Loblaw Companies Limited

Good morning, ladies and gentlemen, and welcome to the Loblaw Company's limited fourth quarter 2022 results conference call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star followed by zero for the operator. This call is being recorded on Thursday, February 23, 2023. I would now like to turn the conference over to Roy McDonald. Please go ahead.

Great. Thanks very much, and good morning, everybody. Welcome to the Loblaw Company's limited fourth quarter and full year 2022 results conference call. This morning, as usual, I'm joined 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. 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 regulators. Any forward-looking statements speak only as of the day 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. Please refer to our annual report and other materials filed with the Canadian securities regulators for reconciliation of each of these measures to the most directly comparable gap financial measure. And with that, I will turn the call over to Richard.

Thank you, Roy, and good morning, everyone. We're pleased to end the year with another quarter of consistent operational and financial results. Our focus on retail excellence and careful management of expenses continue to deliver strong earnings growth. Our unique assets, value offerings, and promotional effectiveness continue to be reflected in the strong sales across our businesses. On a consolidated basis, revenue grew by 9.8%, EBITDA increased by 12.8%, our highest quarterly growth in 2022, and earnings per share grew by 15.8% to $1.76 a share. On a gap basis, our earnings per share reflected a 26.4% decline in the quarter as we lapped a one-time gain last year. In drug retail, absolute sales increased 11.6%, and same-store sales grew 8.7%, lapping an increase of 7.9% last year. Front-store same-store sales grew by 11.5%. The strong cold and flu season and elevated demand for beauty products continued to drive growth in margin-accretive categories like cosmetics and OTC. Pharmacy store sales grew 5.4%. Acute and chronic prescription performance levels are back on track. The slowdown in demand for COVID vaccines and testing was expected. However, we're pleased to see strong growth in other core pharmacy services, like med reviews and flu shots, trending above pre-COVID levels and positioning us well for the future. Pharmacy services now represent a significant business for Loblaw and we expect them to continue growing going forward. In food retail, absolute sales increased 8.8% and same store sales grew 8.4%. Improvements in our market share and strong traffic reinforce the belief that our offer is resonating with customers. In Q4, our internal food inflation was generally in line with CPI. Our discount banners continue to perform well with strong traffic and item discount growth in our hard discount banners. We strengthened our discount position, adding converted four additional stores in the quarter for a total of 11 last year, all with strong initial results. Going forward in 2023, we plan to convert over 20 market stores to discount and plan to open some 30 new food and drug stores. Though discount continues to outperform conventional grocery, our market banners are also delivering strong results. Having the right customer offer in all of our stores remains a key focus. Improved retail, our right-hand side, had a negative impact on same-store sales of 110 basis points. I will add that sales growth remained positive in apparel and home entertainment, and we are comfortable with our inventory levels. Online sales in the quarter increased 8.3%. Online penetration rates have been stable over the past two quarters, trending at two times the pre-pandemic rate. Q4 retail gross margin was 30.6%, down 30 basis points compared to last year. This was driven by a decrease in food retail margin that was partially offset by growth in higher margin drug retail front store categories. Our decrease in food retail gross margin ties directly to the combination of continued cost pressures and higher investments in promotions including our no-name price freeze initiative. Our food retail gross margin peaked in mid-2021 prior to the onset of accelerating inflation. Since then, our food retail gross margin has not returned to those levels. Our Q4 results are further evidence that retail prices are not growing faster than cost, and the company is not taking advantage of inflation to drive profit. And our strong sales and market share performance this quarter are a clear indication that our efforts resonate with customers. On the topic of inflation, we continue to receive a large number of higher-than-normal cost requests, which leads us to believe inflation will remain elevated through the first half of 2023. We expect our full-year 2023 consolidated gross margin to be in line with our full-year margin of 2022 at about 31%. Retail SG&E as a percentage of sales was 20.2%, an improvement of 70 basis points compared to last year, resulting from careful cost management and improved leverage related to higher sales. Sorry. Adjusted retail EBITDA increased by $174 million, or 14% in the quarter, yielding a margin of 10.4% and up 40 basis points compared to last year. Although earnings before tax of VC Financial were down $20 million in the quarter due to the lapping of a one-time gain last year, we were pleased with its core business performance. Revenue was up $55 million, driven by higher interest income from growth in credit card receivable and an increase in consumer spending. On a consolidated basis, adjusted EBITDA margin was 10.7% in the quarter, up 30 basis points compared to last year. Our retail free cash flow was $408 million in Q4 and over $2 billion on the year. In Q4, we repurchased $175 million worth of common share and $1.4 billion on the year. Our role is to meet the needs of the communities we operate in and the expectation of our customers. This means refining the promotions, mix and presence of our supermarkets and drugstores. If we're successful, results follow. A good example this year is in Quebec, where we are modifying our profile, adding discount stores, refining market stores to suit local markets and increase our share. We opened the province's first TNT store in Montreal just before Christmas. The store has been a roaring success, serving an eager customer base. We lined up for hours, day after day, breaking all Loblaw sales records for our new store. Looking ahead to 2023, we have strong plans and feel well-positioned to execute in our core businesses while advancing our growth initiatives. For full year 2023, we expect our retail business to grow earnings faster than sales and adjusted earnings per share growth in the low double digits. We plan to increase our capital this year, investing more in our store network and distribution centers. We plan to invest approximately $2.1 billion in gross capital expenditures, or $1.6 billion net of proceeds from property disposal. The increased level of investments will largely be funded through the sale of approximately $500 million in real estate assets. We currently have over $1.8 billion in excess real estate that we plan to dispose at a more rapid pace over the next few years as we accelerate our investments in assets that drive our core business. Finally, We will continue to return capital to shareholders by allocating a significant portion of our free cash flow to share repurchases. We are pleased with our performance in the fourth quarter as we cap off another strong year. Underpinned by our focus on retail excellence, we continue to demonstrate steady, consistent performance and have positioned ourselves well for 2023. I will now turn the call over to Galen.

