North West Company Inc. (The)

All participants, please stand by. Your meeting is ready to begin. Please be advised that this conference call is being recorded. Welcome to the Northwest Company, Inc. Second Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Edward Kennedy, President and Chief Executive Officer. Mr. Kennedy, please go ahead.

Thank you, and good afternoon, everyone. Joining me today are Amanda Sutton, our VP, Legal and Secretary, John King, our Chief Financial Officer, Alex Yoke, who's our president of our Canadian retail group, and Dan McConnell, who's president of our international retail group. Before I go any further, I'll ask Amanda to read our disclosure statement.

Thank you, Edward. Before we begin, I remind you that certain information presented today may constitute forward-looking statements. Such statements reflect Northwest's current expectations, estimates, projections, and assumptions. These forward-looking statements are not guaranteed a future performance and are subject to a certain risk which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statement. For additional information on these risks, please see Northwest Annual Information Form and its MD&A under the heading Risk Factors. Edward?

Thanks, Amanda. I'm going to start the call with some overview comments and then I'm going to I invite Alex to provide an overview of our Canadian retail operations and Dan McCall to do the same for international. Then I'm going to come back on the call and make some brief comments about our airline performance as well as our investor principles that will tie back to our dividend, the NCIB, we announced as well. As a general comment, this unexpected environment is incredibly dynamic, of course. with the COVID pandemic around us. And as I commented in the press release, it's created unique implications for our customers, communities we serve, our employees and our business. Our employees are working exceptionally hard. You can imagine when you have the volume of business increase that we do under the conditions that we're working within. Although I'm very pleased to say that our incidence of COVID within our 8,500-person employee base is remarkably and commendably low. And I think indicative of safety and care that we're taking for each other. And I'm talking of total cases of less than 15 since the beginning of the pandemic amongst that 8,500. Beyond that though, our role as an everyday needs retailer puts a responsibility it might be viewed as a burden, it's still there the next morning when you get up and you've got a lot of work to do and I want to call out especially our value chain roles of planning, buying, moving and selling the merchandise that we offer and the services that we provide. These individuals have been hard at work, taking time away from work has not been easy physically and travel restrictions being the biggest factor and the sheer momentum that we have and the energy that requires It's a challenge at this point to make sure we can balance our work energy and our workloads to regroup, to recharge and to keep pushing forward as we see the continuation of this environment. And we learn more about it on how we react, how we step forward as we have recently through the year actually since the beginning of the COVID outbreak with much higher levels of community support. specifically financially, what we've done with our foundation and other donations, as well as the general communication that we have with communities to try to be there in regular dialogue on needs that are beyond individual consumer needs. I'm talking now about commercial needs, business to business, government contracts and supply that Alex and Dan will talk a bit more about. So it's an entire mix and shift of activity while at the same time, we're trying to keep our eye focused on what we look like as we emerge through COVID-19, which we expect to be, and this is obviously a guesstimate, mid next year and beyond the key things that we always had on our plate in terms of the right cost for our customers, the best logistics, and top quality people in our stores and really working our niche. And in this particular situation, trying to retain the market share capture that we certainly seem to be gaining through the last five or six months. With that, I'm going to now invite Alex to comment on our Canadian results and the conditions that we're working under and really leveraging to perform as we have been. And then I'll turn it over to that, Alex. Okay. Thanks, Edward.

