Loblaw Companies Limited

Ladies and gentlemen, thank you for standing by and welcome to Loblaw Company's limited Q1 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Roy McDonald, Vice President, Investor Relations. Thank you. Please go ahead, sir.

Great. Thank you very much, Julianne, and we apologize for the brief delay getting moving this morning, but I'd like to welcome you to Loblaw Company's limited first quarter 2020 results conference call. I'm joined in the room today by our executive chairman, Galen Weston, Sarah Davis, our president, and Darren Myers, our chief financial officer. Before we begin the call, I want to remind you that today's discussion will include forward-looking statements, which may include but are not limited to statements with respect to Loblaw's anticipated future results and the impact of the COVID-19 pandemic. These statements are based on assumptions and reflect management's current expectations and are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations. These risks and uncertainties are discussed in the company's materials filed with the Canadian securities regulators. Any forward-looking statements speak only to as of the date they are made. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than what's required by law. Also, certain non-GAAP financial measures may be discussed or referred to today, so please refer to our annual report and other materials filed with the Canadian Securities Regulator for a reconciliation of each of these measures to the most directly comparable GAAP financial measure. And with that, I will turn the call over to Darren.

Thank you, Roy, and good morning, everyone. It's certainly a different world from a little over two months ago when we reported our fourth quarter results. Before I get into the numbers, let me begin by expressing my gratitude to all our colleagues for their incredible dedication throughout this crisis. Our frontline teams and the supporting organization adapted swiftly and with compassion to ensure we continue to deliver the services that Canadians count on in a safe and secure environment. Moving to the quarter, on an adjusted consolidated basis, our reported revenue grew by 10.7%, adjusted EBITDA increased 12.4%, adjusted net earnings increased by 21.4%, and adjusted earnings per share grew by 24.4% in the quarter. Our sales were positively impacted towards the end of the quarter by COVID-19, and an unprecedented increase in the purchase of essentials. As a reminder, our quarter ended on March 21st. In the final two weeks of the quarter, our grocery stores saw an incredible traffic spike, with sales growth of approximately 44%. Our pharmacy saw similar levels of growth, with front store up 42% and pharmacy up 26% in the final two weeks. The significant and quick increase in volumes delivered positive leverage for the business, which were only partially offset by COVID-related costs. Those costs started ramping as the quarter closed. We estimate that COVID-19 generated an incremental $751 million in revenue in the quarter, with a corresponding increase in adjusted diluted earnings per share of 14 cents. Our same-store sales in drug retail grew 10.7%. Front-store same-store sales grew 10.7%, while pharmacy same-store sales grew 10.6%. For front-store, we saw significant growth in all categories except PubMedics. Pharmacy also saw strong growth with prescription count growth of 5.5% and a 4.8% higher average script value, driven mainly by early fills and shifts to higher days of supply of prescriptions due to COVID-19. Food retail same-store sales grew 9.6% in the quarter. Our average article price was 1.5% for the quarter. The quarter saw very strong comps in both basket and traffic. Total retail gross margin was 29.8%. Excluding the consolidation of franchises, retail gross margin declined 30 basis points compared to last year. Food margins were stable, offset by pressure on the drug side, largely driven by mix. Retail SG&A's percentage of sales was 19.8%. Excluding the benefit from franchise consolidation, retail SG&A improved by 70 basis points as we benefited from favorable sales leverage. Retail EBITDA increased 17.9% and EBITDA margin came in at 10%, an increase of 60 basis points compared to last year. Moving to PC Financial, revenue was approximately flat on the quarter while adjusted EBITDA contribution declined $47 million year-over-year, primarily as a result of increased provisions for the potential credit losses associated with COVID-19. Adjusted consolidated EBITDA margin was 9.9% in the quarter. Normalized for the consolidation of franchises, EBITDA margin was flat compared to last year. In the quarter, IFRS net earnings available to common shareholders was $240 million, up 21.2%, and fully diluted earnings per share were 66 cents, an increase of 24.5%. Free cash flow was strong with $1.19 billion generated in the quarter, as we benefited from the increase in demand towards the end of the quarter. In the quarter, we repurchased 2.8 million common shares at a total cost of $188 million. Now let me spend a little bit of time talking about what we're seeing as we look ahead. As noted in our April 9th press release, there remains a high degree of uncertainty about the duration and the impacts of the COVID-19 pandemic on the Canadian economy. We expect continued volatility in our business as shopping behaviors continue to evolve, as does the demand for the types of products and services we provide. In light of these uncertainties, we withdrew our 2020 outlook. Our focus as we continue to navigate through the COVID crisis is to do the right things to protect our colleagues and customers while taking all the necessary actions to meet the needs of consumers. These actions include enhancing customer convenience, supporting our colleagues in our stores and distribution centers with temporary pay premiums and pay protection safeguards, securing our operations, and providing financial support to our communities and customers. These investments are significant but we believe they are necessary and the right thing to do. As we look more closely at the second quarter, it is very difficult to predict how sales will evolve. We expect potential reductions in some discretionary spend categories, as we expect the current social distancing requirements will also impact our sales trajectory. Since the beginning of the second quarter, we've experienced a pronounced change in the trajectory of our sales. For the first five weeks, food sales growth was approximately 10% while drug sales declined approximately 6%. This combined with an estimated $90 million per month of incremental COVID investments to keep our stores safe for our customers and our colleagues will put financial pressure on our business. Both our process and efficiency initiatives and our CapEx program continue with some adjustments necessary to ensure that our retail operations are not impacted during this busy and critical period. We continue to invest in our long-term strategic initiatives. Our liquidity remains strong, supported by a strong balance sheet and the ability to generate significant cash flow from our operations. As of Q1, Wabla's consolidated cash and short-term investments balance was $2.2 billion. This includes $350 million, which we drew in the quarter from our committed credit facility to backstop a $350 million bond maturing on June 18, 2020. With our strong investment grade credit rating and good standing in the credit markets, we intend to access the bond market to refinance the maturing debt. PC Bank has also increased its funding activity both prior and subsequent to the balance sheet date to maintain a surplus liquidity position relative to regulatory requirements. Overall, we feel confident in our liquidity position. Also note that we are very pleased to have received the Court of Appeal ruling in our favor, overturning the 2018 lower court decision related to Glen Huron Bank. In conclusion, this is certainly a challenging time. We believe we are doing the right thing to protect our colleagues and customers while taking all the necessary actions to meet the needs of consumers. While we expect short-term challenges, we are well positioned to continue to help Canadians navigate through today's extremely challenging time and to continue to build on a foundation that positions us well for the future. I will now turn the call over to Sarah.

