Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the Empire's second quarter 2025 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, December 12, 2024. I would now like to turn the conference over to Katie Bryan, Investor Relations, Treasury and Pension. Please go ahead.

Thank you, Joanna. Good afternoon and thank you all for joining us for our second quarter conference call. Today we will provide a 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 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.

Thanks, Katie. Good afternoon, everyone. In Q2, the storied empire continues to be an improving consumer environment with solid execution. We saw momentum and green shoots in both the economy and our business. Our same-store sales have gradually but meaningfully increased over the last two quarters, and we continue to make improvements to our margins and to our costs. As you know, through the period of rising interest rates and inflationary pressures, We focused on protecting the fundamentals of our business while also working on initiatives that would set us up for success once the economy started to recover. Inflation has now moderated and interest rates have begun to decline, representing a positive inflection point for full service, which we've clearly seen over the last three quarters. We've laid the groundwork on our major initiatives, and now the strength we've been building in our business is beginning to come to life in our results. Today I'm going to focus on two topics, our Q2 results and market trends, and then a quick update on our e-commerce business. First, our results and market trends. Same-store sales grew by 1.8%. We're pleased with the progression of our same-store sales, which is in part due to many of the early market indicators that we highlighted in Q1 and that continue to gradually build in Q2. Food inflation has been stabilizing for the last three quarters. contributing to a more predictable operating environment, and interest rates fell by 75 basis points during the quarter, improving consumer confidence. Both our full service and discount channels continue to grow faster than their respective markets, and for the fourth quarter in a row, we continue to see the gap between full service and discount same-store sales closing. We said this last quarter, and I'll say it again, we believe this will be advantageous to us as we continue to lean into our strengths as a full service foremost grocer. Over the last few years, we have made investments to highlight and deliver value to our customers across all of our banners. For example, we know that our own brand's products remain top of mind for our customers, and we have launched a significant number of large format, multicultural, and value-oriented products in response. The early indications we saw last quarter of customers returning to more favorable and predictable shopping behaviors continued to present themselves in Q2. We see customer numbers growing in our stores and smaller declines in the average basket size. That's positive, but it will take time for stretched customers to fully return to their more typical purchasing behaviors. Gross margins continue to improve this quarter, supported by a focus on stores, supply chain, and purchasing more efficiently. Margin improvement of 48 basis points was driven by many small but meaningful actions. A few initiatives that continue to enable our growth include our ongoing deployment of space productivity, significant improvement in our non-theft shrink, and our supply chain. With regards to shrink, we have continued to leverage best practices and expertise across our banners to implement new ways of working in our stores, which are focused on optimizing forecasting, ordering, and delivery schedules. And within our supply chain, there are two key areas we can highlight. First, we're executing with a higher degree of precision and discipline. In practice, that means we're getting better at utilizing our advanced transportation management systems, strengthening partnerships with our carriers, and streamlining deliveries to reduce costs and mileage. This has enabled us to get better in areas such as outbound delivery to stores, where we have optimized delivery frequency and order windows. Secondly, we've been focused on consolidation and expansion across our supply chain network. As an example, in Q2, we completed the expansion of one of our distribution centers in Ontario and expect to realize savings by converting high volume direct store delivery vendors to our distribution center. Not only have these initiatives enhanced our margin, but they have also enabled us to achieve significant improvements in freshness, waste reduction, and product availability. While we've been protecting the fundamentals, we've also put much effort into improving our cost base, which is starting to show in our results. Our SG&A rate grew 46 basis points this quarter compared to 69 basis points in Q1, and is the lowest rate of growth over the last six quarters. Over the last year, our strategic sourcing team has worked extensively with suppliers to enhance value on the products and services that support our operations. This, in combination with the impact of the restructuring and the many supply chain initiatives, have collectively enabled us to improve our cost base. Overall, we delivered adjusted EPS of 73 cents this quarter. When excluding other income and share earnings from equity investments, we delivered EPS growth of about 8.7%. versus the prior year. And now for a quick update on our e-commerce business. We had total e-commerce sales growth of 12% in Q2, driven largely by strong top-line performance from Voila. With Voila, we've enhanced our omnichannel marketing approach, re-engaged LAP's customers, they made a number of operational improvements. You've heard us say this before. Growing Canadian e-commerce penetration is the key tailwind that we need to accelerate the growth of Voila, and we're beginning to see that. Again, green shoots, but movement in the right direction. We've also launched partnerships with Instacart and Uber Eats in Ontario at the very end of the second quarter. These platforms launched in Western Canada last week and will continue rolling out to the rest of Canada in calendar 2025. We wish everyone a safe and a happy holiday season. And with that, I'll turn it over to Matt.