This is Alex. So in Northern Canada, we continue our strong sales momentum across food and general merchandise, driven by a number of factors. The first factor being the fact that despite some travel restrictions relaxing from June, we saw customers continue to stay closer to home across most of our regions. And we're able to capture this hiring community spending because of our everyday offering in food and durable goods, general merchandise. Even though our food supply situation was still tight at the start of the quarter, the food in-stock situation has improved, and we were also able to secure additional general merchandise to really support the sales and support our communities. Another factor helping our customers in the quarter was the additional support from the government in response to COVID-19, whether it be increased income transfers to northern communities or the enhanced subsidies to the Nutrition North program. Many of these support programs started in Q1, but we have seen the continued benefit to our consumers going to Q2 and Q3. A third and final factor was the pricing investment that we have started rolling out. We started this investment in Q1 and rolled out to about a third of our markets in early Q2. Again, despite the lifting of travel restrictions, which have made it easier for customers to out-shop, we have continued to see tonnage sales growth throughout Q2 and Q3 that has offset this pricing investment. Our initial read is that we have captured market share primarily from out shopping but also from competing local food stores. The projected annual investment of this pricing investment is in the $8 to $10 million range for the next 12 months and then ramping up another $5 million depending on our tonnage lift and payback. On the gross profit front, we achieved higher margins due to faster sell-throughs and better utilization of our semi-fixed freight capacities. offset partially by lower margin rates in high performing categories like home electronics and motorized vehicles. This again gives us confidence to continue investing in price as we can see that we can offset the pricing investment not just through sales gains but also through these volume driven efficiencies. In terms of expenses, we continue to invest in safety protocols and equipment as well as additional pay and people for our stores. For PPE and cleaning protocols, we expect the run rate to be reduced to about half of what we saw in Q2. And for people, a significant amount of the expenses in Q2 was due to the large number of temporary hires we put into some communities in the case of a COVID outbreak. We expect that these hires will be exiting our communities over the course of Q3. We have also transitioned away from a broad premium pay program to much more targeted support for when a store experiences a COVID-19 outbreak in the community. as well as the special frontline bonus program that will be distributed to our frontline in Q4. All of this means that we expect our expense, COVID-19 and related expenses to decrease in terms of run rate in the third or fourth quarter. This means that we expect COVID-19 related expenses to be about $1.1 million per month in Q3 and Q4 compared to about $2.3 million per month in Q2 for Canadian business. Looking ahead to next year, our northern Canadian sales outlook will remain positive, like what Edward said. Despite very low incidences of COVID-19 across northern Canada to date, we do expect and have seen varying travel restrictions that will remain in place across most of our markets and to mid-next year until a vaccine is widely available. This timing will obviously be dependent on how testing and vaccine development evolves over the next six months, but in the very near term, just this fall, we do expect that more limitations will be put in place or continue to remain in place. As an example, Manitoba just reinstated restrictions on travel into northern communities given the recent spike in COVID-19 cases in southern regions. As a direct result, we do expect to see this continuation of shopping activity that will shift from out shopping to in community and at home or near to home products and services. And so we expect to perform well in these conditions as we have over the past two quarters attracting even more customers and hopefully making our market share gains permanent through lower food prices, and starting Q1 next year to roll out of our Giant Tiger Source general merchandise offering at noticeably lower retail prices for our customers. We are prepared to face COVID-19 outbreaks in our communities, which will require us to incur more operational expenses in order to safely keep our staff and customers safe. While it is difficult to quantify the magnitude of this risk, what I can tell is that almost all of the communities we serve in Northern Canada have been extremely vigilant and very successful compared to other regions of Canada in terms of preventing COVID-19-related community spread. Finally, within our now much smaller GT business, effective as of the closing of our sales transaction on July 5th, we saw a pickup in food and general merchandise sales in the quarter. Customers everywhere are looking for more of a one-stop shop due to COVID-19, and this was a good fit with GT's convenient locations and mix of food and general merchandise. We expect this momentum to continue for the rest of the year with our five remaining GT stores, with some downside risk if travel restrictions from the north are in place throughout most of the year, as this would affect out-shopping in the northern hub communities that these stores are located with.

Thanks, Edward. Okay, thanks, Alex. I'll now turn the meeting over to Dan to provide a review of our international business.