Thank you, Darren, and good morning, everyone. We began the year much as we ended 2019, well within our expected performance range, with continued strength at Shoppers Drug Mart and good signs of share growth in our grocery businesses. Without the impact of COVID-19, we are trending toward a very complete quarter. All elements of our strategy were in order. As it turned out, Q1 was a tale of 14 days. When the government offered their pandemic warning and suggested Canadians prepare for a long stretch at home, we saw a rush to retail that no desk study could have anticipated. In a matter of days, customer counts in basket size spiked fourfold, sales of paper, frozen and meat products skyrocketed, e-commerce traffic tripled, restaurants closed, and our prepared meal business and recipe-making categories took off. and pharmacies were lined with patients filling prescriptions, seeking health essentials, and advice. While the extreme stockpiling is over, we are clearly still facing new consumer behaviors and an altered, continuously changing trading environment. We meet daily now on a few key priorities, keeping people safe and well-served, optimizing store operations and e-commerce, and advancing business strategies to prepare for what comes next. Today, we must not only anticipate a return to past shopping and consumer habits, but also plan for the fact that many recent changes will not reverse entirely. First, we have to look at our P&L and bring it back into balance over time. As Darren said, that will be a big task, particularly in the second quarter. The impact of wage increases, safety and social distancing investments made in Q1 will fall heavily in Q2. We have committed hundreds of millions of dollars, thoughtfully and decisively for the safety and security of our colleagues and our customers. Next, we need to advance our plans for the back half of 2020, fine-tuning as the economy opens and we better understand the expectations for social distancing and other safety controls. We also need to monitor near-term conditions for our core businesses. For example, early stockpiling benefited all of our stores, but the market division has been a bigger benefactor of the sustained increased buying People are shopping less, buying more, favoring one-stop shops without long lines, and focusing less on price. These conditions benefit market stores, but a prolonged economic pinch or resurgence of general merchandise may favor discount stores. We're well positioned either way, but it is something we'll watch carefully. At shoppers, we must understand the opportunity to assist the primary care response to COVID-19 while also assessing the current drag on certain in-store categories like beauty. Finally, we need to look to the future at emerging trends and map them against our own business strategy, particularly in areas where we have been investing for many years. For example, the industry is using fewer flyers, so we are offering more personal offers through PC Optimum. We have demonstrated our connected health strategy, facilitating virtual physician consults, and using our pharmacies as community health hubs. And we are clearly in a new phase for e-commerce. Our online apparel, beauty, and pharmacy businesses are up. Our PC Express online grocery volumes are three times the norm, hitting levels we didn't expect for many years. Within weeks, we scaled our online capacity by enhancing technology, increasing labor hours, adding overnight picking slots, and optimizing store space. We scaled the system and are now refining how it works at high volumes. Enterprise-wide, I believe we have executed on our strategies well and made the right choices in our COVID response. It makes me both proud and thankful. Proud that our customer satisfaction scores have climbed steadily since mid-March, in some cases dramatically. And thankful for the effort of our team, which has been tireless and caring for nearly two months straight. I can't say enough about the pharmacists, cashiers, stock clerks, managers, franchise owners, truck drivers, pickers in our distribution centres, and our vendor partners and farmers who are keeping the food and drug systems rolling. I've been sending daily notes to our nearly 200,000 colleagues, sharing news, observations, and customer praise for their efforts, and many have been responding with suggestions, stories of encouragement of their own. I received one email early in this crisis from a colleague in our replenishment team. It was short and a simple message that quoted Winston Churchill. It read, after all this is over, all that will matter is how we treated each other. I couldn't agree more. I will now turn the call over to Galen.

