Loblaw Companies Limited

Good morning ladies and gentlemen and welcome to the Loblaw Companies Limited first quarter 2022 results conference call. At this time all lines are in a listen only mode and following the presentation we will conduct a question and answer session. If you have previously pressed star 1 to ask a question prior to this announcement please press star 1 again. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, Wednesday, May the 4th, 2022, and I would now like to turn the conference over to Mr. Roy McDonald, Vice President of Investor Relations. Please go ahead, sir.

Great. Thanks very much, Michelle, and good morning, everybody. Welcome to the Loblaw Company's limited first quarter 2022 results conference call. As usual, I'm joined here this morning by Galen Weston, our Chairman and President, and by Richard Dufresne, our Chief Financial Officer. And 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. As such, 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 Regulator. And any forward-looking statements speak only as if they're 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 deal with the various files with the Canadian securities regulators for reconciliation of each of these measures to the most directly comparable GAAP financial measure. And with that, I will turn the call over to Richard.

Thank you, Roy, and good morning, everyone. The first quarter of 2022 saw continued strong performance across our business, continuing on our momentum from 2021. We delivered solid sales performance coupled with stability in our gross margin. We continued to focus on market share and our pricing position and carefully manage our expenses, all part of our focus on retail excellence. We started the quarter in lockdown. Then, as restrictions eased, consumer behavior shifted as people began to gather, return to the office, and travel again. Inflation accelerated in the quarter, which accelerated the shift to discount in food retail. Our mix of assets across food and drug retail, along with our strong e-commerce and loyalty offerings, helped us deliver strong results in this evolving environment. Given that we are now cycling two years of the pandemic, we will focus on comparisons to prior year in providing insight to our performance and will no longer share two-year average data points as comparisons. We're pleased to report strong and steady results in the first quarter. On a consolidated basis, revenue grew by 3.3%, adjusted EBITDA increased by 10.3%, and adjusted earnings per share grew by 20.4% to $1.36 a share. In the quarter, both our food and drug retail businesses contributed to our performance. In drug retail, absolute sales increased 5.4%, while same-store sales increased by 5.2%, lapping a decline of 1.7%. Front-store same-store sales grew by 3.6%. As we moved past the initial lockdowns early in the quarter, we began to experience acceleration in sales growth in our higher-margin categories led by OTC and cosmetics. Pharmacy same-store sales grew 6.8%, once again driven by our COVID vaccine and testing services, which were not material in Q1 last year. In food retail, absolute sales increased 2.4%, and same-store sales grew 2.1%. Performance in our discount banners strengthened, and for the first time since the pandemic began, we saw the sales mix between our discount and market businesses return to pre-pandemic levels as we exited the quarter. Although customer buying patterns shifted as restrictions loosened and inflation continued, our market banners remain strong and continue to perform well against our conventional grocery peers. In Q3 last year, we announced our network optimization initiative. Over the last few weeks, three converted stores have been completed. We are pleased with their sales performance, which is running ahead of expectations. More conversions are on the way. Our omnichannel performance remains strong. Online sales decreased by 9.8%, lapping last year's 133% growth rate during a period with more stringent lockdown measures. We see volumes now leveling off after a peak of activity experienced in January this year through the latest series of lockdowns. Our digital businesses delivered $3 billion in sales over the last 12 months, continuing to run well above pre-COVID levels. Our omnichannel network is well positioned. We continue to enhance our customer shopping experience through our digital platform while offsetting its cost through optimizing operational efficiencies, deploying new technology, and refine our delivery offering. In the quarter, we further expanded our local store-based offering, expanding PC Express delivery same-day service to over 300 stores. Retail growth margin in Q1 was 31.1%, up 80 basis points compared to last year. Drug retail led our margin expansion in the quarter. With its higher gross margin rate, growth in pharmacy services categories contributed to this expansion. COVID vaccines and testing led this growth, while we also saw traction in medication reviews and prescribing services. Higher margin categories within front stores, such as OTC and cosmetics, continued their momentum, benefiting from customers who returned to socializing and office-based work. Growth margin performance in food retail also improved slightly, reflecting our pricing and promotion strategies, which leverage our unique data sets. We now feel confident in our ability to scale up some of these strategies, allowing us to benefit both sales and margins. We are pleased with our growth performance for Q1 and our competitive positioning in the markets. As the year unfolds, we are focused on delivering consistency in our growth margin performance and our confidence in our ability to do so. Retail SG&E as a percentage of sales was 20.4%, an improvement of 10 basis points compared to last year. We lapped higher COVID costs in the prior year and continued to benefit from sales leverage and operating efficiency. This was partially offset by higher labor costs across the network, including the higher costs associated with the growth in pharmacy services. Adjusted retail EBITDA increased by $140 million, or 12.2% in the quarter, yielding a margin of 10.7%. We were pleased with PC Financial's performance in the first quarter. Revenue was up $21 million, driven by higher interchange and interest income, with a broad-based increase in customer spending. Contribution to adjusted EBITDA from the bank was strong, but decreased $15 million year-over-year as we lapped last year's gain related to reversals in expected credit loss reserves. On a consolidated basis, adjusted EBITDA margin was 11% in the quarter, up 70 basis points compared to last year. In Q1, we repurchased $148 million worth of common shares, representing 1.3 million shares. Maintaining our cadence of annual dividend increases, today we announced our 11th consecutive annual increase, raising our quarterly dividend by 11%. Looking ahead, macro factors continue to make forecasting challenging. In Q2, we expect eat-at-home trends to continue to taper. We expect inflation to remain elevated in the short term. However, inflation may moderate in the second half of the year as we begin to lap higher levels in the second half of 2021 and see the impact of actions taken by central banks. That said, there are broader macro and geopolitical factors that are outside of our control that impact the inflation landscape. While we continue to experience challenges within our supply chain, our in stock position has improved and we remain confident in our ability to navigate the situation. Our full year outlook remains unchanged. I will now turn the call over to Gailen.