Empire Company Limited

Good morning, ladies and gentlemen, and welcome to the Empire fourth quarter 2024 conference call. At this time, our lines are in 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, June 20, 2024. I would now like to turn the conference over to Katie Bryan, VP, Investor Relations. Please go ahead.

Thank you, Joanna. Good afternoon and thank you all for joining us for our fourth 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 empirecode.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 Reindell, 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 factors. I will now turn the call over to Michael Medline.

Thank you, Katie. Good afternoon, everyone. I am very pleased with the way our team is executing despite the currently inhospitable economic backdrop. We have become a disciplined, efficient grocer that is focused on delivering earnings growth. Our results this quarter demonstrate this with strong gross margin control, capital discipline and strong SG&A containment driven by our productivity initiatives and restructuring. We are committed to driving profits and doing the right things by our shareholders. We trust that you will see that in the approach that we are taking with Voila and in our continued commitment to return capital to our investors. The cost control and discipline we are delivering will pay off as we turn the corner on consumer sentiment, which will benefit our top line. Of course, everything we do comes down to our stores, and I am very pleased with how our operators and merchants are performing. I'm going to focus today on four topics. Key market trends, our Q4 and fiscal 24 results, an update on our strategic priorities and commentary on capital allocation for fiscal 25. First, market trends. In Q4, we saw a continuation of recent trends with consumer confidence remaining low due to the hangover of inflation and elevated interest rates. Food inflation continued its downward trend, remaining well below overall CPI and reaching a two and a half year low of 1.4% in April. While we are pleased to see low food inflation, consumers remain very careful in their spending. With the interest rate reduction announced by the Bank of Canada earlier this month, we believe this represents the start of a turning point for improved customer sentiment. As rates continue to gradually decline and Canadians feel less pressure on their wallets, we expect to see customers adding more items in their basket and trading up. That will translate to increased sales momentum for Empire. We are currently more optimistic about the market and our prospects than we have been in a long time. We expect that improvements will be gradual but inexorable. Turning to the quarter, we delivered solid results in the context of this environment. When you remove other income and share of equity earnings, which is largely real estate-related income, Q4 was consistent with both the prior quarter and last year. Gross margins continue to improve this quarter, driven by operating efficiencies and a strong focus on executing with excellence in our stores. This wasn't driven by any one thing in particular, but several smaller but meaningful things. For example, we reduced non-theft strength through a focus initiative, we improved space productivity, and we increased our supply chain efficiency to name a few. In Q4 of fiscal 24 and Q1 of fiscal 25, we are comping two strong quarters where we saw customers return to more pre-pandemic behaviors before they began to retrench again in late summer of last year. We are pleased to see that even in this environment, our customer base continues to grow. Customers are continuing to trade down to less expensive items, but this phenomenon seems to be abating. All of this is reflected in our same store sales increase of 0.2% this quarter. Now for an update on some of our key customer and sales driving initiatives. First, I wanted to provide a comprehensive update on Voila. We remain extremely pleased with Voila and continue to believe that this is the best grocery e-commerce solution in Canada and that it will be attractively profitable in the medium and long term. Customers love the service they're offering, the technology is best in class, and we are running the operations very efficiently. Overall, I am more optimistic about Voila today than I have been in some time. In Q4 of Voila, same-store sales grew by 17.3% and overall sales grew by 23.5% over last year, our highest ever. Voila is well-placed to win this growing channel and we remain committed and confident about its future success. However, as we have stated several times over the past two years, The current size of the grocery e-commerce market in Canada is smaller than we, or anyone for that matter, had anticipated. Our business model included a phased CFC opening timeline that was designed to protect Empire's profitability levels while expanding quickly. The plan was that the rapid growth in grocery e-commerce penetration would result in increased profitability at our active CFCs, and this would compensate for the initial operating losses from the newly opened CFCs. But due to the smaller overall market and the slower rate of growth, this has not been the case. So we're losing more money than we had initially estimated, and this is actually masking the strength of our bricks-and-mortar business. As a result, we are taking several immediate actions to address the higher-than-expected dilution from Wallach and quickly improve performance. First, we've decided to pause the opening of our fourth CFC in Vancouver. That's the right thing to do for our bottom line and for our investors. We want to focus on driving performance and volume on our three active CFCs before we open CFC 4. Construction of the external building