Thank you, Sarah. The global COVID-19 pandemic has led to unprecedented circumstances at Loblaw. As an essential service providing access to food, drugs, and healthcare services across the country, our focus has been anchored in an absolute commitment to do what is asked of us, while at the same time keeping our colleagues and customers safe. Although we appear to be moving into a new phase of the crisis, it is far from over, and we remain committed to sustaining the measures needed to support our communities appropriately until the pandemic is behind us. On the front line of that commitment are nearly 200,000 of our colleagues, and I offer them my sincere thanks for the way they are rising to that challenge. At this point, it's very difficult to anticipate precisely how our business will change in any emerging new normal. However, there are certain customer trends we expect to accelerate substantially from pre-COVID run rates. We believe that online grocery shopping will retain a significant proportion of the current sales penetration that Sarah referred to, and that our company's national leadership position here will serve it well. We are also seeing more and more customers responding to digital promotion strategies, setting the stage for a potentially significant change in how Canadians shop. In that context, the strength of PC Optimum and Loblaw's one-to-one communication channels will be an increasingly valuable asset. And finally, the adoption of digital healthcare services has also grown rapidly over the last few weeks. As patients become increasingly familiar with these services and provinces recognize their important role as part of existing provincial healthcare reimbursement programs, We believe that their use will remain at substantially elevated levels. In the coming months, the company will continue to move quickly to build on its strength in each of these areas of opportunity. We do so from a position of strong financial liquidity and rooted in a compelling strategy. And we remain steadfastly focused on the day-to-day challenges facing our company with a close eye on how best to serve Canadians in the future. I'd now like to open the call for any questions.

Thank you.

As a reminder... Please, Gillian, go ahead.

Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from Karen Short from Barclays. Your line is open. Hi.

Thanks very much. Wondering if you could just talk a little bit about, I guess, first starting with the e-comm. You said, obviously, that was up threefold, and it looks like you've made a lot of changes to meet that demand. But can you talk about what you think the, you know, sustainable run rate is of that in terms of dollars and what the mix is between, say, like, quick and collect versus actual delivery? And then I had a couple other questions.

Okay, so I'll take that. It's Sarah. Hi, Karen. So I would say in terms of e-commerce, we have seen a threefold increase in the penetration. That means that in many of the stores where it's offered, we're up into the double digits in terms of penetration in food. We don't know exactly where it's going to land, but we're pretty pleased with our business because it's very scalable. So it's national in scale. We can offer it based on what customers want right across the country, and we can scale it up and down. There's a lot of variable costs, and now that we've got it scaled to a high level, We can pull back on that if we need to, or we can continue at the level that we've got. So difficult to predict. We expect that it will continue higher than it was pre-COVID, but we do think it will settle in at a lower level than where we are right now. I'm sorry, I think there was a second part to your question as well. Well, just wondering what you think of the behavior.

Yeah, yeah.

Okay, so I would say that delivery has had a higher increase, but it's on a smaller base. So overall, the majority of our business in terms of grocery online is still being done through click and collect and pick up at store.

Okay. And then I guess a couple questions just on the cost. So you called out the $90 million in incremental cost for the period. First of all, I just want to clarify, you said period, but then I think in the prepared remarks, you also had the same comment related to five weeks. I want to clarify if that's a five-week number, if that's a month or four-week period, because normally I think of the period being four weeks. And then the other question I just wanted to ask is you gave a comment on the sales in the last two weeks and then also the EPS contribution, but that would imply like north of 20-plus percent in terms of contribution margin on EBIT, I think, in the last three weeks. So can you maybe just parse that out a little bit?

Yeah, hi, Karen. It's Darren. Yeah, so on your first question, it's, yeah, the four weeks, the cost is for a four-week period, and the five weeks is we just want to give everybody, all the investors, the most relevant data we have, and so the most recent data we have is a five-week period. So we gave a five-week sale picture, but the cost is definitely a four-week amount, and our period is four weeks. On your second question, sorry, what was the second question? The flow through was incredibly strong. What you have to think about is as this was announced by the government, the level of stockpiling traffic we saw was through the roof. And so from a store perspective and operations perspective, you know, we're really just trying to keep up from a labor point of view to a very heightened demand. So the flow through was very good, even despite the fact that there were some COVID related costs in that final period as well.

Okay. And then just last question on the 90 million. I know obviously that some of it is, well, a lot of it is incremental hours and things like that, but do you have any sense when you, when we get into, I guess the new, what people are saying new abnormal post COVID period would look like, how much of that is just embedded costs that you will have now, like from a cleaning, you know, disinfecting type of perspective, once the labor hours can maybe normalize a little bit.

Yeah, Karen, I mean, it's incredibly hard for us to predict the future after all this. We're going to try not to give any color going after the pandemic. I would say these are temporary costs right now that we expect to continue through the pandemic, but it's too difficult for any of us to predict what happens afterwards.

Okay, thanks very much.

Your next question comes from Mark Petrie from CIBC. Your line is open.