Thank you, Richard. Q4 continued the momentum that we saw in previous quarters, helping the company finish the year with strong results. Shoppers Drug Mart had an exceptional performance in the quarter and for the full year. This was due to both strong cough and cold seasons that essentially lasted all year long and sustained strength in cosmetics and fragrance. It was also a great year for our pharmacies as they shifted from COVID testing and vaccinations to delivering important day-to-day health services. Patient feedback has been extremely positive and many provinces are now embracing pharmacists as a way to dramatically improve Canadians' access to basic primary care. As Richard described, in our food business, higher costs of goods coupled with active investments in value put pressure on gross margins in the quarter. The strong performance in our drugstore business provided some relief. However, overall gross profits still declined as the costs from our suppliers continued to increase faster than our prices. The good news is that customers responded well to our efforts, helping deliver strong sales and market share growth. The no-name price freeze was an important driver of that success, as was the strength of our weekly promotional programs. This was true in both divisions. One notable item in the quarter was the outstanding growth in our prepared meals categories, as customers chose fresh, prepared food at great value as an alternative to dining out. Looking forward, we expect that managing the balance between cost and price inflation will remain difficult. We are seeing some costs stabilize and even begin to reverse in a few areas, and we are actively lowering prices in key categories. However, we still have over 1,000 supplier requests on our desks for significant cost increases. We continue to believe that these inflationary pressures are temporary, and that they will ease with time, but predicting how long that will take is proving extremely challenging. In that context, we recently reaffirmed our commitment to no-name prices being an average of 25% less than national brands. We're delivering the best available value in our 400 no-frills and maxi-hard discount stores, and we will continue to push back on unjustified cost increases from suppliers. Finally, we're stepping up our support for those most in need, Last year, we provided more than 5 million kilograms of food to Canadian food banks. This was in addition to over 120 million healthy snacks and meals through the President's Choice Children's Charity, on our way to feeding a million children a year. In the upcoming year, we'll invest over $2 billion to grow and improve our store network, provide more health and wellness care to Canadians, create jobs, reduce waste, and meet our carbon reduction commitments. We will do so while delivering consistently against our long-term financial framework. We're proud of our achievements in 2024 and of our over 200,000 hardworking colleagues and believe that we are well positioned for 2023. I'll now open the call for questions.