for the fourth CFC in Vancouver has been substantially completed, with internal work related to grid build and robot commissioning not yet started. This pause will allow us to continue focusing our efforts on the strong momentum we are seeing with our active CFCs rather than the time-consuming activities associated with launching a new CFC. As soon as we see higher e-commerce penetration rates in Canada, we will be in a position to make a decision quickly on when we'll proceed with opening CFC4. Second, we are working with our partner, Ocado, to decrease our costs and provide us with increased flexibility to serve our customers more broadly, which includes ending our mutual exclusivity. Although it served all parties extremely well since the start of our relationship, by removing it we can pursue complementary growth opportunities in the market, including by serving more types of customer trips and having access to a larger segment of the market, which we're very excited about. Ocado has and continues to be an outstanding partner to us, and this is a decision we've made jointly to grow the business. We will have a one-time charge related to exclusivity as a result of it ending earlier than we had initially planned. This charge will be approximately $12 million. We anticipate this cost will be more than offset by the other operating improvements and savings we expect to achieve. All this to say, there is a lot we are doing to improve the bottom line results of WALA. These changes will have a significant impact on WALA's profitability in fiscal 25 and fiscal 26. We've had great conversations with our partners at Ocado. We're very happy with the partnership and our Q4 rollout results are the best we've had since we launched in June 2020. Now for an update on ScenePlus. Q4 marks the first full year of ScenePlus being active in almost all Empire banners across Canada. ScenePlus program benefits are resonating with customers who are swiping their cards more than ever. to earn points on their grocery shop, get additional savings with member pricing, and redeem points for free groceries. In fact, since launch, Canadians have redeemed over $270 million in points for free groceries across our stores. ThemePlus performance is meeting, and in most cases, actually exceeding our key performance metrics, such as on-card sales penetration, active customers, and supplier engagement where we have more than double the number of suppliers participating in Theme Plus. Program awareness and satisfaction also continue to grow nicely. Theme Plus now has over 15 million members, up 50% since the launch at Empire, which is fantastic, but having them active and engaged is critical. Our focus on digital has allowed us to double the number of loyalty members we are able to contact, which is key, as our digitally engaged members spend 2.8 times more than our non-members. The partnership with Scotiabank and Cineplex continues to thrive and we are extremely pleased with the Scotiabank acquisition campaigns that are bringing many new customers into our stores. We couldn't be more pleased, we couldn't be more pleased with the full year, the first full year in action for SIEM+. Now onto an update on Farm Board. This banner continues to thrive with their same store sales performance highest in our network over the last two quarters. But in addition to their standalone performance, the Farm Boy team brings so much valuable experience and learnings to the rest of our merchandising organization through several strategic initiatives. For example, this past quarter we ran produce pilots in some of Asobi's Ontario stores, leveraging the fresh sourcing, assortment, and operational excellence from Farm Boy to reinvent the customer experience in this department. There are several other exciting things in the pipeline between our merchants and operators at Farm Boy and our other banners to improve our stores, And I look forward to sharing more on how this great partnership is benefiting all of Empire. Our Farboy banner also generates consistently strong returns and has been a great use of capital. And in fiscal 25, we plan to continue investing in this banner by opening another three stores. Now, before I turn this over to Matt, I want to talk about our capital allocation plans in fiscal 25. Our business is generating a healthy amount of cash. $1.5 billion of free cash flow before CapEx, and we will continue to invest your capital wisely. During our seven-year transformation, we need to increase our capital investments to develop new businesses, tools, capabilities, and assets. In fiscal 24, we started to bring our capital investments back down with a target of $775 million. We actually finished the year at $720 million, excluding the Montreal purchase of land, which reflects the high cost of construction and our capital discipline. Where capital projects didn't meet our hurdle rates, teams were sent back to the drawing board to bring down costs. This brought our capital spend in lower than initial expectations for the year, and for fiscal 25, we estimate we'll invest $700 million, and Matt will give you more details on this shortly. Lastly, I'm very pleased to announce today a 9.6% increase in Empire's quarterly dividend per share, which brings our five-year dividend taker to approximately 11%, and represents an increase in our dividends for the 29th year in a row. We also announced that we renewed our NCIB to repurchase approximately $400 million of shares in fiscal 25, and you should know that this represents up to 12.8 million shares, which is about 10% of our public float. We remain committed to returning free cash flow to our shareholders and are at the maximum limit set by the TSX that we're able to purchase under our NCIB. Now with that, over to Matt.