Okay, thanks. Good afternoon, everyone. International has had a very strong second quarter in sales. An increase in sales of 24% compared to Q2 last year was led by same-store sales increases of 17%, as well as the reopening of our St. Thomas store in the USVI. The performance of this quarter is predicated, first and foremost, on the resilience and agility of our teams to quickly adapt to this new COVID-19 reality. The staff restructuring performed a little over a year ago has allowed us to have a team with unwavering focus on our specific international markets. Now, our approach has also been based on three pillars. health and safety, supply chain focus, and social responsibility or community relations. First of all, and similarly to the previous quarter, the number one priority has been the health and safety of our staff and customers. We have taken all the necessary steps to incorporate seamlessly these new cleaning and safety protocols into our daily routines. We believe that this commitment has resonated with our customers and has built trust and rapport with them. Second, maintaining a robust supply chain with dependable assortment is instrumental to nurturing customer trust. Our in-stock levels have been strong, around 90%, and we have been able to navigate the challenging supply chain disruptions the industry has been experiencing. This also means that we've been able to keep the most relevant assortment in stock to capitalize on opportunities of having additional government income support and funds, particularly on our U.S. markets, less out-of-market travel in our Alaska, Pacific, and Caribbean regions, and a shift in consumer spending with more in-home dining and entertainment, which allows us to capture additional market share. In terms of income support, the last remnants of $1,200 stimulus checks and unemployment benefits top up the U.S. market. We're a factor on our increased sales, particularly on general merchandise. Additional recipients of SNAP funds, better known as the Food Stamp Program of the U.S. government, has also had positive impacts on our U.S. territory food sales, given increases in funds from the CARES Act. The USDA provided many SNAP households with emergency supplementary benefits up to the maximum benefit a household can receive. For example, a rural household of one person in Alaska can have a maximum monthly allotment of up to $370 or up to $249 in the USBI. These amounts vary by state. These emergency allotments have been extended through September 2020 on most of our territories. Similarly, the early issuance of the permanent fund dividend, the PFD, in Alaska in July instead of October also boosted our quarter-over-quarter results. However, the PFD was $992 this year versus the $1,606 issued last year. Therefore, our food sales increased 20% in total and were 12% on a same-store basis. On the other hand, general merchandise sales increased 59% in total and same store basis fueled by categories such as electronics, motorized, housewares, and home furnishings as customers spent their supplementary income while remaining within their communities given travel restrictions. Our customer count in basket sizes have also increased, particularly in CUL. They're a good indication of our captured market share. A 9% increase in customer count for same store sales in the CUL Pacific region mitigated lower accounts in the Caribbean markets given macroeconomic headwinds. Total CUL customer counts is 1% higher quarter over quarter for same stores. In terms of basket size, CUL as a whole has had a 25% increase in average basket size. Alaska has experienced some declines in customer counts of between around 10%, but over 30% increase in basket size. We believe We've gained market share in most AC markets as customers shop for more items but less frequently due to COVID-19. Lastly, as essential service providers on our communities, our third pillar of social responsibility has yielded positive results in sales and community relations, especially thanks to business-to-business or B2B government contracts. As major providers in our communities, we have partnered with governments and hospitals to provide ready access, personal protective equipment in the Caribbean and the Pacific For example, we partnered with hospitals in American Samoa and the Health Authority came in to procure these types of products for them. In Alaska, we were awarded a contract within the USDA Food Box program to deliver goods to dozens of hard-to-reach communities. Now I want to touch on some more of the macroeconomic realities of our markets and also highlight our plans for the third quarter and beyond. As mentioned on our previous calls, the Caribbean has had some challenges given that tourism has particularly halted The British Virgin Islands has been shut down since late March and, as of recent, has experienced increasing COVID-19 cases. Given that this market is highly reliant on tourism, to the tune of about 50% of the GDP, we expect headwinds to continue throughout the year. Our focus for the remainder of 2020 will be to control expenses, maintain our health and safety protocols, and recalibrate our inventory to adjust to our offering that is tourism dependent. while continuing to serve our core customer as a leading food retailer, wholesaler, and distributor of the BVI. Other Caribbean islands we are especially concerned about are the former Dutch territories of St. Martin and Curaçao, where government financial support programs are limited. Here, the same approach applies, as well as playing to our strengths as a warehouse discount format. In Alaska, a handful of tourism and commercial fishing-dependent communities in the southeast region of the state are expected to continue to face employment and income challenges. On the flip side, tailwinds are expected in the Alaskan Pacific and U.S. territories in the Caribbean. As we benefit from our central product and service role, combined with some degree of ongoing income support in most regions and continued restrictions on spending activities like travel and food away from home, we are positioning our inventory to continue to capture these market opportunities, including hurricane season and holidays. In Seawall, for example, for Black Friday, we're finalizing a digital e-commerce strategy to allow our customers to safely shop throughout our alternative channels. We will continue to build on our commercial business to business relationships. This includes, for example, pursuing B2B sales aggressively from villages near our Alaska stores, and of course, our USDA food program, distributing food boxes to neighboring remote communities. That finalizes my commentary on international operations. I'll turn it back to you.