Thank you, Galen. Colin, would you mind introducing the Q&A process, please?

Certainly. Ladies and gentlemen, we'll now conduct the question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. And if you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, your first question comes from Irene Attell from RBC Capital Markets. Irene, please go ahead.

Thanks, and good morning, everyone. Obviously, a great quarter. Can you talk to us about what you're seeing in terms of consumer behavior, where we are now in terms of private label penetration, more broadly speaking, trade down, and what you're seeing in the competitive environment?

Yeah, absolutely. It hasn't changed a lot since Q3. You know, there's still that sustained shift to discounts. It hasn't slowed down. It hasn't speeded up. Control brand continues to be very, very strong, particularly at the lower end with no name, although you can imagine that was supported significantly by the price freeze in the quarter. There's a shift happening in proteins, you know, as you would normally expect away from, you know, higher-priced proteins like beef towards lower-priced proteins like chicken or pork. And then from a competitive perspective, yeah, it remains an intensely competitive environment. We're still not all the way back to promotional penetration levels that we had pre-COVID, you know, which is an interesting thing to watch. But, you know, it certainly continues to ramp up and we're seeing customer price sensitivity really across the board, you know, promotionally so in the market stores and then both promotionally and on an EDLP basis in the discount division.

That's great. Thank you. And just looking ahead to the 2023 guidance, if gross margin is going to be stable, then presumably you see significant ongoing opportunities on the OPEX efficiency side. And I guess sort of what you guys refer to as retail excellence. So can you give us some more information, please, on what those sort of big buckets are? And whether you're going to get all the way to brighten 2023 or whether we should continue to see some improvements in 2024.

So big picture, Irene, for 2023, we're sort of getting back to normal market conditions. We're anchoring ourselves on our financial framework. And when we built our plans, it provides us with the outlook that we just talked about. So we think we're going to be just slightly a bit ahead of our financial framework. and the business is going to be more stable than what we've seen over the last few years, and we feel good about 23. As to the big initiatives, I don't want to get into too much detail, but there's a number of those that are on the way that are becoming, I guess, somewhat more important from a financial perspective, but they're nowhere near maturity yet.

That's great. Thank you.

Your next question comes from Kenric Tai from ATV Capital Markets. Kenric, please go ahead.

Thank you and good morning. Particularly strong front store performance, especially if we look at it against a prior year comp of 6.1%, that 11.5% already does stand out. You called out the big flu season, which I think we expected, but could you provide a little more insight with respect to beauty and That's a high-priced, high-margin category in which you appear to still be delivering very strong results. Have you seen a shift in terms of promotional attachment, and does the success in front store represent very effective promotions in beauty and a higher attachment of promotional activity, or how should we think about that beauty performance?

Kendrick, the way really to think about what's happening in the front of store is that it's It's demand-driven in those two key categories. Those are disproportionately driving the results. Beauty is not a particularly promotionally intensive category to begin with. There's promotions that run through the PC Optimum program, which are very potent and attractive, but this is really underlying demand. I think you know as you visit our stores that it's hard for us to stay in stock in OTC products and cold and flu medications. And that's what's driving it. As far as, you know, the everyday commodity products that we would typically sell in shoppers, drug marts, you know, we'd see that not as strong as perhaps in typical years. But that's, you know, largely driven, again, by the promotional intensity in the big box stores and the food stores.

Thank you, Dale. And then just one further one for me. Just with respect to the no-name price freeze, Can you speak to how strategically and perhaps from a share perspective that initiative played out versus your own expectations? I mean, certainly there were headlines around the initiative. It would be useful to understand just how effective that was relative to your own internal expectations.

Yeah, it was very successful. and lots of public awareness around the program. The yellow packaging stands out in a particularly impactful way on the shelf, I think, which contributed to its success. The most important thing is we save customers a lot of money. And as we move forward, we're committed to maintaining that 25% price gap, as I mentioned. And the no-name sale performance continues to be very strong. It lifted during the price freeze. from what was already a pretty high rate of growth. And, you know, it's continued post, you know, January. And so we continue to see it as a really important, you know, part of the way we deliver value to Canadians and help save them money.