Thank you, Michael. Good afternoon, everyone. I'll provide some comments on our quarterly performance, as well as our expectations for the second half of the year, and then we'll open it up for your questions. In Q2, we delivered another quarter of solid performance generated by improving top-line momentum. As we've been saying for the past few quarters, we clearly see gradual improvement in the consumer sentiment thanks to lower inflation and decreasing interest rates. The combination of consumer behaviors beginning to normalize and solid execution on our initiatives is translating to improved sales performance. This, combined with our strong margin and cost control, will help generate improved profitability. Our Q2 adjusted earnings per share was 73 cents and was two cents higher than last year. Further, our other income and share of earnings from equity investments in Q2 was $8 million lower than last year. So, excluding this from both years, our adjusted EPS was about $0.04 or 8.7% higher than last year. Our same-store sales was 1.8%. The same-store sales gap between discount and full-service businesses continues to narrow and is a great indicator that consumer behavior is continuing to gradually normalize. In e-commerce, across all of our online platforms, sales were 12.2% higher than last year. Voila continued to be the main driver of this solid sales growth. Our new partnerships with Uber Eats and Instacart were active for less than two weeks during the quarter. It's early days, but we believe that they will be a very good complement to Voila. Our gross margin rate, excluding fuel, increased by 48 basis points versus last year, which was consistent with the improvement we delivered in Q1. We continue to target 10 to 20 basis points of margin expansion per year as a medium-term expectation. And while we've exceeded this over the last few quarters, we will begin comping very strong growth next quarter. Our SG&A is well controlled. In Q2, our SG&A dollar growth after excluding adjusting items was 2.4% higher than last year, which was lower than the 4% increase we saw in Q1. As in prior courses, growth in SG&A spend reflects our investments in the store network, tools and technology to support our strategic initiatives, and higher retail labor costs, but partially offset by our cost control initiatives, including goods not for resale, supply chain, and the benefits of our organizational restructuring. As Michael noted, our SG&A rate, when excluding adjusting items, was 46 basis points higher than last year. a marked improvement from the increase we had in Q1. As our top-line sales performance starts to improve, we will see a better absorption of our fixed costs, and so we expect that the pace of our SG&A rate expansion will gradually taper moving forward. As I mentioned earlier, our other income and share of earnings from equity investments was $8 million lower than last year, but it was higher than we expected in Q2. Our earnings from Crombie were higher than expected due to their acquisition of the remaining 50% of our residential property. That reflects the lumpy nature of real estate transactions and why we opted to provide the best possible guidance we can give you for this stream of income. For fiscal 25, we continue to expect our pre-tax aggregate contribution from other income and share of earnings from equity investments will be in the range of 135 to 155 million. We expect that 7 to 10% of this range will be generated in Q3, with the balance in Q4. For the full year, we are trending to the upper end of the range, and we will provide you an update on our full year guidance during our Q3 earnings call. Our effective tax rate for Q2 was 25.8%. which was higher than the 22.3% we had last year. While we benefited from non-taxable capital items in both years, last year's tax rate had a larger benefit from these capital items, as well as benefiting from some investment tax credits, which led to a lower effective tax rate. For fiscal 25, excluding the effects of any unusual transactions or differential tax rate on property sales, we continue to estimate that our effective income tax rate will be between 25% and 27%. Okay, let me move on to capital allocation. Our balance sheet remains strong, driven by solid cash flow generation and disciplined capital spend. In Q2, our capex was 149 million, mainly on store renovations, construction of new stores, and IT. We remain on pace to spend 700 million on capex in fiscal 25, with approximately 50% of this investment being allocated to store renovations and new stores. Our share buyback program is on track and we fully expect to complete our 400 million plan for fiscal 25. As of this week, we have repurchased 5.7 million shares for a total consideration of 213 million. So let me wrap things up. As we enter the back half of fiscal 25, We're very pleased with the top-line momentum we are seeing in our business, especially in full service. With many of our key initiatives starting to add incremental sales, such as space productivity, loyalty, personalization, and our expanded e-commerce strategy, we're starting to deliver better top-line growth while continuing to expand gross margins and effectively managing our cost base. So we are well set up for the future, particularly as consumer sentiment continues to gradually normalize. And with that, I'll hand the call back to Katie.