Thanks, Dan. So just to pick up on a couple of comments, clearly there's factors here that are entirely COVID pandemic related. And as Dan mentioned, safety and health has so far been well controlled and preserved and delivered within our stores. We don't take that for granted. And as Alex pointed out, we have contingency plans to, if it should happen, once the stores had to close, how we would supply communities. As far as the future, we don't know but if we look at the current quarters, there's no question we have continued strong sales momentum and it's now become a very current strategy of the company on how to fulfill those sales demands because our buy plans were nowhere near what the selling results are and that pivot to sourcing additional product has been, like all of our employee effort, quite exceptional. not easy to do but it's a very important focus so supply on the food side is tricky probably actually more in the US than Canada in some ways but also in general merchandise because of the booking time that we have but as we've ramped up our buying plans we feel that we can take full advantage of the customer needs and the behaviour changes that we see continuing and one of the elements and I think both Dan and Alex referred to the income support drivers we feel in Canada that there's going to be continued income support for several more months as the CERB payments switch into the relief payment funds under the new federal program. So we can plan around that. And to the degree that we see broad dissemination of a COVID vaccine being several months, if not quarters out, we can now more structurally adjust our business to serve the much higher in shopping needs of our customers. and continue to invest in price so that we can retain that market share when there's a reversion back to post-COVID. Turning to the airline for a minute, the results were very strong at North Star Air. We've highlighted that having our own airplane or air cargo capacity in Canada, again, structurally, with or without COVID, was intended to give us an advantage, a competitive advantage on speed, consistency and cost. Consistency came through big time in this quarter because we ended up picking up market share where we had capacity although our own capacity, the freight that was flying to Alex's stores filled a lot of our available load factors and in fact made those load factors get to incredibly efficient levels. The timing of bringing the third ATR on stream was very fortuitous in that regard. But we also picked up third party business because some of the combi carriers that are out there today had to cut back their passenger service and with that their cargo service and our cargo service is not cut back and if anything it's enhanced over what it was before. So wrapped up in all of that, I think the Northwest brand, specifically the brands of our banners, Costy Less, AC Value Centre, Elastic Commercial Company, Northern and North Mart have been quite strengthened through the last five, six months in terms of our stepping up and being there for customers in a safe way, our community support programs, rising our donation levels, staying in touch with communities at all levels so that we can navigate together through these very different times. Sometimes when these things happen there's different ways it can unfold and we're not sure completely how it's going to of course but so far I think it has tested the fortitude and the ability of Northwest and we've met that challenge in a very positive way. One more comment I'll make before talking about our investor principles or proposition. At the AGM I made some remarks about diversity and inclusion. We've, as I committed to, we're trying hard to encourage a very broad workplace dialogue within Northwest. We have several hundred people who are on our platform. We'd like to see the active dialogue continue to ramp up even more. But we're now in the quarter where we're going to start to take action steps. What kind of inclusion action steps, as well as diversity, and I believe that is a very key differentiation point. on how diversity gets represented in levels of power and influence within Northwest and practice. I just invite our investors and indeed all of our stakeholders to stay tuned for that and we'll continue to report on the actions we're going to be taking going forward. Switching to our investors, we haven't been, perhaps as explicit as we have been just in practice, demonstrative of our investor principles and our value proposition. In the last couple of quarters, we've had this discussion with the board to really solidify and refresh ourselves on what we want to stand for. I'll just go through some of the elements that we think, just like we want to be a great company for our customers, our employees, and the communities we serve as well for our investors. We do believe in a balanced approach of growth and yield. We've stood by that. I'm going to say time tested. I mean, we could always change it, but we'll give you lots of warning first if we're going to for 30 years. And we've noted from time to time that that approach of growth, modest growth, not necessarily above average, but steady growth and above average yield will statistically or empirically generate superior returns over time. And it just happened this week where we were I shared with the board a Globe and Mail article to that effect, where higher dividend, lower growth companies, the CAGR was 14%, lower dividend, higher growth, or zero dividend growth stocks all performed more poorly over a 1977-2020 timeframe. We took ours as far back as we could with time we had to the late 1990s, and we were at 15.6% at Northwest CAGR on yield and growth. Some of those are higher inflation times than today. Our focus today would be about 4% to 5% yield and 4% to 5% growth to get total returns at 8% to 10%. But coupled with that is very high decile, top decile capital efficiency, which I think we demonstrate with our return on net assets and ROE, and also top decile on low beta or low volatility. And that's really important as well to us because we believe that our business risk particularly now perhaps since we've de-risked somewhat with Giant Tiger as a much smaller part of the business, allows us to take on more financial risk. We think we could be a one-to-one debt equity or two times a debt to EBITDA is another sort of proxy for that, comfortably if we needed to, without adding a lot of financial risk to what is, we believe, a very low business risk enterprise as we've constructed it to date. And when you combine all those elements together, they lead to some of the decisions we've made, for example, to increase our dividend at a higher than normal rate. We think that catches up our dividend CAGR to where it should be and gives us the yield that we think we should be at overall, stays true to what we consider to be our cash flow available for distribution after maintenance CapEx, and also leads to the normal course issuer bid decision. I mean, we do realize that deleveraging the company is not the best use of capital either. We are in a cash generating position right now, quite a significant one. We will continue to look for opportunities that fit quite tightly with the risk return elements of the business that I've just described. Some of those could be COVID-19 triggered and we're very, very open to that we're looking talking listening but there's no guarantee of it and in the meantime we think the NCIB is a tool we notice that all other retailers have it and many many companies that we should have as well to make sure we keep our capital efficient and don't burn a hole in our pockets with it and I don't think we have in the past so it's not so much that it's more making sure we have all the tools in place to live up to our investor proposition. So that concludes. I'm just going to turn to John for a second, because he usually listens more carefully about what I might have missed, and he says I'm okay. So, operator, we'll turn the call open for questions now. Thank you.