Hey, good morning. Um, I just wanted to ask about your approach to promotions, uh, primarily in the food channel, but also, but also drug, I guess. Uh, I know you've made some adjustments to distribution and that varies by banner, but overall, how have you seen the dynamics around promotions change over the last, I guess, eight weeks and obviously, you know, not really, um, appropriate to drive traffic, but of course you still want to bring excellent value to your customer. So how have you sort of balanced those dynamics?

Okay, so I'll start with that. Hi, Mark. So I would say that what we've committed is that we would continue to provide as much value to our customers as we did pre-COVID. So we've continued with the promotional activity. But, yes, we have had to adjust it to make sure that we didn't have promote rushes into our stores. So, for example, we did do a no-tax event across our superstore business. We extended it. Normally it would be over a weekend. Given that we're encouraging customers to come one time per week per family, we had it over a seven-day period. So great value for our customers, but at the same time being respectful for what we're asking of our customers to make sure that they stay safe, as do our colleagues. I would say we're also looking at some changes in terms of the amount of paper we're using. We have gone to more digital flyers in our discount business. They've gone to 100% digital in some of the superstore business. We've reduced the flyers in Quebec. Some of it is dependent on some of the provincial guidelines as well. I would say on the shopper side, pretty similar. They've gone to some promotional activity through digital, trying to keep the exact same price position through this to make sure our customers continue to get value. and just reflecting some of the rules that we're working within.

Okay, thanks. I mean, I guess just sort of netting it all out, I'm just curious about your perspectives on gross margin, at least in the short term. I mean, obviously, you know, bigger basket size, lower shrink, those are all beneficial. Presumably, there's also less contribution from suppliers in terms of trade spend. So just wondering how investors should think about gross margin in the short term.

Hi, Mark. Again, we're going to hold back from giving color as to predicting what will happen on gross margin. I think there's a few moving parts, which I think you touched on in your question there, and it's just difficult to see how these are going to play out. We are seeing more cost pressure from vendors as well, and our goal is to keep prices as low as we can for Canadians. So there's a lot of moving parts in terms of gross margin, and it's a bit difficult to predict right now.

I would say there's a little bit of a mix change, too, because what we have seen is an increase in some of the, obviously in sales of sort of the pantry building, but we're seeing declines in our general merchandise business, which also has an impact on margin. So apparel and general merchandise and beauty are all down. They are all relatively high margin parts of our business. But we're seeing the very high margins or increases in sales in terms of the food part of our business.

Okay, thanks. That's helpful. I mean, I guess just touching on that, are you able to quantify or will you share the quantification of the impact from the gender merchandise and apparel decline on your food same-store sales comp, I guess, either for Q1 or maybe more importantly for the Q2 to date number?

I'm not going to provide that today, Mark. I'd say in the Q1, it was, you know, given the growth we saw was less impactful, certainly in Q2, it's had a bigger, in the five weeks, it's had a bigger impact. And in particular, as you know, with shoppers' drug being down, there's a bigger impact in there. There's some impact on the food side as well. But we're not going to break that up today. Okay. Thanks. All the best. Yep. Thanks, Mark.

Your next question comes from Patricia Baker from Scotiabank. Your line is open.

Good morning, everyone. I have a few questions. My major questions have been addressed. But, Sarah, I just want to get a clarification first of something you said in your opening remarks. And I missed my phone cut out, so I missed the beginning of what you said, but I heard the last part of a phrase which said, we'll fall heavily in Q2. And so were you referring to the costs?

Yes, so the impact of the cost that started in Q1 but not in a significant way, the $90 million that Darren mentioned per period will have an impact clearly on Q2.

Right, and the definition of the word fall here was more like it will hit in Q2 rather than fall as in decline.

Oh, I see what you mean. No, it will hit Q2. To make sure that's perfectly clear.

Okay, then just talking about the online and the big surge there, you said triple, up three times, and you also indicated that your online business is way ahead of where you would have expected to be in 2020. Can you just give me some sense of, is your online business as a percent of sales? Is it where you would have expected it to have been in 2021, 2022?

We are staying a couple of years ahead of where we were, so I would say two or three years ahead. It's hard to know exactly because obviously things have an impact on that, but it would be a couple of years ahead of where we were anticipating.

Okay, that's very helpful. And then when did you start to see the right-hand side of the store or general merchandise and apparel start to drop off?

We saw it in the last two weeks. So they were definitely negative in the last two weeks of Q1, and they've continued to negative in most of the weeks of Q2 so far.

And apparel has been a larger drop.

That's right. Apparel is down more. General merchandise, we have seen some, depending on what's happening in the store. We've seen sales in those ones, so not as big a drag, but apparel has been down.

Okay. Have you done anything on the apparel side, like sort of lower your inventories or delay purchasing or anything?

We have. So we're absolutely preparing for what the back half of the year will look like. Of course, apparel has long lead times, so you're limited in what you can do. But we are reducing our buys where we can and also looking at changing some of the merchandise that we are getting in terms of the type of merchandise we're getting as well. So definitely factoring that in. And I would say that sales online are actually up, but it's a small base, so not as much to offset the decrease in the bricks and mortar.

Okay. And just with respect to shoppers at Drug Mart, and when did you start to see the decline there? Did that start when the government started to, you know, lower, expect you to lower the density of people in the store and when you limited, you know, put in the social distancing measures?