Thank you, Michael. Good afternoon, everyone. I will speak to our Q4 financial performance and our fiscal 25 expectations before moving on to your questions. Our Q4 bottom line was almost exactly what we had communicated during our earnings call in March. Performance this quarter was very similar to both Q3 of this year and Q4 of last year. We delivered Q4 adjusted EPS of 63 cents compared to 62 cents in Q3. In Q4 last year, adjusted EPS was 72 cents, but this included a higher contribution from other income and share of equity earnings. If you exclude this, adjusted EPS was flat with last year. Moving to the top line, We delivered same-store sales of 0.2% as we began to comp some stronger sales performance last year, and as a reminder, we'll also be comping very strong same-store sales performance in Q1 of fiscal 25. Even with food inflation returning to normal levels, it will take some time for consumer behavior to return to normal given these higher interest rates. But the interest rate reduction earlier this month was a great step in the right direction, and we expect consumer sentiment to improve throughout fiscal 25. Our gross margin rate, excluding fuel, grew by 68 basis points versus last year, reflecting continued momentum from Q3. The rate of expansion was greater than we had anticipated, and wasn't due to any one specific item, but reflected the combined impact of many actions we are taking to support margin performance. Some of these were improvements in space productivity, shrink, particularly in fresh, efficiency initiatives and supply chain, and business unit MIPS. When we look at SG&A, as expected, dollar spend grew year over year, largely reflecting business expansion, higher retail labor costs, and investments in our store network. And similar to recent quarters, the SG&A rate also increased versus the prior year, with our SG&A growth outpacing sales growth as we continue to invest in the future. But our cost reduction initiatives and enhanced discipline are beginning to deliver. In Q4, when you exclude our adjusting items, so restructuring costs, the cybersecurity adjustment, and grocery gateway integration costs, our SG&A dollars increased by 2.5% versus last year, which is notably lower than the 4.1% increase we saw in Q3. Similarly, when you look at SG&A rate, our Q4 rate increased by 55 basis points versus last year, which is notably lower than the 90 basis points increase we saw in Q3. So we're happy with our SG&A progress, and this will set us up for success when sales improve and we can generate a better leverage of our fixed costs. The contribution from other income and share of equity earnings in Q4 was about $31 million lower than last year, largely reflecting the large capital gain we generated from the sale of a property last year. Now, I'm going to come back to this real estate-related income later in my remarks when we discuss fiscal 25. Our effective income tax rate was 28.3% in Q4, which was 300 basis points higher than last year, mostly due to the revaluation of tax estimates. For fiscal 25, excluding the effects of any unusual transactions or differential tax rates on property sales, we estimate that our effective income tax rate will be between 25 and 27%. Finally, on our Q4 numbers, let me give you an update on our adjusting items. There's nothing new this quarter. Firstly, we excluded restructuring expenses of $15 million after tax, or $0.06 of earnings per share. And secondly, after completing our cyber insurance claims, we excluded net recoveries of $10 million after tax, or $0.04 of earnings per share. These two adjustments reconcile our reported EPS of $0.61 to our adjusted EPS of $0.63. Now let's turn to fiscal 25, and I'll start with Voila. As Michael said earlier, we remain very confident in Voila as our medium and long-term solution for grocery e-commerce. However, with lower e-commerce grocery penetration than we had initially forecasted, we needed to take immediate action to improve short-term financial performance and to protect against additional unforecasted losses. While we do not provide specific information on our Voila businesses, or on our individual CFCs, we will enhance our path to profitability by pausing the opening of CFC4 while we focus on our three active CFCs, and by working with our partners at Cardo to increase flexibility and decrease costs, and by exploring other business development opportunities. With regard to capital allocation, our plans are supported by a strong balance sheet and our ability to deliver significant free cash flow. Firstly, we announced today a 9.6% increase in our dividend. And secondly, we announced the renewal of our NCIB program to repurchase approximately 400 million of shares in fiscal 25. Thirdly, but most importantly, we plan to reinvest approximately 700 million of capex in fiscal 25, with about half of this allocated to renovations and new stores. and about a quarter to IT and business development projects, and the remainder to the combination of logistics, sustainability, and e-commerce. As we've said in the past, capital discipline is paramount, and we were extremely disciplined in fiscal 24. If you exclude the land that was purchased in Q4, CapEx was approximately 720 million, which was well below our original guidance of 775 million. As Michael said earlier, If proposed capital investments don't generate the right level of return, they are rejected. Now let me return to other income. To provide further clarity on the performance of our core grocery business, we will begin to share an outlook on the combination of our other income and share of equity earnings, which is mainly our real estate-related income. In fiscal 25, we expect the pre-tax aggregate contribution from these two line items to be in the range of 135 to 155 million, which is largely in line with fiscal 24 if you exclude the gain on the sale of the Western Canada fuel business. We expect this to be realized with the following quarterly cadence, about 35% in Q1, 10% in both Q2 and Q3, and then 45% in Q4. The 35% that I noted in Q1 includes the pre-tax gain of 39 million related to a sale and leaseback transaction that we recently completed in June and is disclosed in our MD&A. And let me reiterate, we have always viewed this other income to be a part of our normal course of operations. Before we move on to your questions, a few final thoughts from me to leave you with. Over the past two years, we've demonstrated our resilience and our ability to effectively execute in a challenging economic environment that has been adversely impacted by extended periods of high inflation, elevated interest rates, and tight consumer spending. Throughout this period, we've protected the fundamentals of the business, resisted empty calorie sales, grown our gross margins, and proactively managed costs. And these cost control initiatives, including our restructuring program, non-merch procurement initiatives, and supply chain projects, are beginning to produce benefits. And our proactive approach to improve profitability at Wallah will also begin to generate benefits in fiscal 25. So we're really looking forward to fiscal 25 because as interest rates continue to come down, we believe that consumer behavior will begin to normalize and in turn support our top line growth. This will enable us to drive more leverage into our business, especially now with an optimized cost structure. And ultimately, we will grow our EPS in line with the long-term targets as stated within our financial framework. 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 Chris Lee at Desjardins. Please go ahead.