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your hands up before making your selection. If you have a question, please press star 1 on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star 1. At this time, if you have a question, there will be a brief pause while the participants register for questions. Thank you for your patience. And the first question is from Sabahat Khan from RBC Capital Markets. Please go ahead.

Thanks and good afternoon. Just a two-parter maybe on... the food comp that you saw during the quarter, you called out good mix. Can you maybe talk a little bit about the type of product that you're selling and if the mix is expected to continue? And then just on the GM comp, if you can maybe talk through maybe the type of product that you were selling and how much of that is expected to maybe continue for the back half of this year as things start to open up and maybe people go out of market a little bit. So just a little bit of color on both of those comp numbers.

Okay, so I think the answer I can give will cover both parts of the business. The blend part of our food that has worked against us on margin is food service. It's come back a little bit, but it's still slower. Shell stable, some of the heavily outshot categories, which have very low shrink, are a higher blend. And overall, I would say if you take, so those would be the two adjustments, higher shell stable, lower prepared foods everything else would be about a similar blend but at much lower shrink levels the sheer velocity of our sales means much less wastage and spoilage so when you net it all out we're net positive on this a little bit less promotional activity has helped as well but the biggest driver isn't so much blend it's across the board reduction and shrink because of sales turns and velocity in food the same actually applies to general merchandise and this is another The blend in GM is actually a bigger factor, but I'll just, since I talked about shrink, I'll finish the thought. Here, again, we're seeing much higher turns, much lower markdowns, much lower age stock, hopefully some lessons learned about what we should be ordering more of and less of in the future. But the dilutive part of the blend is in big-ticket durables. That's actually not going to be impacted by relaxation about shopping. That is more income-driven. We already have a healthy, I'll call it opportunistic market share in things like home furnishings, motorized and electronics. When our customers have the income and they're shopping locally and we're in stock, three conditions, we'll get the sales. If roads are opened up or there's more flights out of town, one of those conditions is gone, that's true, but the other two conditions are still there. So GM is, again, is more income than mobility driven. On the food side, and to your point about what happens, post-COVID-influenced behaviors, depends in part on how well we've been executing today. And Dan didn't mention, but part of the market share gains, which help, within the islands that we're serving today, the high double-digit type comps we're achieving on islands without income support are because we're in stock. because we have superior service and perhaps safety in our stores. So those are consumer behavior changes that won't, we hope, shift that well back because they're coming over for all the good reasons that we think can survive COVID. Where the business is coming from an out-shopped competitor, not a local one, of course, it's a behavior change that could revert. Will the reversions be back to the norm or to a new normal? No one can tell. But this is where our price investments and our in-stock comes into play, especially the price side. We're hoping that we're appealing to more people from a share wallet standpoint to stay with us for items they really don't want to outshop for. And now from a price value standpoint, we're more compelling. And time will tell. That's a tough one for us. We're trying to run a lot of little test pilots around as we go through this and try to control for the COVID impact. And as we... At this stage, it's difficult. I mean, the green shoots are very positive, but there's a lot of other factors at play here that are COVID-related. So we just don't know yet. But that's certainly our goal is to stick some of that market share to us based on a shift in behavior that we think will be more permanent.