Thank you. So I'll get back in the queue.

Your next question comes from Mark Petrie from CIBC Capital Markets. Mark, please go ahead.

Yeah, good morning. I think Q4 was the first time we saw a basket-sized flat in 2022. Do you attribute that mostly to inflation continuing to flow through, or was there a normalization or a shift in consumer behavior, or is that a payoff from work specifically targeted at that?

You're saying gross? You were talking about gross margin?

Grocery, yeah. Grocery basket size, yeah.

All baskets, yeah. Well, it's It's just like that's where I think we are in the cycle. I think we've seen traffic go up. We've seen inflation affecting how people fill their baskets. So it's tough to see what's going to happen over the next few months, but I don't think we've finished the shift to discount, but we're still leaning towards discounting more and more.

Okay. And specific to the shopper's gross margin, hoping you can help us understand some of the puts and takes there, specifically as it relates to the impact of the mixed shift to higher margin products, but also the actual product margins, the performance of private label, and then also the impact of pharmacy services.

The bulk of it is mixed. Essentially, that's the story on gross profit for shoppers, period.

And is private label penetration rising within shoppers? I mean, I know it's happening more in food, but is it happening in shoppers or not really?

To be honest, I don't have the answer. The private label activity has been very much on the food store in the quarter. And the story on shoppers is front of store, and that's where the activity has been. On pharmacy, what we've mentioned is the COVID services peaked last year in Q3 and Q4, so we were expecting them to go down. But despite that, we've seen great pickup in flu shots and med reviews, which allowed us to deliver a decent growth, albeit not at the same rate as we did in Q4 of last year.

Yeah, and maybe I'll just add that no name doesn't have quite the same presence in those small front shop, Shoppers Drug Mart stores, but President's Choice actually has higher penetration in Shoppers Drug Mart than it does, you know, in the rest of the food stores. You know, that's how strong it performs, and it continues to do so.

Okay, thanks, and then just one last one, more of a housekeeping, but Is the real estate that's going to be disposed of in 2023, is that occupied by Loblaw? So will it bring incremental rents into the system, or is that separate?

It's occupied by Loblaw, and it's not material for Loblaw.

Okay. Thanks. Best of luck.

Your next question comes from George DeMay from Pennsylvania. Scotia Bank, GBM. George, please go ahead.

Yeah, thanks. Good morning and good quarter. On the outlook for the double-digit growth in ETFs, can you maybe tell us a little bit where you're baking in in terms of food inflation? And from a cadence standpoint, is it going to be a stronger first half versus a weaker second half? Maybe any color you can provide there.

Our plan contemplates a relatively stable performance by quarter.

Okay, in terms of the food inflation, can you maybe give us a little bit of sense of what you guys are taking into that guidance for the exit?

As we said, we expect inflation to remain elevated in the first half. Your guess is as good as mine for the second half.

Okay, thanks. And just more broadly, can you talk a little bit about the automation opportunity, where we are today in terms of maybe the VCs and perhaps how long it will take to get to where you want to get and how should we think of the returns to the margins there?

So, our DC is currently being built. The building should be completed by the end of this year. Automation will start to be installed at the beginning of next year and should take about a year to get finished. So, we expect our new automation center to begin operation end of 2025, early 2026. And the way you need to look at this investment, it's an opportunity cost. So the automation is way more productive. So it allows us to significantly increase the throughput. And so that's how we derive our return from such projects.

Okay.

Maybe just worth mentioning, we have already a fully operational automated warehouse in Cornwall that serves ambient food. and we've been operating automated warehouses to support the drug and beauty business in the country for some time.

That's good.

Your next question comes from Michael Van Elst from TD Securities. Michael, please go ahead.

Right there. I'll start off with an easy one, hopefully. The NCIB, you purchased, I think, 3.3% of your shares last year. Do you expect that to increase given the rise in the free cash flow?

Right now, we're steady as it goes, no change.

Okay, so should we expect steady in terms of share count, steady in terms of dollar amount or percentage of free cash flow? How do we model that?

We look at both, but we need more of dollars.

The e-commerce, the second quarter in a row that we've seen it starting to grow again, up 3% and up 8% this quarter. Is this just inflation or is it the number of users increasing again? And what do you think is leading to this growth overall?

