Alimentation Couche-Tard Inc
TSX:ATD
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Alimentation Couche-Tard Inc
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Good morning. My name is Sylvie, and I will be your conference operator today. [Foreign Language] I will now introduce Mr. Jean-Philippe Lachance, Vice President, Investor Relations and Treasury at Alimentation Couche-Tard. [Foreign Language]
English will follow. [Foreign Language]
Good morning. I would like to welcome everyone to this web conference, presenting Alimentation Couche-Tard Financial Results for the Fourth Quarter and Fiscal Year 2022. [Operator Instructions] After the presentation, we will answer questions from analysts asked live during the web conference. We would like to remind everyone that this webcast presentation will be available on our website for a 90-day period.
Also, please remember that some of the issues discussed during this webcast might be forward-looking statements, which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Therefore, our future results could differ from the information discussed today. Our financial results will be presented by Mr. Brian Hannasch, President and Chief Executive Officer; and Mr. Claude Tessier, Chief Financial Officer.
Brian, you may begin your conference.
Thank you, Jean-Philippe, and good morning, everyone. Thanks for joining us for the presentation of our fourth quarter 2022 results. We're pleased to report really a remarkable year despite some of the most difficult operating conditions in my career, none the least a pandemic, a war in Europe, supply chain, staffing challenges and now inflation.
With our unique geographic diversification, scale and operating resilience, we had record-breaking results across many key metrics and made good progress on our strategic goals. During this quarter, we saw growth inside the store accelerate as well as innovating for the future, including beginning our e-mobility journey here in North America and launching the rollout of our Smart Checkout technology in the U.S. and in Scandinavia.
I'll go into these initiatives in a bit more detail later in the presentation. But before moving to results, I also want to take a moment and comment on the broad impact of inflation hitting a 40-year record high this quarter. No doubt, consumers are feeling the pressure, both at the pump and the checkout lines. Thankfully, in most of our geographies, unemployment remains very low at really record lows.
We remain committed to providing good value to our customers across the network, and through our localized pricing efforts and fuel promotions, we're working hard to make sure our customers' lives are a bit easier every day, even during these difficult times.
Now turning to our results, beginning with convenience. Compared to the same quarter last year, same-store merchandise revenue increased 2.3% in the U.S., 6.2% in Europe and 0.1% in Canada. In the U.S., the quarter cycled against a very strong comp last year at plus 8.1%, and food was very positive compared to prior year with strong double-digit growth.
Across the network, our Fresh Food, Fast program is now in over 4,000 stores around the globe, meeting our objective for the fiscal year. We're excited about the acceleration of sales and engagement of our operators as we refine our offer for our customers. During the height of COVID, we struggled with supply chain, and we're not -- we were not reliably able to source chicken as one of our key SKUs.
Happy to say today as we sit here that we're in the chicken business. We launched a variety of great-tasting chicken items in the quarter, and they're generating very strong incremental growth in our stores, and we're expanding that across North America.
We continue to optimize our assortment as we identify new items that are desired by our customers and increase purchase frequency. While supply chain issues have been a challenge in some items, our expanded supplier relationships and duplicate supply sourcing have enabled us to improve our in-stock positions versus prior quarters.
We're pleased with the progress we're making in our food journey, and we're excited with the additional opportunities and new items in our pipeline. In our dispensed beverages, our Sip & Save beverage subscription continues to attract new users to the program. With inflationary pressures, customers are seeking deals, and Sip & Save is truly an amazing offer. We currently have over 450,000 active subscribers in the program that are now visiting our stores with more frequency. We continue to refine our online enrollment experience and make it easier for our customers to sign up and renew monthly and enjoy their favorite drinks at a great value.
Packaged beverage growth increased through the quarter, led by substantial growth in immediate consumption, soda and sports drinks, largely due to innovation and a first-to-market opportunity, including our Mountain Dew proprietary flavor that we launched in conjunction with Pepsi, which has just shown great results.
Strong national activities continue to drive year-over-year growth in energy drinks. Supply chain continues to be a core focus to ensure our needs are met in the marketplace as immediate consumption increases as our markets come out of COVID. In our age-restricted category, beer sales showed mixed results with European beer business exceeding prior year sales. Across the network, wine and liquor finished the year with a positive performance, and we continue to see good results from our upgraded wine display instructions where we've rolled that out.
Thanks to our localized pricing initiatives, we're creating new data analytics tools to make our category managers lives easier and allow them to respond more rapidly to changing cost environment. In our assortment optimization effort through new ways of working in conjunction with more sophisticated analytics, we're aiming to more effectively identify products that are top and bottom performers across the network on a store-by-store basis and adjust our assortment more quickly to better meet our customers' needs.
We also want to provide an update on the rollout of our loyalty initiatives. In Europe, the Extra program has been live for many years in 7 of our BUs and has been a key driver for the growth of our business this year. At the same time, we've finished scaling an improved program concept, which we piloted last year with great results and feedback from customers in 3 of our BUs in Europe and a small market in South Carolina. The goal is to continue to expand this concept across the remaining European BUs over the coming quarters.