Well, Shoppers was up significantly for the last two weeks of Q1. And then I would say as the stockpiling stopped and leveled off, we would have seen a decline in the pharmacy business. And the beauty business would have dropped before that. So the beauty business dropped in Q1 in the last two weeks and has continued. And we have changed the – so there's a couple things happening in beauty. It wasn't the focus of what people were coming into the stores for. We changed the role of the beauty advisors and did just have them help out in store. So we weren't actively selling beauty at that time as well. Some of that we're starting to change now depending on the store. And then, of course, as you said, the impact of reducing the number of people in store would have also had an impact. The change in the number of days of supply also would have had an impact. And, of course, just the stockpiling. People had bought out their prescriptions for a period of time. All of that would have had an impact and a decline, and we're seeing in Q2.

Okay, excellent. So just sticking with shoppers, this is my last question. So we don't know how long this is going to last, and as you indicated, the first five weeks they saw a 6% decline in sales. Are you looking at potential things that you could do to help associate owners should this impact their business?

We have been looking at all aspects because we have a lot of franchise owners on the food side of our business and of course the colleagues in our business as well. So we have been looking at ways. There are some shopper stores that have been closed because they are in shopping malls. So that will be something that we factor in.

Okay, thank you so much, Sarah. Your next question comes from Peter Squire from BMO Capital Markets. Your line is open.

Hi, good morning. Just a question on the on the credit card business. You took the allowance up in the quarter for obvious reasons. I quickly did the math. It looks like you took the allowance up about 175 basis points, though I'm not sure. Can you talk about, like, is that right? Is the allowance rate up about 175 basis points? And also, can you talk about other indicators of credit performance, such as... past due or write-off rates, anything you could provide.

Yeah, Peter, I don't have the exact number in front of me, so I don't want to be misquoted on whether that's exactly right. So I'd have to run the math after. But as you mentioned, I mean, the provision is that The ECL provision is very forward-looking, and so it looks at a whole bunch of macroeconomic trends, and the idea is that you're taking the hit before things happen, looking at what could happen in the economy. And so that's why we saw the $45 million increase there. But from what we're seeing so far, I mean, we're a very... high transaction portfolio. We're not seeing any major changes at this time in terms of payment patterns. You wouldn't expect probably to see that yet. This is, you know, as the economy goes into a further recession, you start seeing, as people are more cash-strapped, you start seeing things. But so far, we haven't seen a... a lot of change there. We're obviously watching for that closely, and we'll have to continue to update our ECL provision as we look at more of the macroeconomic trends that are out there.

I think what we have seen on our credit cards is a reduction in spend. So we have a significant reduction in spend. People obviously aren't traveling, aren't buying some of the things that they normally would. We are seeing an increase in the spend on food, as you could imagine. But overall, the spend is down, so the receivable balance is actually coming down. and the payments have not changed significantly, so we're in a good position, we feel. But as Darren mentioned, the ECL is based on economic trends, it's based on unemployment rates, lots of other things that are future-looking as well.

And the final one, just on that point that Sarah said, we do expect to see some pressure still from the banking Q2 because it's based on a high transaction portfolio and we're seeing lower purchases, so obviously there'll be some impact from that.

And when you describe it, Darren, as a high transaction portfolio, does that mean also relative to the portfolios of other credit card companies? Like people pay off their balances. They, they don't borrow the way they do with other card holders.

So a lot of the earnings are based on interchange as opposed to interest in our portfolio. So as people spend less, it has an impact on the amount of interchange.

Okay. That's all I have. Thanks.

Thanks, Peter. Your next question comes from Irene Nattel from RBC Capital Markets. Your line is open.

Good morning. A couple of questions, if I may. Coming back to the current trends or the sales trends in-store, could you talk a little bit about what you're seeing around category, sort of Have we seen the normalization center story? Is it more now the periphery? What's happened to private label? Those types of things.

Hi, Irene. It's Sarah. I would say the biggest trend that I did mention in my comments but hasn't come up as a question is actually the trend in between our two divisions in food. So I do want to sort of highlight that as a big trend. So market, division, and Our conventional stores are seeing very large growth, continue to see very large growth, and I would say our discount stores have not seen the same growth, which is why when Darren talks about the first five weeks having 10% growth in food, that is skewed quite significantly between the two divisions, which is interesting to see. Because I would have said over the past few years, we would have seen discount, and as a Canadian market, discount would have been growing faster. Now we're seeing the opposite during this pandemic. We're attributing it to the fact that people are only doing one shop. So if they're only doing one shop in the week, they want to make sure that they have the best assortment. They want to make sure that they go into the store that perhaps has a shorter line, is not quite as crowded as some of the smaller discount stores. And they're not shopping around. So many of our customers would go to multiple banners, and now they're doing one shop, and they're choosing a market division store. So we are seeing that. And as I said, they're looking for the higher assortment and the shorter lines, as well as I would say they're probably a little bit less conscious of price at this point in time. And they're also taking up more of the spend from restaurants and other options. offers that they could have that are now closed. So that's what we're seeing. In terms of within the store, we're definitely seeing, you know, high growth in areas for people cooking from scratch, which we also would have said prior to this COVID time would have been a declining area, not as many people cooking at home. And now there's a big resurgence. So lots of flour and cooking, baking supplies. We're still seeing a lot of that. Of course, you've heard about, you know, people stocking on paper. Meat would be another area. So definitely produce. We're seeing strength in all of our key food categories. As you know, we've closed some of our HMR, so our home meal replacement. So any of the hot categories, those are closed. So that would have an impact on sales. So an interesting dynamic happening. And then, of course, our discount division is also more heavily skewed to having the right-hand side, general merchandise, more beauty, and, of course... the apparel that we talked about. So interesting dynamic there.