Yeah, so the way we think about it now is that it's you know, following the pre and post pandemic, you know, periods. Yes, there's a little bit of growth, but we're not yet, you know, we don't yet have full visibility into what that normalized growth rate is going to be. Inside the numbers, you know, there's multiple parts to our e-commerce business. There's a drug business, which is quite significant. There's the front shop at Shoppers Drug Mart. And then of course, there's the large part through PC Express. And we see some strength on the drug side. In particular, we see strength on the home delivery side, growing materially faster than what we're seeing in pickup, although pickup's holding pretty steady. And delivery is still very small for us, but growing rapidly. So it's going to take us, I'm going to guess, now through the balance of 2023 before we have a really clear sense of what this new run rate is for e-commerce.

So based on the penetration that you're at now and the level of disruption that we're seeing in the store, can you comment on that level of disruption and the picking? Has it been an issue or have you been able to kind of figure out a way to keep it a little less noticeable and then how did it alter the way you decide to go to, you know, to pick your picking strategy, I guess, over the next few years?

Yeah, look, there are some stores where the picking, you know, penetration is so high that it is very visible and it is maybe on the edge of being disruptive to customers. But the number of stores where that's, you know, even the beginning of an issue is very small. Having said that, We are constantly looking at new ways to improve pick efficiency and productivity and we have multiple projects going on with that goal in mind, both improving the manner and fashion in which we pick in stores And we've also opened a pretty successful manual facility here in the west end of Toronto, downtown Toronto, that is picking in a dark warehouse, for lack of a better word, for a pretty extended market all across Toronto. We're very happy with the way that that is operating, with the tick accuracy, the speed. So we're increasingly confident that you know, these medium-sized, dark manual picking facilities will play a complementary role, you know, to store pick in our network.

Okay. And then just finally on that side is, you know, at the current level of penetration, is media revenue opportunity significant? Where do you stand in terms of ramping that up? And do we need to see a lot more growth in e-commerce markets for the media revenues to start becoming more meaningful?

Yeah, media is still small, but growing rapidly. I think we reached a milestone in December when we launched our retail media platform, which will allow customers now to do self-serve, i.e., build their own campaigns on their own. So we're excited with what's ahead in 23, but it's still a small business, albeit profitable.

Yeah, and I wouldn't tie directly e-commerce growth to our ability to realize value in media. It's an important element of the model because, of course, online eyeballs are easier to monetize, but The loyalty program and what we can do there is also a source of media dollars, leveraging our existing store traffic footprint. And then there's also a third-party media channel that we are exploring and see opportunity into. So it's an important part of the way we grow the media business, but it is not the determining factor limiting growth.

Great. That's helpful. Thank you.

Your next question comes from Peter Sklar from BMO Capital Markets. Peter, please go ahead.

Hi, good morning. It's Emily for Peter. So I'm just going to go back to gross margin. We understand that pharmacy and front store gross margins have been offsetting the retail food gross margin. And with the front store sales so exceptionally strong this quarter, 11.5% same-store growth, it really had a mixed impact So we're really wondering on a sequential basis, maybe versus Q3 or maybe the cadence through Q4, how has the grocery gross margin trended, like how you entered the quarter and how you exited?

So what we're ready to disclose is that our gross margin in food retail was down and our gross margin in pharmacy was up. And that's as far as we'll go from a detail as to what's happening with the gross margin.

Okay, thank you. So let's switch gears to PC Optimum then. Similar to our question on gross margin, we're just wondering how has usage in PC Optimum trended in Q4 versus previous quarters? Do you see more redemptions and more participation? And if there's any insights on trends that you could glean from the data that you get from the program, that would be helpful. Thanks.