Good afternoon, everyone. Michael, I know I asked you this last time as well, but in light of today's announcement, I'm just wondering if you have any updated views on on two things. Number one is, what do you think are the key factors that are limiting e-commerce adoption in Canada? And number two is, how long do you think it would take before penetration reaches a level that will allow Wallah to be profitable? I'm sorry, I know this is a big crystal ball question.

That's a good question. Let me do the penetration one first, which is, Currently, e-commerce penetration has gone up recently, just so you know. And the demographics are in our favor on this one as well. But it's at 4%. We would have expected it to be 6% to 7% penetration of grocery at this time. At the same time, that wasn't a break-even. That was better than that, what we expected, 6% and 7%. So I'm not going to tell you when and where. But it's somewhere between four and those numbers that we need to get at. Now, at the same time, as you can see in all these places, we're not waiting for the economy. We're not waiting for everything. We are doing all sorts of things to make e-commerce more profitable for us and not just waiting for that. But that will come. The solution is fantastic. Customers love it. We'll do well. But we can't wait for that. We owe it to our investors to become... much more profitable year after year, and then make this one of our best businesses in terms of returns. So that's where we're aiming at. In terms of my own theory behind why e-commerce hasn't caught on in grocery as it has perhaps in hard goods or soft goods in Canada, and below that of countries like the U.K. and the U.S., is I think twofold. One is that we have great competition and bricks and mortar stores in this country and they serve our customers well and maybe that's better than what others find and wherever they live. That's one theory. The other theory and one I subscribe to but it's open to debate is when Canadians really needed to count on grocery e-commerce during the worst days of the pandemic, it stuck, right? Most of the offerings out there were terrible with terrible substitutions and not on time because people were just trying to get food to people in crisis, and I understand that. But I think that hurt the brand of overall e-commerce and grocery. But what we're seeing is you try voila, You're sticking with it. It has our highest NPS scores by a mile, even higher than Farm Boy, and customers love it. We just need more people trying it, which they are now doing, as you've seen. And we are becoming much more confident in the industry growing. Part of that will be the industry growing, and part of that is we're going to grow the industry. So a little more confidence, but it's below where anyone thought it would be. Matt, maybe you might want to add something on to that.

Yeah, I'll just answer your question about CFC4, Chris. So we haven't set a specific target as to what penetration needs to be before we launch CFC4. The key really is the point of the announcement today is we're going to focus our minds now on running the three CFCs we have with excellence. So you can imagine over the past four years, The teams have been focused on opening a CFC to opening a CFC to opening a CFC. So now with this poll, this enables them to really focus on running those CFCs excellently. So it's going to be a combination of e-commerce penetration growing and our profitability growing across all of the CFCs. We made this decision and have been discussing it internally And the notable improvement that we're already seeing in those three CSCs is quite clear, as you can see from almost 25% growth in Q4. So we're very pleased with how that's progressing. And when those two metrics move in our favor, then we'll make an announcement about CSC4, and we can quickly get that CSC up and running.

Well said. Thanks for that. Maybe a follow-up on that is, you know, appreciate all the colors so far. And when you mentioned that you expect a significant improvement in profitability as a result of some of these actions you announced today, can you help us understand or size it up for us? What's the size of this improvement that we can expect over the next year or two?

Yes, I'll share what I can. Chris, so as you know, we stopped talking specifically about Wallah profitability two years ago. But what we've been... saying for basically the past two years is that with lower grocery e-com and lower growth, then we've been making more losses than we had initially planned. So that's really the reason that we had to move as quickly as we did to protect short-term profitability, and that's clearly what our shareholders have been expecting from us. So, look, when we look to fiscal 25, we will have a full year of CSC3 in our numbers. And as you know, in the early years is when we make the most losses before the CSC ramps up. So what our goal is for fiscal 25, including a full year of CSC3, is to make sure that our losses are no more than what we had in fiscal 24. So that's our goal. We're close, we have still some work to do, but Pierre and the team are working hard on this, and that's our goal. No more additional losses.

Great, thank you. I'll get back into the queue, and all the best. Thanks, Chris.

Thank you. Next question comes from Tammy Chen at BMO Capital Markets. Please go ahead.

Hi, thanks for the question. Speaking with Lola here for a second, Can you talk just directionally a bit about the three different CSCs? Is the first CSC, the one in the GTA, the profitability or utilization there is relatively the best and the third is the lowest? Or among these three, it's a bit of a tighter band in terms of the utilization and profitability? Are all three at this point not profitable or maybe one is getting close to that. I don't know if you can give a bit more color about that. And Michael, did I hear you say that if overall grocery penetration was more than 4%, closer to that 6% to 7%, the entire voila would be break-even?