Very, absolutely. And just a point of clarification, a couple points of clarification, please. When you talk about sales being up 10%, because I'm thinking, for example, about here in Quebec where grocery stores are closed on Sundays, that is a total weekly spend number? Yes. Yes. Okay. And the 6% decline at shoppers, is that full store or is that just, you know, could you clarify what that 6% is?

Full store.

Full store. That's the full store. Okay. Because presumably we're also seeing some normalization of RX because, you know, we saw some of the forward buy. So it's both RX and front end, correct?

That's right.

Yeah. Full store. And then final question, I noticed that there was no dividend increase announcement today, and also no commentary around the NCIB. And I was wondering if you could just walk us through your current thinking on both of those.

Absolutely. Yeah, so I mean, first of all, we remain committed to returning capital to shareholders as part of our value creation model, and we're certainly still committed to that. On the dividend, we are, I think it's eight years now in a row of doing annual increases, and our intent is still to do an annual increase. We just didn't announce one This quarter, just in light of the current environment, we just didn't think now was the right time to announce that, but something we'll continue to look at. And on the buybacks, I mean, we have a very strong balance sheet. Our goal is to continue to return, again, capital to shareholders. I think in the short term, we will take a pause on buybacks, just as we see this play out, but our intention is to continue to do buybacks, which is the reason you would have seen the normal courses announced today.

That's great, thank you.

Your next question comes from Michael Van Elst from TD Securities. Your line is open.

Hi, good morning. Just have a few follow-ups because most of it's been covered, but when you talked about the 10% increase in food and the 6% drop in drug for the first five weeks, can you give us a little bit of color how that's trended over that five weeks? Because we know it was really strong at the end of Q1. Did it start stronger at the beginning of Q2 and then fade? And are we starting to see any signs of entry destocking yet?

Hi, Mike. It was almost as we flipped the quarter. We saw the very quick change, and I think it came from all the different tactics put in by government and all the isolation that needed. So we saw the drop very, very quickly. I would say that some of the trends... Certainly, we saw beauty sales getting higher declines through this period of five weeks. We're starting to see a little bit of pickup in that area, but it's still negative. So, a little bit of sign of optimism there that we might see some improvement. Also, as people did their earlier fills and they did them for longer periods of time, they're going to eventually need to come back and get their fills on time. on their medication, so we think that should drive some demand. And then on the food side, I think we saw very large drops in apparel as the first weeks of this started. We're starting to see a little bit of improvement there as well, but still pretty significant negatives in those numbers.

Sorry, although it sounds like it was relatively stable throughout the five weeks, but maybe a little bit better in the last period, the last week.

Yeah, I think that's probably the right way to think about it right now. And, you know, it changes every day we look, which is why, you know, we're giving you what we know and not trying to predict where it goes because, you know, it just changes so quickly right now.

And even though the total numbers show steady over the five weeks, the category within them is moving around. To Darren's point, we've seen apparel down and then not as far down, and so we've seen movement within it, but the overall, it's been pretty steady.

Okay, great. And then I wanted to try and get you to clarify the e-commerce penetration comments that you made, because you said your e-commerce has tripled, and there's a lot of The general thought out there is that e-commerce for the industry has been closer to one, but yours is probably higher. But you also said that in the stores where you operate, many of them are seeing double-digit penetration. So we don't assume that you're close to double digits in penetration. Can you give us a little bit more clarity as to where your e-commerce penetration is on food?

Yeah, that's a good question. So I think the way that we look at it is the e-com team looks at it based on their base, so where they offer e-commerce and which stores across it. And so we've got, I think we talked about having about 75% penetration in stores, and then it would have gone from around 3.5% of that to above 10, into double digits in some stores. That's sort of the roundabout math of how we get to triple. In some stores, GTA, for example, we're penetrating higher than that. Those are national numbers. When I say the tripling, we would have seen higher demand in the GTA.

That would mean 75% times over 10%. You're talking about close to 8% of penetration.

I think Roy was trying to figure out the specific math, so maybe he can go through it with you, but that's the way that we look at it.

You said you're a few years ahead of schedule or ahead of expectations, but if you were to look out now, I assume you expect a pullback based on your earlier comments, but where do you think it'll settle now in the next two to three years?