Okay, thanks for that. And then just on the topic of having things in stock and being able to move them around, Looks like NSA is getting going, and you indicated you're doing some third-party work. I think when you did the acquisition, you mentioned that you were thinking about using that as a platform to maybe build and expand that capacity. Do you see this third-party business continuing? Is it encouraging you to maybe invest more behind that business as you come out of this pandemic? How are you thinking about that?

We're thinking about it. We've only got a few quarters under our belt of consistent business Highly efficient, high productivity type performance from NSA. The NSA team is, we think, phenomenal, but they've had some rough skies, let's call it turbulence, to get to where we are today. So it's kind of a left hand, right hand, left brain, right brain. On the one hand, we're very pleased and very focused on optimizing the service we provide to Alex's stores. And a new lightweight pallet program is a breakthrough. Some of the direct pallet to backdoor stores are saving tons of labour. On the one hand, we're optimising, but one side of us is also looking at growth and where does this take us. Again, some of those it takes another party to have maybe an arrangement that will work or just to join the right conditions. I'd say we're three quarters on just getting what we're doing done well today. And then 20% is a focus on what we could look like down the road. But certainly we have a vision and an aspiration to be the best, not just by largest, but a larger, solely focused cargo airline serving the north.

Okay. And then in terms of some of the market share gains that you sort of talked about earlier and as you sort of look out to next year and beyond, how are you thinking about just your broader investment plans in your stores? You know, you had the Top 40 program a few years ago. That probably helped in this situation. But how are you thinking maybe for your 2021 CapEx plans and onwards? Is there any major changes you're looking to make?

Well, it's a great question because as part of our overall assessment of maintenance CapEx, when I spoke about indirectly dividend policy and cash return to shareholders retained in the business to sustain and grow, we're kind of at a crossroads there because we've looked at top 40 and the capital intensity of it, and that's why we slowed it down. We recognize that we've got to be careful on our bricks and mortar because the business is changing. I mean, we'll learn more. We'd like our stores to be leaner. We put on a lot of e-commerce activity. It tended to be driven by more COVID lockdown situations, and then consumers would come back to the store. But we are seeing through our dark store in Alaska very, very high growth in e-commerce. And that has implications on how much you invest in the bricks and mortar. Having said that, our physical store network is the backbone of the company. Right now, we have to pause and step back and look at what's a capital efficient, project efficient way to touch as many stores as possible to put the essential replacement capex into the stores, the store of the future, not the store of the past. Today it's actually a good time to take that pause because we can't deploy our capital fully right now. The restrictions on construction crews and mobilizing projects into the north is quite severe and as we look at the rest of this year into next year we're probably going to be at a lower ebb of capital spending i.e. possibly below depreciation. Will there be a catch up in the years ahead? Hard to say. I think the challenge for our team is to come up with, again, real capital efficient ways to touch a lot of stores, but not necessarily in these big lumpy four, five, six million dollar ways. I'd like to see more quarter million, half million dollar touches. I don't have any more detail on that, but I think, again, because we're in this mode where we're kind of frozen on any acceleration of CapEx because of COVID, it's a chance to step back and figure out what we really want to do with our maintenance CapEx going forward.

