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.