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 prompt that your hand has been raised. If you're using a speakerphone, please lift the handset before pressing any keys. The first question comes from Chris Lee at Desjardins. Please go ahead.

Hi, good afternoon, everyone. Just maybe I start off with Michael. I think you mentioned in your opening remarks that you continue to see a smaller decline in average basket size. I was wondering if you can provide a bit more details in terms of what's driving that smaller decline. Is it driven mostly by higher dollar amounts, or are you seeing some pickup in terms of unit volume? Thanks.

If you don't mind, I'll pass it over to Pierre.

Basket size compared to last year and two years ago is improving right now. So the decline was smaller. And in some region, we're seeing basket size increase right now. So indicator on basket size is improving. The gaps, because we know over the last two years, we had more transaction with smaller basket size. It was a general trend in the market, including in a discount business. And recently, we saw an improvement in the basket size trend. And in some region, we're seeing basket size increase right now.

Okay, and that's because you're seeing more just people buying more units? Is that one of the reasons?

Exactly. Unit also. Unit indicators showing improvement. There's many components that we're looking at. So basket size is improving. Unit is improving. Unit transaction is improving gradually, but we're seeing positive trend in those indicators.

And is that sort of more broad-based across the country, or is there a certain regional markets where you're seeing that?

In both full-service and across the country.

Okay, perfect. Thanks for that. And then maybe, Matt, just maybe a question on gross margin. You know, it did increase 48 basis points excluding the fuel impact. I'm just wondering, you know, at a high level, how much of that improvement was due to mix? Because it does seem like the decline in fuel and wholesale tobacco revenues were a bit larger than previous quarters. So I'm just wondering if you can maybe break it out for us. What was the mixed contribution in a quarter? And then maybe relate to that as you look into the second half of the year. Do you expect the declines in wholesale tobacco revenues to continue so it will still provide a bit of a margin tailwind for the second half of the year? Thanks.

Sure. Thanks, Chris. Yeah, if you look at the 48 basis points of gross margin improvement during the quarter, I mean, as we said before, there's multiple initiatives that are all adding a small amount to that improvement. But mix is about 15 basis points of that. So that gives you the indication of that. And then, like we also said, supply chain contributed in Q2, which it did not in Q1. and then the rest is core. So mixed is about a third of the increase. And then in the second half of the year for gross margin, first of all, let me set expectations on total. So as we've said, I will not move away from that 10 to 20 basis points. That's what we expect on an ongoing basis. But for wholesale in particular, Yeah, I mean, it's a continuing trend that tobacco sales would decrease. So we'll see what happens on wholesale. That may give us a small mix impact benefit in the second half of the year. We'll see how that progresses.

Perfect. And if I may just speak in just maybe one last question, maybe on for that. I know you don't disclose the earnings dilution impact anymore, but are you able to share just whether on a year-over-year basis, if that level of dilution has stabilized or perhaps improved as a result of some of the cost-saving initiatives that you have implemented over the last three or four quarters.

Thanks. I'll add to that one. The good news, Chris, is that for each CFC, the losses they are making are getting less. So it's accretive now to our business. As you said, we're not going to quote the actual figures, but the good news is it's gradually getting better.

Perfect. Thanks, everyone, and have a safe and happy holiday.

Yeah, same. Thank you.

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

Hi. Thanks for the question. On the food side, you mentioned in-store initiatives executing well on them. Can you elaborate on what you're referring to? Is there anything new or distinct that you're doing in terms of how you're managing the stores and the in-stock and your offering? Or is this just the consumer is showing up more to your stores now than recent quarters?

I think it's both. There's multiple initiatives that are landing in store. It's the teamwork effort between merchandising, operation, marketing, and supply chain. So fresh is an area of focus for us, and our business is improving faster in the fresh business. It's improving everywhere, but we're seeing better improvement on fresh, which is our strength, and we're pleased to see that. So a real focus on fresh is great. The turns are improving. The freshness is improving. There's a lot of small initiatives well owned by operators, which is very nice to see right now. All the strategy and initiatives are landing in stores and then strong ownership by operators and dealers and franchises. So we're pleased with that connection between different functions. and they're working really, really well together.