And just a last clarification question for me. It looks like the last year's EBITDA has rised up by about $3 million and change. And just an initial glance indicates it might be a restatement of the compensation line or just a revaluation of that. Can you maybe clarify kind of the restatement there on the share-based compensation line?

Sorry, Salva. I missed that point.

So the EBITDA, the adjusted EBITDA for last year looks to be about 53 million. It looks like the share based compensation. Right. Okay.

Yeah. So in our adjusted earnings measures under the non-GAAP measures, previously, this goes back several quarters, Saba, where we were only reporting option expense. And we found in talking to people such as yourself and others that suggested why don't you just pick up total share-based compensation costs and that's all we've done. So that note there that you're referring to is just identifying that on the non-GAAP measures it's share-based compensation costs and that's cross-referenced to the note in the financial statements. Thank you.

Thank you. The next question is from Stephen McLeod. Please state the company you're with and proceed with your question.

Thank you. It's BMO Capital Markets. Good afternoon, guys. Hi. I just wanted to circle around on a couple things, most notably with respect to the outlook. You know, the tone in the press release was quite positive. The tone in the MD&A was a bit more cautious. So I just wanted to, you know, sort of identify the difference between the two and kind of where you're at because it sounds as though you know, ultimately, I mean, netting and all that, you are quite positive with respect to the outlook. Is that the way you interpret it?

Yes. If we start where the year started, and if we were, you know, pre-COVID, of course, and we looked at what our current plans were, they weren't announced at the time, but if you were, you know, in our boardroom or management planning, et cetera, we'd be looking at, you know, the GC transaction, the admin downsizing, the price investment in Northern Canada stores, the decentralization that Dan McConnell announced, has been working on it. And by the way, getting that USDA contract in US only was when you got C-level people on the ground running these SBUs in Anchorage. All these things were in a plan that we felt was a very strong plan for the year. And then COVID is layered on top of that. So those underlying structural positives are still there. And so we start with that. And we say, well, what was the 2019 plan? Well, it was a pretty good plan. We had some pretty, we think, achievable numbers, and it was early, but we were on our way. We put the customer behavior changes that are going on right now and the trial restrictions and some of the income supports and our essential needs position, durable goods position. You know, I can say there's no question we're going to be tracking on numbers higher than we would have been our original plan, which was already, we hope, to be a very strong year. So that's the outlook as far as I can tell you now. You heard from Dan and Alex, and particularly Dan on the Caribbean. We have concerns, as you would expect us to, with going into the tourism season now and what's going to happen. We've still held very strong gains in certain types of markets. There's certain types of tourism, for example, Cayman, is a higher-end tourist market. We've got very, very strong performance in that island. Barbados, somewhere with USVI, we have very, very strong performance in Barbados. That's market share capture. So we're cautious, though, and I think you'd appreciate that a couple quarters of this kind of performance and a trend that looks like it's continuing still makes us concern and building contingencies into what could happen if income was to fall off in Barbados, if there was to be a COVID outbreak in the north. We have to point these things out. And at the same time, we always felt we had some real underlying strength in the business and underlying momentum. So I don't know if I'm making sense there, but it's just trying to balance expectations, including our own. and not also... I think investors have had a... I've just watched, I mean, with other retailers reporting, there's been a somewhat underestimation of the comp sales performance from at-home food retailers. So I appreciate that people are catching up to this, but I think there is a deeper shift here, as I think investors are appreciating. And then what could trip that up? I mean... Obviously, it's not going to be like this forever, but our near-term outlook would still be very positive. And that doesn't mean every quarter looks like Q2, but they look, you know, quite strong compared to an otherwise normal year.

Yeah, that definitely makes sense. That's good color. Thank you. You know, the gross margin, or sorry, general merchandise same-store sales was, you know, up a whopping close to 55%. Can you talk a little bit about how much of that do you think is potentially a pull forward in demand as people get driven by in-period spending because of government transfer payments and income assistance versus how much of that do you think is pull forward to spend?