Let me answer the first part about the individual CFC. So again, what I can tell you, Tommy, is that as Each of our CFCs continues to ramp up and grow volume. They get closer to profitability. So that was always the model. That's what's happening. So CFC1 continues to move in the right direction. CFC2 continues to move in the right direction. CFC3 is in launch mode, right? So their losses are increasing as we get to a full year of run rate. So to answer your question, Yet they are all three are still losing money. That's absolutely in our expectations. But they're all heading in the right direction. But they are losing money.

I would say that CFC1 is above the overall same store sales because it's been in the market longer and now in Quebec. So it's all time. To your second question, good question. It's not exactly what I said, by the way, but I'll be very clear on what I say here. Not at 4%, but let me just put it this way. At 6% to 7%, we're all going to be happy, us and our shareholders. Very happy. So as we move, as that inches up and we continue to operate better and we're seeing these sort of same-store sales, it's going to look very good.

Okay. Understood. And... potential partnerships. So as I understand, as you've ended the exclusivity here, you're able to now look more into these partnerships. Is there any more you can say about that? How are you thinking of it? So should we interpret that as essentially other various retailers that do or offer e-commerce? It would be to lean on the infrastructure of Wolan, the three CFCs. Is that essentially what you're getting at? Thank you.

No, that could be something we do, but that's not what I was trying to get at. What we're talking about here, and I'm not going to get into too many details, but I think you're smart, and everyone on this call is really smart. You're going to know what I'm talking about. By ending exclusivity, this is going to allow us the opportunity to pursue complementary growth opportunities in the market, including by serving more types of customer trips and having access to a larger segment of the market. The big moneymaker in the medium and long term are these big basket shops that have a lot of But what we're seeing is that we also have to fulfill other missions in terms of satisfying customers to grow this business, and they've got to be profitable missions, honestly. And so right now we're in conversations with partners outside of the Wallah universe to be able to compete in other ways, not just through our CFCs, At the same time, we also believe that we'll be able to bring some of these customers into the voila environment because it's such a great service as well. And so I think in the next couple of quarters, you're going to hear more about that.

Okay, thank you.

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

Yeah, thanks. I think the comments on Bala have been very clear and helpful. One just broader question with regards to sort of your e-commerce offering, and I guess specific to Western Canada, given that the Vancouver CFC will be postponed, what's the offering to the Western Canada customer today, you know, with regards to click and collect? And is that something you expect to ramp up in the coming months?

Yeah, we're going to wrap that up as to fill in for the time period before we go forward with CFC4. But right now, just to give you a flavor of it, the BC market is served through 28 curbside pickup locations. And as you know, Mark, our Thrifty Food banner continues its online delivery. It started over 20 years ago serving Victoria and the Lower Mainland. So we have coverage there. I mean, it'll be better when we open up the CFC in terms of coverage, but we have made plans as well to make sure that we have a strong presence there. And pursuant to the last question as well, we're going to have other ways to serve this market that will grow our market share but also be profitable. Yeah, okay, understood.

Thanks for that. Thanks for that question. Yeah, and I guess, too, just sort of together on the margin lines, the gross margin improvement, as you said, was a little bit better than you kind of signaled last quarter where you talked about sort of a normalization in the improvements that you've been seeing. Could you just talk about sort of the outlook there for fiscal 25? And then similarly on SG&A, you know, a pretty modest increase, all things considered. And do you think that's a reasonable run rate, that 2.5% that you delivered in Q4 normalized? Is that a reasonable run rate, you know, barring any material change in sales trends?

Sure. Let me answer both of those. So, yeah, well, I mean, we're really happy with both of those line items in Q4 and as we look forward to fiscal 25. But let me start with margin. Yeah, as I said in my script, really this comes down now to operational excellence, and that's what's really kind of pleasing about our margin performance. There's nothing major in there, like there was maybe a few years ago with promotional optimization, which was driving 80 basis points in a quarter. This is a series of smaller initiatives that are all positively contributing. We talked about space productivity before. We talked about supply chain initiatives before. We talked about mix before. The one that's new this quarter, which we're very pleased about, is shrink. So I would categorize that as non-theft shrink. But our operators are really making great progress on this and will continue to do so. So in terms of looking forward to fiscal 25, I think I've said consistently that over the next three, four years, we're targeting 10 to 20 basis points of margin expansion per year. That might be a little bit bumpy quarter to quarter, depending on what we delivered in the prior year, but that's what our expectations are. And we have enough tailwinds with improved shrink performance, mix, space productivity, and how we run the business in order to generate that margin increase. And to be clear, just in case there's any doubt, none of this is coming from pricing. So that's really what's happening with margin performance. So I would bank 10 to 20 basis points for you.

Are you good with that or do you want to add anything?

Maybe the only thing is because inflation is going down, because customer behavior remains fairly steady compared to a year ago. The business is more predictable than it was a year ago and it's easier to manage. Procurement, replenishment, production are more manageable and predictable. That's very helpful to manage promo mix and shrink. I think with the level of inflation we have right now and some improvement in customer sentiments, we feel good about how we can deliver better and good control on all aspects of all components of the margin.