Got it. Okay, thanks for that. And my follow-up question is, at a high level, curious how you're thinking about your different banners and the strategy for them going forward. So in Ontario, I'm just curious on the Farm Boy and the Longo's banners, do you feel there's still material runway in that province for these two banners? Could you expand them elsewhere? And also wondering out west, for FreshCo, I think your target's been to convert 25% of your footprint there. To FreshCo, I think you're getting close to that target. How are you thinking about that mix out there? Could that target change? Would you consider converting some more after you reach that 25%? Thank you.

Yeah, hi, it's Michael. Thanks for the good question. When you hit, you hit, I don't think you could hit a banner. I'm not happy about right this second, but we're seeing You're going to see many new Farm Boy and Longo stores going up over the next year and two years and probably after that, but we've already approved many that you'll see. We're incredibly pleased with the progress of both those banners in Ontario. Could they go to other provinces? I think Farm Boy could go to other provinces, but they're not going to go to other provinces because we think that the brand resonates so well in Ontario and we have so many opportunities to put up and even convert some of our stores to farm boys. And in terms of Freshco at West, yeah, we always are looking for opportunities to put stores up where we can make a lot of money and serve our customers and take market share from our competitors. And so you'll see more stores going up in Western Canada and Ontario in Freshco. So yeah, we have, I think we're, We're seeing right now is that we can renovate stores at a lower cost and get a really good return right now. And we'll take the capital that we were spending on renovations and put up new stores in geographies where we don't have coverage, where we can take market share, and where we can thrill the customer. And you're going to see that across pretty well all of our banners across Canada in a measured, smart way that's good for our shareholders. Thank you.

Thank you. The next question comes from Vishal Sridhar at National Bank. Please go ahead.

Hi, thanks for taking my question. I was wondering, now that a scene has more than 15 million people, it's quite a large installed base. How should we think about the evolution of that? Have we hit a steady state or do you anticipate there's more room to go in terms of that install base and usage?

Yes, it's been incredible growth. I think we started at below $10 million and now we're over $16 million and it continues to grow. Obviously, we'll see smaller growth than we did in the early days when people were running to sign up. But the big prize is having it come home yet for us, which is we're seeing incredible work by our merchants and marketers and our operators, to be honest. in terms of using this platform, the data it produces, and the one-on-one interaction we can have. The data is phenomenal. So we're glad in terms of the number of customers. It makes us one of the most popular and well-used loyalty programs in the country. And we're well ahead of any sort of plans that we had in terms of the results so far. But the big prizes are happening now and will continue to happen as we use it. So you're right, though. I mean, you can't get to 100 million. But I think we still have growth in terms of the numbers as well. And I think our partners believe the same.

Okay. I was intrigued by your comment, and you've mentioned this before, about consumer normalization and the improvement in your business. And that's happening as we called out. Some of your, you know, there's different perspectives across retail peers, you know, across Canada. And I know you still keep your finger on the pulse of what's happening in retail. And not everyone feels that the consumer is necessarily improving in a meaningful manner. So I'm wondering, once you look at your results, do you attribute that to your initiatives or in fact, it is the consumer or is it easier comps or how should we think about exactly what's driving this improvement?

I still force myself to stay in touch with everything and read everyone's transcripts and all that stuff. And I honestly am having trouble reconciling some of the statements being made out there with what we're seeing, but you'll have to ask other people what they're seeing. But what we're seeing, and by the way, this is still a tough economy for Canadians. Don't get me wrong. This country deserves a stronger economy and I'm sure we'll get there. But It's improving gradually. If you're getting sick of the word gradually, you're going to keep hearing it because the only ones I can think of, the other synonyms are moderately, cautiously, and progressively, and none of those are as good. But it is improving gradually. We said it early, we said it first, and we were right. And that's good for Canada. Now, you're always going to have blips here and there over a period of time, but we're seeing green shoots. as I think you call them, and a lot of the investors call them, and we're seeing progress. But it's small. It's gradual. But that's all we need with the strength we've built in our business and the execution improving across our whole business, but a lot of it attributable to Pierre's leadership and his team. So, yeah, that's what I'm seeing. But I know I read different things, and I just can't reconcile some of them from either the economics or the reports that we get from people or from what we're seeing on the ground. So, there is a bit of confusion. But, you know, whenever there's an inflection point, things change. Some people are behind the curve.