That's a good question. I don't know. We don't really know. We know that we have a lot of demand right now, and we have had, obviously, wait times have been longer than we would have liked, which is why we've had to scale up our capacity more. in an incredible amount of time and have that flexibility. But we've been adding slots. We've been picking at night. We've been seizing the opportunity on Sundays in Quebec in order to be able to do some picking, so adding the capacity. And so we have it. So we know that going forward we can deal with it if it stays. But we do think that as the economy opens up and people are allowed out, People will like to still go back to the stores as our guests. So I don't know what exactly the penetration is going to be. But whatever way, I feel like we've got a good model where we can scale up and we can scale down depending on what the consumer is looking for.

Okay, great. And then on your strategies and around the cost side, you've waived the pick fees, at least during COVID. Is there any intention to... put those back in place post-COVID, or are those more likely to be more permanent? And then what are you doing on the, like, what do you see in terms of home delivery? It seems like you're ramping up your home delivery efforts in different parts of the country. Can you talk a bit more about what your intentions are there?

Yeah, so we did drop the fees because we felt that was the right thing to do for Canadians during the pandemic and give them the opportunity for those that might have underlying health issues, the opportunity to not have to go into stores. So definitely that would be why we dropped the fees. We're looking at the right time to perhaps bring back the fee, but we haven't made a firm decision one way or another yet. We're really just trying to make our way through this pandemic And in terms of delivery, yeah, we have both offerings. And we do have a white label offering in order so that you can go on to the Loblaws or whatever store that you shop at site, and you can choose whether you pick up or you want to have delivery. So we have been partnering with Instacart, but we also have our own white label delivery option as well now.

And how extensive is that white label delivery option, and is this a permanent?

Right now, there's no fee, and what it will be going forward is yet to be determined.

Okay. Thank you.

Your next question comes from Chris Lee from Dejao Bank. Your line is open.

Hi. Good morning. I want to start maybe with a couple of questions for Darren and then a couple for Sarah. So, Darren, I wanted to just to clarify on your comments about the cost of $90 million additional costs for the full week, just on a high level basis, if I were to try to model out what the costs look like for Q2, can I just go 90 times 3 and that's sort of roughly the number year over year increase in costs that you're expecting to incur for Q2?

Well, you'll have to make the assumption on how long you think the cost will go for because they are tied to, you know, things being isolated. So if everything opens up and it all depends on, you know, we've got to put the right precautions in place depending on what the government is telling us to do and what's happening out there. But as a proxy for today, I think it's your best bet just to take that number.

Okay, that's helpful. And then just on the 6% decline of shoppers, I'm not sure if you gave a breakdown between what was the pharmacy and the front store.

we did not give a breakdown of that.

Okay. And are you able to share that?

Not more than the color that we gave, which is, you know, things like cosmetics has been down or beauty has been down more since the quarter, but we try to give you some directional comment, but we're not going to give the absolutes today.

Okay. And just lastly on the number question, on EPS growth, as you alluded to in the press release, if we exclude that 14 cents from COVID, your EPS would have been up about 6% year over year. But if I also exclude the higher credit losses in PC financials, which was a fairly meaningful drag, I get to sort of a nice double-digit EPS growth for a company. Am I missing something there? It seems like your underlying trend was actually quite strong if you excluded the direct and indirect impact of COVID.

Yeah, the 14 cents included the bank. Oh, I'm sorry, okay. So you're right. Just over 6% would have been the number, and it would have been right on plan. We were quite pleased with our performance going into COVID. We were making a lot of improvements in the business. But, yeah, so it would have been 6%, and it's an all-in number.

Okay, perfect. And then, Sarah, maybe first a question on loyalty. Since all the travel-related loyalty programs are not very popular these days with people refraining from flying, It just seems to me there's a great opportunity for the company to really leverage the PC Optimum card to bring even more people into your ecosystem. I guess my first question is, do you agree with this view? And secondly, what are the plans in the works to achieve that?

Well, that's a good question. I would say we absolutely believe that our loyalty program is a great one, and there is the opportunity to bring more people in as they're as other loyalty programs are focused on travel and other things that they won't be doing for a little while. So we do think that there's the opportunity. I think that we did mention that, both Gail and I, seeing it as a great opportunity for us going forward. The one-to-one connection has a couple of benefits to it. One, as we don't have as many, if the industry stays with fewer flyers, it does give us the ability to talk to our customers one-to-one. I also think it's a very compelling offer, so we should be able to get more people to sign up for it as well. We already have a lot of customers who have signed up, but we're always happy to have more for sure.

Gotcha. Okay, and then maybe just one on online, the grocery side. I think it was you or maybe your peers that talked about the high incremental nature of online business with a large part of your sales coming at the expense of your competitors. And I can only imagine this has been amplified with the outbreak. So my questions are, number one, are you able to track what percentage of your online customers, say in the last couple of months, are new Loblaw customers? And then number two is, what steps are you taking to ensure that you keep those new customers once things return to normal?

We have been able to track the number of new customers we have. We've also been able to track the number of customers we did have that are now choosing to go online. So we do have some interesting data, and we absolutely would like to keep these customers. We'd also love to keep them as conventional or market division customers as well. So we are looking at tactics to make sure that we keep as many as we can.

Great. All the best to you and your colleagues in these challenging times. Thank you.

Your next question comes from Vishal Sridhar from National Bank. Your line is open.