In the U.S., while we see promising results in the test sites, we're at the tail end of development of our new global infrastructure -- loyalty infrastructure that will make us able to roll this out on a scalable basis throughout North America.
Moving to the fuel side of the business. Same-store road transportation fuel volume decreased 1.7% in the U.S., impacted by high retail prices and some of our fuel rebranding activity that we'll get into in a bit later. Fuel increased 3.7% in Europe as we continue to take share and show very strong performance and increased 4.3% in Canada.
In our Circle K fuel rebranding work over the quarter, we completed about 300 rebrands, bringing the total for the year to 680 additional sites and the overall number to nearly 3,500.
The Circle K brand ambassador program nearly has 900,000 activations, and our brand ambassadors continue to educate our customers about the brand value proposition, a quality guarantee and premium claim. The Win Free Fuel for a Year U.S. campaign wrapped up this quarter with 288 winners announced, and we're pleased with the growth of our premium Thursday program and the increased transactions in our Easy Pay program, which gives a great discount at these times of high prices. Based on the test results, we do believe that the rollout of our enhanced loyalty program later in the year in North America will also deliver enhanced value for our customers and drive incremental visits in fuel volume.
Like our peers in the industry, we are experiencing pressure in different areas of our supply chain, particularly in the fuel supply chain. However, we've been able to maintain reasonable inventories with our strong sourcing capabilities. Now with more than over 1,000 drivers in our U.S. fleet for fuel, we're working hard to maintain reliable supply for our customers during the challenging time, both in the trucking industry and also in terms of U.S. supply overall with the inventories being record lows in many of our products.
Like all participants, we're impacted by the inflationary pressures in labor and fuel. Yet, having our own internal fleet, we were able to accurately measure these effects and mitigate these cost pressures where possible.
In Europe, volume for both cards and bulk fuel are trending ahead of prior year. Card volumes have again trended ahead of pre-COVID levels, driven by a strong recovery in the fleet in B2B sectors and continued very robust performance in the transport sector. We've also seen continued improvement in card operational margin across most of our markets.
Our European charging EV network now consists of over 1,100 charging units, up 11% versus prior quarter and covering more than 250 stations, primarily in Scandinavia countries. In May, we're building on our relationship to bring electric mobility solutions to our customers in Europe. We announced our first Circle K branded charging station in South Carolina, and our plans are to bring EV charging to 200 Circle K and Couche-Tard stores across North America in the next 24 months.
As we expand EV charging availability in the U.S. and Canada, we'll be taking a strategic approach, building a network for the future by looking at areas with strong EV adoption rates and electric delivery infrastructure to enable us to provide convenient charging options for our customers, whether that be in town or on the highways. We anticipate deploying both our own charging assets to serve the growing EV customers as we do in Europe and also to partner with other participants in the emerging EV mobility economy.
Turning to innovation. We're excited about the rollout of our pioneering easy-to-use Smart Checkout. At the end of the quarter, we had 90 stores live in Sweden and over 450 sites in the U.S. We recently announced that Smart Checkout will be expanded to 7,000 stores over the next 3 years. We've also added one more frictionless site in Arizona, bringing that total to 8; and our license plate recognition, which is a Pay by Plate where the customer does not need to insert or tap at the pump, is now active at over 800 locations and Net Promoter Scores remain very robust.
This past year was also a record one in terms of our new store builds. The ongoing strengthening of our network real estate team, combined with our efforts to improve our design, development and entitlement processes, have resulted in a robust pipeline for future store openings. During the quarter, we completed the construction of 42 stores, reaching a total of 133 since the beginning of the fiscal year. We currently have another 58 sites under construction that will open in the coming quarters.
Despite supply chain challenges, combined with cost increases, our teams have worked very hard in renovating existing stores and developing a new prototype, which will -- we are value engineering it to -- deliver reduced costs and quicker build times.
In Europe, we now have over 350 locations with a rise in brand, look and feel. These sites have new fixtures to offer grab-and-go fresh food sales, and we're seeing increased traffic and basket in these locations.
Now before turning it over to Claude, I wanted to address the staffing challenges, particularly that we felt in North America the past year. It's truly been a pain point throughout the year in all of retail. I'm pleased to report that we've seen steadily increasing candidate flow over the last quarter and currently into this quarter due to increased social media outreach and engaging employee branding campaigns. We're encouraged by the higher ratio we saw in May, which looked much better than previous months and is allowing us to be more selective in the candidates that we bring on board. This should also result in reduced overtime as we go forward. And so we're looking to hire additional 25,000 team members this year as we reach our summer season, and we're on a good trend to hit this goal.
I'm going to pause there and let Claude take you through more of our fourth quarter financial results.
Thank you, Brian. Ladies and gentlemen, good morning. For the fourth quarter of 2022, we are happy to report net earnings of $477.7 million or $0.46 per share on a diluted basis. Excluding certain items described in more details in our MD&A, adjusted net earnings were approximately $573 million or $0.55 per share on a diluted basis for the fourth quarter of fiscal '22, compared with $564 million or $0.52 per share on a diluted basis for the fourth quarter of fiscal '21, an increase of 5.8% in the adjusted diluted net earnings per share.