Thank you.

Thank you. The next question comes from Michael Van Eyst at TD Cowan. Please go ahead.

Great. Thank you. Good afternoon. I wanted to get back to the store expansion. You haven't had a lot of square footage growth. I think it was pretty flat this quarter. I saw, I think, 16 net negative stores, but they must have been quite small from Q1 to Q2. What stores are those that you're closing down, and where do you see that square footage growth getting to over the next 12 to 24 months?

Matt will talk about the closures, and you were right in terms of your summary there, but he had more detail. Then I'll talk about the growth.

Yeah, just cover the 16. So as we continue to kind of strengthen our overall network, so the 16 stores we looked into it this morning, there's some liquor stores in there, there's some convenience and fuel, some fuel stations. So it's mostly those things as opposed to our big stores. And we will continue to do that to optimize our network. And then I'll pass it back to Michael.

Yeah, thanks. Great question, Michael. So as I said, we're reallocating capital. And as you know, we're rather stingy with capital because we like to get returns. And what we've been seeing lately is that we can move money from our renovations and get a really good job done cheaper. And that we're very keen, as we see returns and opportunities on new stores, we see a lot of opportunity. And so we're confident in that, and I believe by capital allocation, moving money around, that you'll see double the number of new stores next year. And we're particularly bullish on Province of Quebec. We're particularly bullish on Farm Boys and Longos, as we said, and in fact, most of the banners. But I think you're going to see, and this is a multi-year project. But next year, you'll see a doubling in terms of new stores.

Okay, so what would that get you to in terms of square footage growth?

We'll get back to you on that. I don't have it at the tip of my finger. Okay, and then I wanted to... These are not... A lot of them are big stores, and then there's... It's a good mix, but it's not... This will be some square footage.

And then on the discount side, I think you're still short of your original target. I think 48 discount stores in Western Canada, you're... thinking something in the 60s, if I remember correctly, and you've only added two in the last 12 months. And I'm wondering where the challenge is in opening up new discount stores in Western Canada, or is it just that you don't allocate the capital to that?

Yeah, it's a second. You hit it right on, which is, so our plan, you know, we're pretty transparent today. So we're going to, by the end of F27, our current plan is to have 65 or more fresco stores in Western Canada. And it's just capital allocation. They're doing, I mean, as you, I think you can probably see through some of the reports or some of your information, they're knocking the cover off the ball in the West and, you know, and we're getting stronger and stronger in terms of Fresh Goes in Western Canada as we build the brand.

Thank you. And then last question for Matt. The OPEX growth in Q2 was like 1.9%. In Q1, it was 3.9%. So I know you like to look at it as a rate. But when I look at it sometimes as a growth rate year over year, it gives me an indication too, since you don't have that much, you know, a big difference in your revenue growth. So it seems a little low at 1.9. Obviously, it's a good accomplishment, but it seems a little low in this cost environment. And I'm wondering, was there some kind of timing in there? or like a bigger number last year so that we shouldn't expect that kind of pace, like a 2% growth rate going forward?

Yeah, that's a great question. As we looked at our quarterly numbers, we dig into this a lot. So if you remember last quarter, I said, I look at it slightly differently because I look at SG&A excluding adjusted items. Last quarter, we were 4% higher than last year, which I was not happy with. This year, we're 2.4% higher, which I am happy with. There's nothing particularly unusual in our Q2 results. There's no one-time credits or anything along those lines, so we can think that it's a normal quarter. But as we go forward into Q3 and Q4, will we achieve a 2.4% increase? I would be very happy with that. Will it be somewhere between the 4% and the 2.4? Probably. But we'll have to see how Q3 and Q4 evolve.

Great. Thank you. Thank you. The next question comes from Irene Nattel at RBC Capital Markets. Please go ahead.

Thanks, Anne, and good afternoon, everyone. Just was really intrigued by your commentary around some of the work you've done on supply chain, and how that's helping not only in the cost side, but also just better in stock. And I'm wondering if you could talk about where you are on that journey and similarly where you are on the shrink journey and how much more you think there might be that could help on the gross margin side going forward.