Hi. Thanks for taking my questions. I got dropped off the call earlier, so I might have missed it. I apologize if I re-asked it. With the change in the exchange rate and the higher costs, which have been noted, and heightened demand for certain food products, potential shortages and others, do you see inflation creeping back to the system in a larger way? Maybe not next quarter, but call it two, three quarters out?

Hey, Michelle. Yeah, I mean, I made some comments before. We are seeing increased costs from our supply chain. Of course, there's just a lot more cost in the whole supply chain system today. And we do expect that to put pressure as we go forward on costs, which therefore will put pressure on price. Our goal is obviously to keep prices as low as we possibly can for Canadians, but I do think it's reasonable to expect to see some inflation as we go into the back end. I'm not going to try to predict the number, though, of course.

I would say on the U.S. exchange, it's fortunate timing in the sense that we're going into the summer growing season in Canada, so we will buy more of our produce locally. will come from Canada, so it won't be as big an impact, but to Darren's point, we are seeing some inflation across the board.

Okay, and just moving back to this e-commerce topic a little bit here, obviously Loblaw's view in the past was that click and collect will be the favored way for consumers to shop within digital, but you offer a multitude of options for the consumer, so Just wondering what you're seeing of quicker growth, and I know it's off a smaller base, for a ship-to-home. Has that changed your view on click-and-collect in any way, or do you still think it's in the past stance?

I don't think it changes our view. I think our strategy has always been to be flexible and open and to understand what consumers want and to make sure that we have an offering that is appealing to them. Right now, the vast majority of our online business, food business, is click and collect. But as you mentioned and as I said, the delivery part has increased more. But I don't think it changes our view, really. It's just a higher demand in total overall.

Okay. And you mentioned a white label offering for delivery to home. Can you just explain what that means?

Yeah. So right now, in the partnership with Instacart, the way that it works is you would go onto Instacart's website and you would order what you want and you would choose Loblaws as the store that you wanted to order from. Now you can go on to a Loblaws website and order delivery, and it will be fulfilled through Instacart, but it allows you to go into ours. We think that that is a good offering for us to offer our customers.

Okay. And is the cost and revenue model different for the two offers for Loblaws?

No, it's just where you go, where the customers go to pick their order, to choose their order online. It's just that's where the differentiation is.

Okay. And in the disclosure documents, management noted that they reduced CapEx a little bit while focusing on the process efficiency initiatives. Just wondering if that capex reduction is just an effort to be prudent. Is it because management's changing its views on certain investments? Is it because construction is difficult at this moment in time and you can't build stores or retrofit stores like you'd like? Any help there?

Yeah, it's a bit of everything. I mean, really, we're focused on maintaining operations. We're going through this difficult time, so we're trying not to do anything that would be disruptive to the stores. And then there's also challenges in the construction side, just given what that whole industry is going through as well. So you're just seeing a bit of all of those things that will lead to a slightly lower CapEx, certainly during this period of time.

Okay. Yeah. And on the cost that you mentioned, so the sales moderating, you did a very helpful job of explaining the trends that you're seeing early in Q2. So sales moderating, costs creeping up, and I may not have got this, but did you make any reference to whether the increased sales will offset the heightened costs or was the comment that we'll just have to wait and see?

Well, I'm going to let you do the math, but if you look at the increase in sales and the decrease in the drug side, with the cost, it's obviously a pressure to the numbers. It would be that they would offset, so the answer to that is no. But I'll let you guys do the modeling as to where you think things could come out. That's just a period of time as well, but at this point, from what we've seen, no, it would not offset the costs.

Okay. Wonderful. Thanks for the call-in.

Okay. Thanks, Michelle.

Your next question comes from Patricia Baker from Scotiabank. Your line is open. Thank you very much.

A couple of follow-ups. With respect to the white label delivery, is that only in the Loblaw banner?

No. It might have been just piloted in the Loblaw, but the idea would be that it would be across all of them. Okay. So it's available across the country? It either is or it will be. I think it is in various ones, perhaps not all of them. But I'll get back to you. Roy can get back to you on specifically which ones.

Super. Okay, and then just one more online question. What's the customer experience currently with respect to wait times and slot availability delays?

It's been, so it did, it was, of course, with all the demand, we did have delays, particularly in some of the major centers. But we're down to six days on average, and with plans to get down back to the daily, being able to do it within the day, that's obviously our ultimate model for customers to order in the morning and be able to pick up in the afternoon. And so we've been adding capacity as fast as we can in order to get back to that. But we're around six days right now, and it depends across the country, and it depends exactly on the day, but around six.

Okay, excellent. Thanks, Sarah.

But I would say, if I can make a little bit of a pitch for it, is that our overall, I think customers understand the pressure and also understand that this is a pressure not just to us, but to others who offer online as well. So despite the wait times, our overall satisfaction is above 80, and it's been steadily increasing every week. So we are happy to see that.

We have no further questions in queue. I turn the call back over to the presenters for closing remarks.

Great. Thank you, everybody, for your time this morning. Please give me a shout if you have any follow-up questions, and you can mark your calendar for July 23rd when we will be back online discussing our Q2 results. Thanks very much. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.