially retailers, face. I mean, the increases are ridiculous. And so we have Doug Mason, Senator Markey, and over there, and the whole real estate team, it's got to be even more efficient in terms of putting these stores up, because we will not take a lower return. We're not going to Let me promise you this. We're not going to flush your money down the toilet, okay? We're going to put up stores where they make economic sense and we get the returns. I want to say for sure that we're going to have more stores. With banners, we're not going to let you know exactly what we're doing there, but we have very distinct plans in every jurisdiction. but we're going to make sure we're getting the returns from that. I think that it's a very, very difficult time to put up new stores with construction costs, so we've got to be real smart about it.

Thank you very much.

Thank you. Next question comes from Chris Lee at Desjardins. Please go ahead.

Hi, good afternoon, everyone. My first question is I think you guys have been quite clear that the slower-than-expected e-commerce industry adoption has pushed out the timeline for EBITDA break even for Wallah. I guess my first question is, you know, other than the tough economic conditions, why do you think adoption has been a bit slower than expected?

It's a great question in terms of, because just for people just tuning in who don't follow this all the time, Canadian e-commerce grocery adoption has been slower than most of the markets that we would look at, like the UK or US or some of the other markets. More akin to Australia, I think, when you look at it. And it's a bit bewildering in that it's lower than anyone thought it would be. I think part of it is that we have good grocery stores here and a lot of competition, notwithstanding what some say. Secondly, I do not think we started as early with good e-commerce solutions for our customers, so they didn't get into the game as quickly as the U.S. and the U.K., especially the U.K. And then when a lot of companies got into grocery e-commerce, it was during a pandemic and it was a bad experience. We are seeing now some increases in terms of penetration of e-commerce, especially lately. We do believe that it will get to the levels we thought it would be at, although maybe where UK and US are, and it'll just take a bit longer. So, you know, I'd say it this way. Are we going to be happy a little later on? We will be happy. Are we happy now with the penetration and how it's affecting our e-commerce? We are not. So we're doing everything. We're operating at the highest net promoter score I've ever seen. I've said that before. The customers love it. The operations are fantastic. Retention of the customers is great. And by the way, from what I can understand, we're running it fantastic. The cost, our ability to hold the margins, and our ability to attract customers. We just need more customers and to get more throughput through there. And I think you'll see that. And so we're working on all aspects of this to get this going. At the same time, you know, we're happy we have it, but I'd like to be a year or two further along.

Great. Thanks, Michael, for that. And maybe just to follow up on that, are you able to share just roughly what is the gap between your current industry penetration versus where industry needs to be? for the volant model to be forgiven.

I don't think we've ever disclosed that. You could probably do it back in the envelope. And the penetration now, we recorded three and a half for a while there. I think the penetration overall, I can say, look it up somewhere, but it's 3.8% now is the number we're using.

Okay. And I know the consolidation of the grocery gateway has resulted in some nice cost synergies for you guys. I'm just wondering, are there other cost efficiencies that you can perhaps accelerate that will get you to EBITDA break even sooner for voila?

I'll answer in one word, yes.

Okay. Are you able to share some of that?

Oh, that's another one word. No, I'm sorry I can't. You know me, I want to be transparent, but I can't tell you every single thing because it's either competitive or not disclosed. And I'm not about to announce something tomorrow, but we have all sorts of plans, and... And Pierre and Moet have been, are working very, and the teams are working very, very hard on getting this going. It's a big priority for us. This is a big investment. It's an important part of our business. It's going to be really important when you look out further. So this takes for the size of it, it takes an inordinate amount of our time, but it's worth it.

Okay, that's great. And maybe just have a question for Matt. You know, if If SIMS or sales were to, let's say, hold at the low single-digit rate for next fiscal year, I guess my question is, is that enough to keep your SG&E expense rate at least stable, given that you do have some nice cost-reduction initiatives going through that should help upset some of these incremental growth investments that are still coming through?

Well, I'm going to go with Michael's single word of being yes, but that's... So the simple answer is yes. The efficiency initiatives we have, the cost control initiatives we have, that gets us to our financial framework. So I don't want to give guidance in terms of fiscal 25. We're finishing our plans, but as Michael said earlier, we remain very optimistic for the medium and long-term future of this company. We have lots of plans. They're going to deliver significant value moving forward.

That's a great question, because we've obviously had some board meetings the last couple of days, and we're talking about this. We're going to sell as much as we can sell, right? But when we plan, we've got to plan that we're not going to have 10% comps or something like that. We've got to be incredibly efficient and be able to drive. What can we control the most? SG&A. What can we control the next most? Margins. Okay, and so even at what the numbers you might have been suggesting, we've got to do well on that. And then if things get a little better, then it's fantastic for us. And that's the way you've got to plan, especially in these economic times, and that's what we're really drumming into the company.

