Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the EMPIRE first quarter 2025 conference call. At this time, all lines are in the lesson-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, September 12, 2024. I would now like to turn the conference over to Katie. Please go ahead.

Thank you Julie. Good afternoon and thank you all for joining us for our first quarter conference call. Today we will provide summary comments on our results and then open the call for questions. This call is being recorded and the audio recording will be available on the company's website at 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 Reindell, Chief Financial Officer, Pierre Saint 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 Metline.

Thanks, Katie. Good afternoon, everyone. Fiscal 25 has started with good momentum. As I said last quarter, we have become a disciplined, efficient grocer that is focused on delivering consistent earnings growth. This was reflected in our Q1 results, with strengthening team store sales growth and strong control over our margins and costs. Our team remains focused on strong execution and operational discipline, and we continue to see incremental benefits as our strategic initiatives pick up traction and deliver results. Although this is not yet a strong economy, nor a strong consumer environment, we are beginning to see market conditions gradually improving, supporting a return to more predictable and favorable customer shopping behaviors. We said previously that as inflation moderated and interest rates began to decline, it would be a positive inflection point for full service, and we've been seeing that over the last six months. I'm going to keep my comments short and to the point, as I believe our first quarter results speak for themselves. I'll focus on two topics today, our Q1 results and market trends, and an update on our strategic priorities. First, our results and market trends. Sales excluding fuel grew 1.3% this quarter, with same store sales of 1%, showing improving top line growth, particularly when stacked against our same store sales of 4.1% from the prior year. We are pleased that CPI's food inflation has remained stable at around 2% for several consecutive months, contributing to a more predictable operating environment. Both our full service and discount channels are growing faster than their respective markets, and we are optimistic that our positive top line trends will accelerate in the year ahead as the Bank of Canada continues to decrease interest rates. We also believe that the gap between full service and discount same store sales will continue to close as the economy improves, which will be advantageous to us as we can continue to lean into our strengths as a full service grocer. Last quarter on our investor conference call, we were asked a very good question as to what we were seeing from the customer that gave us confidence that consumer health was gradually improving in our business. When we look at consumer trends over the last quarter, we're seeing several early indications the customers are returning to a more favorable and predictable shopping behavior. Customer traffic continues to grow in our stores and we're seeing smaller declines in the average basket size. We're also seeing a decrease in the average number of stores shopped by Canadians. And for the first time in many quarters, promotional penetration is flattening after several consecutive quarters of increasing promotional customer behavior. These are all early indicators that consumer sentiment is improving and while it will still take time for stretched customers to fully return to their more typical purchasing behaviors, these factors are translating into the very early innings of positive sales momentum for Empire. Gross margins continue to improve this quarter supported by an unrelenting focus on stores, supply chain and purchasing more effectively. Margin improvement of 46 basis points outperformed our stated goal of 10 to 20 basis points over the medium term. While this improvement was driven by many small but meaningful actions, a few initiatives that continue to enable our growth include the ongoing deployment of space productivity and our committed focus on improving non-theft shrink. One example includes enhancing our store distribution and replenishment processes to ensure our shelves are stocked with the optimal assortment and quantity. For several quarters, we've been increasing our focus on being a customer destination for fresh products. These efforts are paying off as we're seeing solid growth in this segment of our business, which also contributed to our margin performance this quarter. We also benefited from a more predictable promotional environment in Q1, as I mentioned, which made promotional tonnage more stable and therefore easier for our merchandising team to manage. Overall, we delivered adjusted EPS of 90 cents this quarter, our highest ever. Even when excluding other income and share of equity earnings, we delivered earnings improvements in Q1 versus the prior year, which, as a reminder, was our strongest quarter last year. While the operating environment has fluctuated significantly over the last few years with several periods of extreme volatility, we've consistently protected the fundamentals of our business while also implementing new strategic initiatives and establishing the processes and discipline needed for us to consistently deliver these strong results. Now for an update on some of our strategic priorities. First, ScenePlus. ScenePlus and the related strength it gives us will be a key driver of growth for Empire. A year and a half ago, we completed our rollout of ScenePlus across Canada. Today, the impact ScenePlus has on our customers and business is exceeding all of our expectations. We have over 15 million members. Our CN Plus members are now spending on average 55% more than non-members. CN Plus has significantly boosted our incremental sales and margin compared to our prior loyalty program. We are scaling personalized offers and seeing promising results, and our supplier partners are enthusiastically supporting our efforts. As I said before, we are still in the early days of this program, And while we've made significant progress, there remains much opportunity to drive even greater value to our customers. Next, space productivity. You'll recall that the first phase of this program focused on deploying optimized category planograms by banner and region based on our algorithms, which was completed in fiscal 24. Every market is different, and our space productivity program has enabled us to better align our layout and offerings to the unique customer profile of each respective market. As one example of this, based on the algorithm outputs in one of our regions, we changed one of our large frozen categories to offer a greater proportion of premium products. Although this change was not an intuitive merchandising move, the team trusted the data and by making this change achieved double digit sales and margin growth. This is just one example. and we are very pleased with the value being delivered from the first phase of this program. Phase two of space productivity is well underway, and it focuses on optimizing the non-fresh space across categories. This is not a cookie-cutter approach, as the algorithm considers each store's size, customer demographics, and local preferences, and takes this into account as we optimize the store layout. This includes analyzing category and product adjacencies and the flow of aisles to ensure the optimal flow for our customers. Originally, this phase was focused on full-service stores, but with the success we've seen from our initial pilots, we have also begun to rapidly roll it out at our discount stores. And now, for a quick update on Vola, we continue to see strong top-line performance with sales growth of 26% Q1. The operating improvements we are making, such as optimizing routes and enhancing product assortment, are helping to drive volumes and improve profitability. We are also continuing to work closely with our partner, Ocado, to enhance the customer experience. For example, in the last quarter we made a number of website enhancements to reduce areas of friction in the consumer journey. Beyond Voila, we are also activating several other meaningful growth opportunities within e-commerce so that we can serve more types of customer trips and have access to a larger segment of the market in a capital-light, accretive manner. We look forward to sharing an update with you on this next quarter. And with that, over to Matt. Thank you, Michael.