And then to answer the question about SG&A, Mark. So, yeah, we're very pleased with how SG&A looked in Q4 for the reasons I said earlier with the cost control initiatives. When we plan out fiscal 25, our SG&A rate is slightly higher than at F24, but our goal is that we want to be close to having a flat SG&A margin next year. That's an adjusted SG&A margin, to be clear. But that's what our goal is. We're going to be close, but that's what we're targeting.

Okay. Appreciate all the comments and all the best. Thanks, Mark.

Thank you. Next question comes from Michael Van Elst at TD Securities. Please go ahead.

Hi, good morning. So I wanted to circle back on Michael's earlier comments about the consumer optimism. And I understand how with rates coming down, that should be some help and inflation coming down, that should help. But how do you balance that out versus the significant pressures from a large component of mortgage holders that are going to see their mortgage rates go up substantially over the next two years how do you i guess what else are you seeing from the consumer that makes you makes you confident that you were going to see some improvement in the consumer health over the next you know four quarters yeah i think it's a great question and what we're seeing from external studies on consumer sentiment and in our own business is that

As I said, it's going to be gradual, but we believe it's now improving that we're out of the abyss and that we believe, even though Canadians remain under pressure, as I said, because of shelter costs and all sorts of other costs coming at them and mortgage renewals, rent increases, everything, that this is still a trepidatious consumer, what we're seeing is them coming off the trough, out of the trough. And we're seeing that, we're seeing early indications of that throughout our business, even though it's still not, I mean, these are not heady days, but we believe this is the early changes. We'd like to see, obviously, stronger consumer sentiment, which will come from lower interest rates and some other things happening. But we believe in our business that we've seen the problems stop growing and get better. We're also seeing one of the things we see, but you can look up the consumer sentiment yourself, but one of the things we're also seeing is this quarter a further shrink between the difference between full serve and discount same-source sales as well.

Yeah, I would just, and the only thing I would add to that, I think Pierre alluded to it earlier, that the stabilization of consumer behavior is what gives us confidence, right? Because we see this kind of gradual improvement in all of our metrics across our entire business, not just in sales, but in promotional effectiveness, in margin control, in how we manage our stores. That stabilization of consumer behavior really plays into our hands. I have always used the word gradual. I expect gradual improvement throughout the year, but it's gradual improvement everywhere, and that's what gives us that optimism.

Okay, that's helpful. And you reiterated your 8% to 11% long-term EPS CAGR. It's a forecast or guidance that you put in place. last year and you've seen your earnings down a couple of percent in a tough environment uh obviously um so that would mean that you need to get above eight to ten percent at some point over the next few years to get back into that tiger how do you feel like do you feel you can actually get into that range this year yes yeah and that would have to be if you're that would have to come i'd assume from some top line growth, some more meaningful top line growth in the back half of the year?

We hope for some top line growth. We do. But we are not planning for ridiculous top line growth to make that target.

All right, great. And then just finally, on your capital program, Matt talked about cutting back the budget to $700 million. I think originally we were thinking more like $800 million. So what projects are generating the good returns? I'd assume Farm Boy is one of them. What projects are you most happy with and you're continuing with? And then where are you cutting back?

That's a great question. We have a lot of detail on this because we're so focused on returns and benchmarks. But look, over the past three to five years, almost anything we've done in real estate has had a fantastic return. That's becoming a little bit more challenging now because of the physical cost of capital. But even within that space, the work we're doing on Farm Boy, on Longos, the new stores, they all generate a very healthy rate of return. So that's why we still allocate 50% of that capital to stores. So that reinvestment in the stores will remain strong. In terms of other areas, so the work we do on business projects, so when you think about space productivity, for example, the work that we do in stores, they all have a very strong rate of return. The reason for the reduction really is it's trimming across the board. So in prior years, we had a larger investment in e-commerce that now, of course, is coming to an end now that our CFC Thor building is complete. And that will translate a little bit into logistics, so we'll move some of that investment into logistics, which has more of a long-term but a very positive IRR. So it's a little bit of reallocation between spend buckets and just trimming. But 700 is a healthy number for us for fiscal 25.

All right. Thank you.

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

Thanks, and good morning, everyone. A couple of follow-up questions, please. So first of all, following on Mike's question and your answer, Matt, you called current borrowing rates or cost of capital as being a factor. If, in fact, we do see rates coming down over calendar 24 and early 25, should we be expecting that CapEx number to go up again for F26-27?

It's a great question. I think the answer to that is no. We've worked very hard to make sure we have really strong capital discipline in place. I think you know my focus on return on capital and making sure we deliver a good return to our shareholders. So we are, if anything, improving our hurdle rates and making sure that we deliver really strong returns on our capital. So no, I wouldn't bank an increased assumption. I think our $700 million number is good for a couple of years.