Great, and maybe that leads me to my last question. You said earlier that you guys are so cautiously optimistic, you know, 8% to 11% EPS growth is still a good target. I'm just thinking now, again, for next fiscal year, I'm going to take the other side of that question, which is if economic conditions remain unfavorable and then the trade down and all that continues to be against you for a bit longer, I guess from a net earnings perspective, what is the downside here? Can we actually see negative earnings or is there more initiatives, everything you just said, Michael and Matt, that will get you at least sort of stable, if not slightly better earnings, despite in the worst case scenario where conditions remain challenging for much of next fiscal year?

Well, I would give you a much rosier picture than that, Chris. So, first of all, our financial framework is a long-term financial framework. It's 8% to 11% long-term. That means some years we may be below, some years we may be above. But in terms of as we look forward to fiscal 25, you know, the Kind of the worst possible period for us, for Empire as a full-service grocer, is this year. So when we look forward to next year, as that gap, as the same store sales gap between full-service and discount continues to narrow, as our consumer confidence begins to gradually increase, that only plays into our favor. So no, we're not looking at any, that sounds like quite a doomsday prediction. We're not looking that way at all. Again, we remain cautiously optimistic as we look to next year.

But we hedge against everything now. We owe that to you, our shareholders. So that's why we're going after big prizes in SG&A, top decisions that don't affect the customer but take costs out of the business. And tightening every single screw we've got And that way, if it's not as rosy as we would hope, we're good. If it's rosy, we're fantastic. And you're all going to wish you bought today at this low valuation. So that's the way we've got to manage this company, and that's what you do in tough times. And I think we've done pretty well. Q1 was a pretty good quarter, and then the consumer hit the brakes a bit. We became a bit more trepidatious as we approached them. Labor Day. So full serve can do real well. And as recently as Q1. And then after Labor Day, and I think if you talk to most retailers or most businesses, they saw the same thing. Because I talked to them. And now if we can start to get some more optimism in the consumer and we can get, you know, people don't want to shop at four or five grocery stores. They don't want a bad shopping experience. They've had to make decisions they don't actually like. And if we could see some better times and less inflation and some construction costs settling down, things like that, we'll be in very good shape. But you've got to run like it's going to be tough, and then if it's better, wait. We make out like bandits. So do our consumers.

Thanks for the answers, and all the best.

Thanks.

Great questions.

Thank you. Next question comes from Kemi Chan at BMO. Please go ahead.

Hi, thanks for the questions. I've just got two quick ones here. First is, sorry, maybe I'm just not understanding this part, but when you said that this quarter, the gap between discount and full service narrowed, sounds like more than you had expected. But how come your comp this quarter wasn't better than, wasn't better sequentially, it was similar sequentially?

Because we're comparing it, that's a good question. Thanks for the clarification, first of all. Because we're looking at the gap between us and our Mostly our two major competitors. And when you look at, yeah, so we went down 10 basis points, which is not a hell of a lot, but it's 10 basis points, I guess. And I'm not going to give an ad for the two competitors, but if you look at how their comps are performing and where they were at, as you're seeing inflation coming down, you are seeing... palpable differences in that gap, and we're closing the gap. So, yeah, so, you know, we're down 10 basis points. You can go look at the others and what they were down. I'm not going to go do that work. But that gap is shrinking, and what I was saying, other than Pierre, it shrunk more than we expected.

Oh, I see. Okay. Got it. That's so clarifying. Thank you.

My other question is... For your SG&A, and I'm looking at an adjusted number, so I'm stripping out the restriction costs and the little bit of cyber that was in there. So on an adjusted basis, it looks like your SG&A was up about mid-single-digit percentage year over year. And I'm wondering if you're able to even qualitatively speak to or rank the buckets. Like there's the wage inflation, there's the investment in your stores. You've got the new CSC, the third one that's come up. Are you able to speak to, of these different pieces, like what were the biggest components behind the adjusted SG&A growth year-over-year? Thank you.

Yeah, sure. No, I can certainly walk you through that. So, again, adjusted SG&A year-over-year. I mean, the biggest buckets of cost increase is, first of all, what we call business expansion. So when we have increased the number of stores, when we have a new Fresco store, a new Farm Boy store, a new Sobeys store, so business expansion is the first piece of it. Retail labor is the second piece of it. There's our cost of staffing in the store through regular pay increases, union negotiations, minimum wages, et cetera. So those are the two biggest buckets. Our depreciation is a little bit higher. We can continue our stable CapEx, which is obviously higher than many years ago. So our depreciation is higher. And then probably one thing just to call out, during this quarter of last year, when we had the cybersecurity event, we pretty much shut down everything else. So we were focused on making sure that we protected ourselves against that event. So our consulting costs and our are a little bit higher this year than last year. But those are the main buckets of the cost increase year-on-year, in dollars, in dollar spend.

Got it. Thank you.

Thanks so much. Thanks, Anna.

Thank you. We have no further questions. I will turn the call back over to Katie Bryant for closing comments.

Great. Thank you, Joanna. 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 fourth quarter fiscal 2024 conference call on June 20th. Talk soon.

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