Yeah, so two things are happening, you know, positive trends in relation to the PC Optimum program. You know, the first is that, you know, our points value proposition is used by customers to be an equivalent to cash. So it's a really important part of the savings equation as customers think about how best to save money. So as we headed into the fourth quarter on the end of the year, we saw a noticeable but not significant increase in the rate of redemption. So people essentially using their points to reduce the cost of their grocery bills. But I wouldn't over-rotate on that trend. It's notable. But it's not a massive shift off what would be typical. And then the second thing that's been happening is the number of actively engaged PC Optimum users has been growing at a very satisfactory rate. And so for us, two things happened. The existing core Optimum customers redeeming a few more points, actively engaging in the program and responding to our personalized promotions. And then secondly, we have materially more customers who are in that, you know, field of active engaged. And so they are also contributing, you know, to the earn and the burn of points and also making a positive impact on our sales.

Thank you very much. Those are my questions.

Your next question comes from Rizal Sridhar from National Bank. Please go ahead.

Hi. Thanks. Thanks for taking my question. Just related to the step up in CapEx, I'm wondering if this is a longer term CapEx cycle that we should see and do you have on these heightened investments or the increased investments, do you have a lot of sight on the returns and if they can exceed the current thresholds that the business is currently generating?

Our objective on return has not changed. It's just that over the last few years, we're probably running a bit behind the industry in terms of square footage growth, and so we're doing a bit of catch-up, and so that's what we're doing.

Sure. So in terms of the CapEx, at the current levels, how long should we model that? Is that a few years kind of thing, and then it goes back down to the historical rate, or is that more of a long-term run rate?

Yeah, for now, what I'd do is I'd probably do that for maybe two or three years. We'll revisit that number after that.

Okay. With respect to the general merchandise business, just wondering, I know you gave some details in your preamble at the top, but just wondering what you saw. Did that pressure the comp on the total comp, and was that a pressure that you see gradually improving?

The pressure we saw in Q4 was somewhat similar to the one we saw in Q3. For us, the key was to make sure that we were managing our inventory as well, because that's what we were seeing was happening with other retailers globally. And so I think we've managed it well so far, but we remain very focused on making sure we don't over-purchase going forward so that we can protect our margins as much as possible.

Okay. So in terms of the same source, though, Colette, one percentage point pressure in terms of the same store?

Yes, and it was about the same in 2.3.

Okay. And on the strategic procurement activities, which was indicated in the disclosure material, I presume that's something that Loblaw regularly does. So just wondering why it was called out. Is the magnitude of opportunity larger than you would otherwise see in prior years?

But we started on that initiative last year. We're extracting as much value as possible from using the scale of our enterprise. And that initiative has been growing nicely in 2022 and is sort of gaining traction for 2023. So that's going to be one of the initiatives that will help our gross margin in 2023.

Okay. And lastly here, you know, just on the street tonnage math, I know it's not perfect, so just wondering what Loblaw saw specifically on tonnage in the quarter.

So I guess a starting point, very happy with the sales, as you can see in the results. Equally happy with the tonnage market share growth, you know, which is – you know, an important measure and metric for us. And then, you know, in terms of absolute tonnage growth, you know, we're still moving through the cycling challenges of COVID, you know, but the underlying performance we're very comfortable with, and we've seen improving trends on tonnage really since the beginning of the year. And the caveat, you know, that I would offer up is that in Q1, we're headed into another COVID lapping distortion. And so the relative performance from a sales and tonnage perspective is going to look a little wonky. But the underlying trend, which is what's important for us, you know, will continue to be where we need it to be.

Yeah, I want to double click on that. I think the same store sale performance we delivered in Q4, you're not going to see the same thing in Q1. So it's very important that we were in lockdown for the first six weeks of 2022. So please make sure you keep that in mind when you build your models.

Thank you.

We're focused on absolute sales level, not comp performance right now. And so that's how you should look at our business.

Your next question comes from Chris Lee from Desjardins Capital Markets. Chris, please go ahead.

Hi, good morning, everyone. Hey, Galen. You mentioned in your opening remarks that promotional intensity has not fully returned to the pre-pandemic level. I'm just curious, you know, why do you think that is? And does your outlook for the year kind of contemplate an intensification of the promotional environment, you know, as we go through the year?