That's really helpful. Thank you. And then going back to the discussion about consumer spending, are we to understand that, let's say, on a sequential basis, and I'd also be interested in commentary, Q1 to date, that sort of private label trade down, promotional intensity, sort of trading up, trading down in package sizes, are we seeing that behavior finally stabilize? Yes.

Yes, absolutely. And so over the last quarter, and we continue to see customer buying more in promotion, our TPR measurement, but it's stable compared to previous quarter in years. Customer continue to shop more stores, continue to shop our stores, our transactions are up across every single banners. And we are seeing the increase interest into the private table. So our sales in private table continue to perform very well. Penetration is going up. And profitability through private table is going up. It's another good contributor to our margin performance. So it's stable. It's predictable. It's easier to manage. And we are seeing into this quarter in some weeks some relief on the the TPR on the formal penetration, which is encouraging.

That's not from you changing it. It's from the consumer. Yeah, exactly.

Understood. Thank you. And on the private label penetration, so are we kind of stable in that low 20s, low to mid 20s level?

As I said many times before, it's improving. Promote penetration is an indicator, but it's not the only one. We need to make sure that every single item in every single category are relevant to the category. So I'm not a big fan of measuring performance by performance, but more by relevancy into the category. And they need to play a specific role into the category at a good margin expansion compared to national breadth. But it's improving, which is good. And I think you're close to our number in your assumption.

That's great. Thank you. Finally, I swear this is the last question. You noted that these are all just little tag follow-ups. You noted that business was up across all banners. So are you saying same-store sales was up across all banners in all regions and that Longos and Farm Boy were the strongest?

I think you said customer count.

Customer counts are up in every single banner. So because people are shopping more stores, first of all, and people continue to shop our stores. So people are not shifting 100% of their purchase from one store to another one. They're just shopping multiple stores, and they continue to visit our stores. So that's the good news.

And just to be clear, Irene, so we don't have positive comps in all of our banners in all of our regions. Again, as you can see. as we start to lap some of those stronger comps from prior year, both in Q4 and in Q1. But having said that, our sales trend is improving across the board. So that's what we're really encouraged by.

And the next thing, that's a great point that Pierre makes, a good question to answer, but if we were losing a lot of customers, I'd be more worried. As things continue to get better, we're going to see, oh, we don't need to go out and get a lot of new customers. When they come, that's great. Just want one more item in the basket. You get one more item, and then two more items, we're flying. And so we've just got to, and that's not the economy. I'm looking at Pierre right now. That he and his team continue to improve like they are. A lot of things we don't talk about on these calls, but I'm seeing improvement in terms of operations and merchandising across the board. and we have a lot of good initiatives underway to do that. So, you know, customers are still there. We just need them to stop cheating on us a little bit and come home to where they really like to shop and just need one more thing in the basket, and that's what we go for.

Is that fair enough up here? Yeah, and the only thing we'd like to add is the investment we've made in in data where the last couple of years are very useful right now. So the team is using data like never before. So they know exactly customer behaviors, where we have opportunities. So the team is leveraging the data more than ever to make sure that we remain very promotionally relevant. So I'm very confident that the team is having the right tools to continue to drive growth going forward with those indicators and with this data.

That's very helpful. Thank you.

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

Hi. Thanks for taking my questions. Once, you know, several years ago, Empire suggested that the Voila business could generate EBITDA margins comparable to the bricks and mortar business. And since that period of time, the bricks and mortar business has improved. And obviously, in this call, despite deferring the CFC in Vancouver, management seemed to express enthusiasm. So maybe you can give us some bookends, help us understand what the potential of the business is and some parameters. I know you said six to seven would be very happy, but I'd like to know what that means in some numerical terms. So if you can give us some indications of what underpins your confidence in voila to reorient us, that would be helpful.

Yeah, thanks, Vishal. We're probably, Matt's going to disappoint you a little bit by not giving you every number, but we're going to try here to help you out. But I did say that, because at scale, voila, we expect to have better EBITDA margin than bricks and mortar, and that makes sense. At scale, you have all sorts of scale advantages, even given delivery and all that. And that's just a fact. But not at scale. It doesn't have that EBITDA margin, obviously. So we've got to get that closer to that six or seven number to get that kind of scale and have this as good and then better EBITDA margin. And I stick to that.

Matt? Yeah. You gave my question. The only thing I would add to that is, Even theoretically, when people look at an e-commerce model versus a bricks-and-mortar model, they think, well, if price points are approximately the same, then how can you generate as much profit in e-commerce when you have an additional distribution expense? Well, there's a couple of reasons in there. First of all, we charge for that distribution expense, so we get to recover some of that. But the second biggest reason, the difference between bricks and mortar and e-commerce is you get to monetize the data. So over time, both through retail media and other channels, we'll be able to monetize that data. So in the long term, there's no reason, as Michael said, that Voila can't be at or even better EBITDA margins than bricks and mortar.