Our past experience is that a little bit of that can happen. more community or only region specific situations where there's been an influx of income or at home spending in this case it can pull forward for example next year's snow machine sales or ATV sales but at this point it's so broad and we haven't yet seen where if the income continues we have enough things that lower income individuals need in their household for replacement So it's not scientific, but it's actually more than what I'm just saying. When we look at households, we look at what kind of durable consumption or spending is going on, and we say, okay, yes, you've got this, but what about the mattress business? What about the white appliance business? Our per capita ATV sales in this market, we're nowhere near what would be considered saturation. I don't think we're there yet, but I think your point, would be stronger if we get into, let's say, to put a pin in it, mid-next year, into Q3, Q4 next year, where the income and the travel may not be as conducive to our offer, notwithstanding the underlying momentum I think we would have had anyways, then yes, there could be a double whammy of people starting to travel more and some saturation. Because at some point, durable goods spending does get there. But I don't think we're even close yet after five months. Just look at the rotation of what we're selling and the committees that we're selling into. We're still a few quarters away from that.

Right. Okay. Okay. Thank you. And then, you know, I guess to ask another way, and I know you've given some great comments through the call with Alex and Dan, but just curious, like, what kind of visibility do you have into kind of this multi-quarter organization demand strength? Like what gives you the confidence that you think it's going to be there?

As opposed to falling off. Yeah, okay. So we look at current trends. We look at, I mentioned the conversion. Okay, well, let's start talking about only quarters. The current status of COVID-19 and what's happening with the upticks and trends which affect the North. Even though the North today has only a couple of cases. Manitoba just locked down again. No travel into northern Manitoba. The reason that northern communities have done such a great job keeping COVID down to such low levels is because they've severely restricted travel. I can't see that lightening up because they've had success, and now looking at the south, urban markets are saying, well, they're going up. They're spiking up. We're only getting now into back-to-school and flu season, so it's likely got nowhere to go but up. for the next several months. So that to me, now we're into Q3, Q4 with very similar conditions to what we have today, if not more severe in terms of controls. So that's the consumer behavior shift part in terms of where they are with their time and their space to move around. And then secondly is the income part. And both Dan and Alex touched on this. I mean, we do expect the U.S. will figure something out to replace the the income support. Although time's ticking away, our sales have held up very strong even after the last checks. But between the Democrats and Republicans and how they'll work out a new package, we've made just a simple assumption that there'll be some level of income support for low-income US consumers and citizens through the course of COVID-19. It won't go to zero. In Canada, we feel the same way. The CERB payments go away at the end of September, but they've already announced a replacement program. It's $100 a week less, but we think that program will be a strong part of the income support in the communities that we serve. So we have those signals. The one in the U.S., of course, is mercury on how that income support will materialize. The one in Canada is quite specific. It's when it starts and finishes at six more months after the end of September. And then COVID, I mean, I've given you my opinion on what I think the next, say, three, four months look like. The new year is hard to say. We've also, as I said earlier, we've put this pin in that said broad dissemination of COVID. Just for our own internal planning, we have to buy merchandise to sell. We're more than willing to say that it's likely into the middle of next year so that we can plan for the sales that we think we're going to get in spring.

Yeah, okay. Okay, that's great, Keller. Thank you very much.

Thank you. Once again, please press star 1 on your telephone key if you have a question or comment. The next question is from Michael Van Elst from TD Securities. Please go ahead. Mr. Van Elst, your line is now open.

Hi, guys. It's Evan in for Mike. All my questions have been answered. Thank you.

Okay.

Thank you. There are no further questions registered at this time. I'll turn the meeting back over to Mr. Kennedy.

Okay. Thank you, operator. And thanks to everyone who dialed in on the call. As usual, if you have any follow-up questions, I can be reached or John King is your points of contact. We'll look forward to having you on our Q3 conference call in early December. Thanks very much, Operator, and good afternoon, everyone.

Thank you. The conference is now ended. Please disconnect your lines at this time, and we thank you for your participation.