Yeah, I mean, look, it's just a fact, something that we observed. You know, there was a real retreat, you know, in promotional intensity through COVID as people, you know, had historically low levels of price sensitivity. And it's just an interesting call-out. It continues to grow, promotional intensity. You know, we continue to, you know, to – to engage customers, you know, that way. We're trying to do it as sensibly and as intelligently as possible. And so will it return to pre-pandemic levels and when will that happen? I don't know the answer to either of those questions, you know, but we are seeing, you know, we're seeing an increase in promotional intensity with customers at the moment, but certainly not something that is radically different from where we were in Q4.

Okay, and it sounds like it is a manageable risk. If it does intensify, it looks like you have other levers to kind of offset that to allow you to achieve your earnings growth guidance. Is that fair to say?

Yeah, I mean, look, this is a normal part of How we trade and how we manage the business is, you know, trying to manage the balance between shelf prices, you know, promotional investments, and then improvements in mix. And, you know, we'll just continue to manage it effectively as we have for the last number of quarters.

Okay, that's helpful. And then just in terms of your capital expenditure, the incremental capex you're spending on new store growth, does that essentially get your retail square footage sort of back to around 1%? I know it's been flattish for the last few years. Is 1% kind of the number you're shooting for this year?

About that. Well, I don't think we'll be all the way there at the end of 2023, but, you know, that's the growth rate that, you know, we think keeps us in line with the rest of the market. And I should say, you know, one of the – real learnings over the last 24 months has been the identification of new store growth opportunities and material incremental sales options as a result. And I think Richard called out a particularly outstanding one, but we put that T&T in an old Loblaw store that had been closed for, I think, 10 years. So dark, closed, And we added that store at 70,000 feet, really blowing the doors off in terms of its sales. That's 100%, you know, incremental business for us. And, you know, as I said, that's at the top end of the available options. But, you know, there are quite a few others out there, you know, that we are, you know, intentionally pursuing.

That's great. We look forward to seeing that in a few weeks. And maybe just on the CapEx, Richard, I wanted just to confirm. So, You are essentially right now expecting that the gross CapEx for the next two to three years will be kind of about $2 billion, same as this year. But you would be funding some of that through real estate divestiture. So from a net CapEx basis, you should kind of have $1.6 billion. It's the runway that we should be expecting for the next two to three years. Is that correct?

Yes.

And then just to want to confirm, you said you still have $1.8 billion of excess real estate after we sell the $500 million, or do you have $1.8 billion in excess real estate right now?

That's including the $500 million that we're in process of disclosing right now.

Okay, that's helpful. And then just in terms of the outlook, you mentioned the gross margin rate will be stable. Can you talk about your SG&A expense rate? Do you expect more improvement this year?

I wanted to give a sense on gross margin to sort of give you a perspective on how we feel about the business. We're going to keep working really hard on SG&E to make it better every quarter as we progress the year, but I'm not going to comment on the specificity of where we're going to be with SG&E.

Okay, that's good. And lastly, I know I always ask you guys this, but any updates from the government with respect to changes in generic drug prices later this year?

You know what? Let us get back to you on that. There's been a moderate update. It's not material to the business looking forward, but we can give you a few more details. Roy can give you a couple more details on it if you'd like.

Okay, fantastic. Thanks a lot.

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. And we have a follow-up question from Irene Attell from RBC Capital Markets. Irene, please go ahead.

Thanks. Just one point of clarification and then another question. So point of clarification, when you're talking about revenue run rates, if we go back and look relative to 2019 and kind of look at CAGRs and trends, That should be the way that we are looking at it, or is there anything above and beyond that that we need to keep in mind in terms of quarterly cadence in 2023?

We look at our absolute sales number every week. That's what we're looking at. We're not looking at takers. We're not looking at same-store sales. We're looking at how much sales are we delivering week in and week out, and that's what we're very focused on right now. Understood. Okay.

And then just one follow-up, one question on President's Choice Financial. In your outlook for 2023, are you anticipating, you know, any additions to PCLs, any changes in allowance rate, you know, that kind of thing?

Nothing significant for PC Bank on our results for 2023. Thank you.

There are no further questions at this time. I'll turn it back to Mr. Roy McDonald for closing remarks.

Great. Thanks, everybody, for your time this morning. I'm around if you have follow-up questions, and please mark your calendars for Wednesday, May 3rd, when we will be releasing our Q1 results. Have a great day.

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