OK. Thank you for that. That was helpful. I wanted to get back to that traffic point, which I found to be interesting. So I have two questions, and I think one of them you partially answered. But my first question is, and I'll ask them both together. My first question is, is the traffic that you're seeing in aggregate across your banners, is that stronger than population growth? And related to that, I know management said they're prioritizing profitability over empty calorie sales, which makes sense. But at what point does management get worried that, you know, some of these traffic patterns that these customers are creating as they entertain other banners stick and they lose those customers more so, you know, for a longer period of time?

Maybe I'll do the last one and then I'll try to tackle that population one. Yeah, I mean, we have seen, we have seen Customer surveys that show us that people want to shop, they don't want to shop this way. They don't want to go to five stores. They want to go to the store they like. And let's take it in Quebec, yeah, the store they like, okay. We've also seen that in different times, even in this cycle, including last year, Q1, that we had 4.1% comps because customers were feeling a little better and then they hit kind of an interest rate wall in late August or middle of August. And we saw that through the economy, and we saw that in almost every business that that happened. Will some people change their behaviors? Maybe a few. But as you point out, there's more population. But we believe, and we saw it at Christmas, and we see it at different times, that we are not, all we need is one more thing in the basket. It's not like we need, you know, 10 things in the basket here. So people do not want to shop this way. due to exigencies out of their control, they have to, which is tough. It's been tough times. As things get better, we'll be the biggest recipient of things changing, and we'll be happy because that will mean Canadians are in a better spot. In terms of the other question, I don't know if we have an answer to that.

Well, I would just add in terms of the comparison with population growth. As we've said this whole period, our customer numbers are what gave us the confidence that when sentiment returns that we will benefit and we'll be well-placed because our customers are still in our store. And now we're beginning to see the benefits of that. Population growth isn't the only way we get new customers. So when you think about how we're growing our customer base, the work we're doing on scene, the work that we're doing with assortment and our experience in stores, all of those things, we're attracting new customers to our banners. So it's not just population growth. So just to add to that, that's part of the reason that our customer numbers are as strong as they are.

Thank you very much.

Thank you. In the interest of time, we do ask that you limit yourself to one question coming from Chris Lee at Desjardins. Please go ahead.

Okay, I had a few follow-ups. I had to pick a good one, I guess. So maybe just to sum it up, like I think Michael, in answer to Mike's question earlier, he asked you like, you know, you're going to achieve 8% to 11% in PS growth this year. And I think you sounded fairly direct and confident that the answer is yes. Just from everything that I've heard you say so far, is part of your confidence really predicated on things that are within your control, you know, in terms of how you're managing for a lot in terms of all the other initiatives that you're doing? Is that kind of the way we should think about it, that it is, that's what you're sort of confident, or is it depending on really still market factors?

So, great follow-up. Thank you. Thanks for asking a follow-up question. So, our plan is to be this year in that range. As I intimated, but I'll be clear here, that it is predicated on the market getting a little better, but not rate this year, but not a lot better because, you know, it gets better than that's like cherry on top of sundae, okay? What we've done this year, and Blala will be part of it, is we put together a plan that we should be able to be in that range given a slightly, slightly better market in this year. And, you know, as you know, Part of that will, a big part of that will be an increase in internet earnings and a big part will be the NCIB, like most companies today in retail and what they're doing. But we don't like to put high sales numbers in because we like that to be in addition to what we're doing. So this is in other ways the initiatives under altitude that we're doing. aggressive actions that we're taking in addition to what our strategy is that we're not ready to talk about right now. But that's the kind of thing we're talking about here because we want to make our shareholders happy and they deserve it. It's been a couple of harder years. And if we get outside sales gains, we're not counting on it. That would be a bonus. And if we don't see as good an economy, we'll make changes to make sure that we do everything we can to try to fit into that 8 to 11.

Okay, thank you.

That's our expectations.

Thank you. And the last question comes from Mark Patri at CIBC. Please go ahead.

Yeah, thanks. Just a quick one. Matt, I think I heard a comment where you said sales trends are improving across the board. Was that something specific to like private label penetration or something like that, or was that a broad comment just about the business overall?

It's really a broad comment across the board. I don't like making massive generalizations, but we are seeing that pretty much so broadly across the use of all of our banners and all of our regions.

Yeah, okay, thanks. And since that was quick, I'll squeeze one more, which is the dividend increase, obviously that outpaced the EPS growth. How do you guys think about that? Should we be thinking about that as sort of a stable payout ratio from here, or what's the right way to think about it?

Well, I'm not going to comment on future years, but I think our trend and our past experience has been very, very stable in this. We do kind of like those dividend increases of 8% to 10%. Sometimes it's a little bit higher. I think, how many years now, Katie, have we got dividend increases? Twenty-nine. Twenty-nine. So, you know, I don't think it would be unreasonable for you to expect that we'll have a similar increase next year. Okay. Thanks for that. Thank you. Thanks very much.

Thank you. At this time, ladies and gentlemen, I will turn the call back over to Katie Bryant for closing comments.

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 first quarter fiscal 2025 conference call on September 12th. Talk soon.

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