Yeah, supply chain is playing a very key role in our improvement. So they contributed to gross margin improvement, as we said at the beginning, by optimizing our outbound, so the team did a really good job optimizing routes and maximizing loads, but they also contributed to improving freshness and delivery frequency. It's very helpful right now. Our turns in stores is very good. Shrink is going down in both stores and RSCs. Also, the situation is more normalized in terms of forecasting because You know, we're seeing a more normal environment to work with. So all those components contributed to have a better efficiency in supply chain, a better efficiency in replenishment, and an optimization. And as I said, supply chain is not necessarily just cutting routes and maximizing loads, but they are close to the store needs. In some cases, we improved the frequency of delivery. with way bigger results in the store results than the money we could save in cutting deliveries. So supply chain is working very, very closely with store operation and they are contributing to this improvement that we're seeing in margin and in their outbound costs.

That's really helpful. Thank you. So on this journey, are you where you want to be or do you think that there's still there's still more that you can get out of the supply chain piece of that.

I've never heard Pierre say he's happy, so let's hear what he has here.

The fun thing in our business is there's always, always room for improvement, and the team are seeing the exact same thing. We're working closely also with our inbound portion, and we have stronger partnership with inbound carriers and optimization of bringing product in our RSCs and in our store. And we are operating really, really well, so we can focus on optimization right now. We're ahead of the curve, so we're planning well. The situation in supply chain is very stable, so we can focus on optimization right now, and we're seeing still opportunities to be better.

That's really helpful. Thank you. And just one final question, if I might. We've seen some really strong results from some of the drugstore players here in Canada. And I know that pharmacy is a relatively smaller piece of your business, but you do have a lot of pharmacies in Western Canada. Just wondering, you know, how those are doing and particularly whether there was any contribution to the comp as a result of some of that strength.

Yeah, you're right, because those of you based in central Canada wouldn't know that we've We have a relatively large pharmacy business which is operating well right now and is contributing and doing a good job. I think we've been putting a lot of effort into the food business because that's our big business and that's where we can drive a lot of results and improvement in our business for our customers and our shareholders. It's a good timely question that we haven't had in a while because in the last couple couple of months, we're working hard on a strategy for pharmacy to even improve it more and improve our results in our current pharmacies. And so I think there's, although we're pleased with the results, I think there's upside that can be had there. And I know that the executives are working on that and they report to Pierre working hard on that and we're working on that strategy and tactics.

That's helpful. Thank you.

Thank you.

Thank you. The next question comes from John Zamparo at Scotiabank. Please go ahead.

Thank you. Good afternoon. I wanted to come back to the topic of square footage growth, but from the perspective of the industry. And it's accelerating or is relatively at an elevated level from some of the country's larger players. We've all seen what's happened with population. though it looks like that's coming down. I wonder what you think about the industry square footage growth and whether or not you consider it rational and is there a risk that the industry is adding too much capacity?

That's a good question. I think that most of our competitors are pretty rational players and they're making their own decisions and they're making what they think are smart decisions and we'll have to see whether Some of them are too aggressive or not aggressive enough. I don't know the inner workings of other companies. I feel like we talk about ourselves. We try to put up stores that make money and have good returns, and we'll continue to do that. As you can see from the results right now, we're not suffering from people putting up new stores as we might have been two years ago or even 18 months ago in a different environment. So I think the market can handle it. But at the same time, where we see opportunities to go into markets where we're not represented or underrepresented, where we can take market share and make more money, we're going to do so. Okay. I appreciate the color.

And then moving back to gross margins, that's been up significantly on an ex-fuel basis to start the year. I'd like to better understand the puts and takes for the back half, especially as you lap an average of, I think it's 75 or 80 basis point increases from the second half last year. So is there a chance this comes in meaningfully above the 10 to 20 basis points you typically target on an annual basis? And if not, should we expect potentially flat or declining gross margins in the back half of the year?

Is there a chance? Yes, there's always a chance, but I certainly wouldn't expect it. Our expectations are 10 to 20 basis points. As you said, we're going to start to lap some very significant increases in margin last year. So, yeah, I wouldn't expect it. We're not.

Got it. Okay. And then just one more on e-commerce. I wonder if you can talk about the performance from your new partnerships subsequent to the quarter. It was only in place for a couple of weeks, as you said, but I'm wondering how that's going. Are you seeing incrementality from these partners on top of your existing Walla customers?

Yeah, it's Michael talking that I should give the credit here to Doug and Pierre and Pierre's team for putting this into place very, very quickly. One of the fastest implementations we've seen. I think we're very happy with the partnership. Very early days. It allows us to hit a customer that we were missing out on. We're seeing very very small overlap with our current business. It's so early, though, and we want to look at more data. If we think it's higher than that small number, I'll tell you next quarter. But I think it's not cannibalizing our business. It's de minimis. And we're capturing sales that we would not otherwise have captured. And I think it's good now. I think we're nailing it now. We're in the business to make our customers happy and our shareholders happy. And I think This is a nice addition, and that's what it is to our overall business.

Okay, great. I'll leave it there. Thank you very much. Thank you.

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

Thanks. Good afternoon. Just a couple of follow-ups. Specifically on seamstress sales, You know, we heard a lot about shifts in consumer spending patterns over the last couple of years, you know, specifically ascribed to trade down, you know, like frozen versus fresh or lower quality cuts or products. Would you say those are reversing along with some of the other behaviors that you've already summarized? Yes, it is.

So we're seeing a bigger increase in growth in fresh products. So the thing we saw during the decline, we saw a decline in fresh and people trade down to frozen or canned meat and canned fish. The thing we're seeing right now, it's the opposite. People are coming back, shopping our fresh department, which is very, very good news for us. And we're seeing higher growth in fresh departments, fresh, fresh departments. So this is exactly what's happening right now, gradually. But it's exactly what we're seeing.

Yeah. Okay. Got it. That's helpful. Thank you. And I'm curious if basket composition then in online has shifted at all. I know it's a different baseline. It's also somewhat of a different customer and occasion. But do the shifts that you're seeing in the store, are those mirrored in the online business as well?

Online business remains mirrored. pretty stable in terms of composition of the basket. The basket is way higher in e-commerce, especially with the assortment we have, but I didn't see a big change recently. I didn't see the number in details, but the basket size remained very high and stable. I have to look at the composition of this basket. Curiously, we should see a little bit more increase in fresh and in non-fresh. You know, it's the same customer, customer are shopping on the channel. So we should see the same thing, but I don't have the number in front of me.

Well, Mark, we'll get back to you. If we're seeing something different, we'll get back to you on that. But that was my understanding too. But if we see something different, we'll let you know.

Yeah, sounds good. And then just the last one I wanted to follow up. I know you touched on shrink earlier, but I just wanted to make sure if you could just go over sort of where you are at in the evolution of shrink levels, and if you expect that to become a bigger tailwind, or is that a dissipating tailwind, and how should we think about the materiality of that today?

Again, there's always room for improvement, but over here we did a significant improvement for many different reasons. As I said, Because we are operating in a more normalized environment, everything is easier to manage. Forecasting, replenishment, this is easier. So this is one component of the improvement. The other component of the improvement is the focus and operation on shrink. And we did many small things to improve it. So I would say we will continue to improve our shrink. We're still seeing opportunities, but we won't deliver the same year-over-year results and improving and shrinking than we did last year. But I think there's still opportunity to capture.

Okay. Very helpful. Appreciate all the comments, guys, and happy holidays.

You too, Mark.

Yeah, thank you.

Thank you. The next question is a follow-up from Michael Van Eyst at TD Cowan. Please go ahead.

Thank you. Just a quick one. Michael, you mentioned that you want to get to that 65 fresh go stores by fiscal 27. Would those 17 or so increase, would you expect that to be more conversions or a new industry?

The question, Pierre, is for the fresh go stores that we're putting up in Western Canada, the additional 17 or plus, what percentage do you think roughly will be new to market rather than conversions?

Most of the conversion has been done, so we'll be mostly new stores.

There might be two or three conversions as we go forward.

Most of the conversion has been done. The loaning food has been captured in conversion to Freshco, and we're very pleased with the same store sales in Western Canada right now with Freshco.

Okay, great. And happy holidays to everybody as well. You too, Michael. Thank you, Mike.

Thank you. That concludes our Q&A. I will turn the call back over to Katie Bryan 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 third quarter fiscal 2025 conference call on March 13th. Talk soon.

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