Adjusted net earnings for fiscal '22 were approximately $2.8 billion compared with $2.7 billion for the previous year, which represents an increase of $54 million or 2%. Adjusted diluted net earnings per share were $2.60 for fiscal '22 compared with $2.45 for fiscal '21, an increase of 6.1%.
Our results for both the fourth quarter and fiscal '22 have exceeded our expectations on many fronts, especially in light of a challenging global environment. Inflation was particularly notable during the fourth quarter, impacting mainly many aspects of our business.
We once again diligently managed through these challenging conditions and were able to mitigate the impact from a higher inflation level and continued pressure on wages.
We have also continued to invest in our operations while maintaining a particularly strong balance sheet, allowing us to return capital to our shareholders during the quarter, including the completion of our upsized 2021, 2022 share repurchase program.
As we look ahead to fiscal 2023, our healthy financial position and strong capital structure, including our newly implemented U.S. commercial paper program, positioned us well to continue delivering strong results and return further value to our shareholders as we remain focused on our ambition -- our ambitious double again strategy.
I will now go over some figures for the quarter. For more detail, please refer to our MD&A available on our website. During this most recent quarter, excluding the net impact from foreign currency translation, merchandise and service revenues increased by approximately $75 million or 2%. This increase is particularly attributable to organic growth and to the contribution from acquisitions, which amounted to approximately $27 million, while being offset -- partly offset by the disposal of stores following the strategic review of our network.
During fiscal 2022, excluding the net impact from foreign currency translation, merchandise and service revenues increased by approximately $623 million or 3.9%. Excluding the net impact from foreign currency translation, merchandise and service gross profit increased by approximately $72 million or 5.9%. This is primarily due to organic growth, including the positive impact from our Fresh Food, Fast program as well as to pricing initiatives.
Our merchandise and service gross margins increased by 1.3% in the United States to 33.1%, by 0.2% in Europe and other regions to 38.3% and by 1.4% in Canada to 32.4%. Our merchandise and service gross margin in the U.S. and Canada were also impacted in the prior year by unfavorable adjustment -- inventory adjustments related to a realizable value provision on personal protective equipment of $26.4 million or $3.2 million -- and, sorry, $3.2 million, respectively.
For fiscal '22, excluding the net impact from foreign currency translation, merchandise and service gross profit increased by approximately $318 million or 6%. Our gross margins increased by 0.6% in the United States to 33.7%, decreased by 0.9% in Europe and other regions to 38.2% and increased by 0.8% in Canada to 32.2%. The decrease in Europe and other regions is due to the inclusion of Circle K Hong Kong for the full year in fiscal 2022.
Moving on to the fuel side of our business. In the fourth quarter of fiscal 2022, our road transportation fuel gross margins was $0.4612 per gallon in the United States, an increase of $0.1167 per gallon. In Canada, it was $0.1341 per liter, an increase of CAD 0.0249 per liter. Fuel margins remain notably healthy throughout our North American network due to the favorable market conditions, a higher fuel breakeven margin in the industry and the continued work on the optimization of our supply chain, including our Circle K fuel rebranding initiatives.
In Europe and other region, our road transportation fuel margins was [ $0.0551 ] per liter, a decrease of $0.0334 per liter. Fuel margins were impacted by increases in crude oil prices, supply chain challenges from the current geopolitical context as well as volatility in the diesel market. For fiscal 2022, the road transportation fuel gross margin was $0.3962 per gallon in the United States, $0.0986 per liter in Europe and other regions and CAD 0.1174 per liter in Canada.
Now looking at SG&A. For the fourth quarter of fiscal 2022, normalized operating expenses increased by 15.6% year-over-year, excluding the 3.1% unfavorable impact of higher electronic payment fees. This 15.6% increase on a normalized basis is driven by prior year government grants of $41 million, measure necessitated by the impact of the labor shortage and the need to improve employee retention; an increase of marketing initiatives and other discretionary expenses that were significantly reduced in the prior year quarter; inflationary pressures, including higher utility costs in Europe, higher costs in -- from rising minimum wages as well as incremental investments in our stores to support our strategic initiatives.
This increase was partly offset by lower COVID-19 related expenses compared to the corresponding quarter for the fiscal year 2022. When considering the cost of the retention measures implemented, which totaled approximately $19 million, the employees related COVID-19 costs in the prior year, such as thank you bonuses of $5.2 million as well as government grants of $41 million, the normalized operating expense increase year-over-year of 15.6% is further reduced by 4.3%.
For fiscal 2022, normalized operating expenses increased by 9.4% compared with the previous fiscal year, mainly due to the factors similar to the one described for Q4. Despite the challenges, we have deployed strategic efforts in order to mitigate the impacts of higher inflation level and continued pressure on wages, which is demonstrated by a compound annual growth rate of 3.4% of our normalized growth of expense compared to 2020, including employee-related costs below inflation despite the challenging market conditions.
Excluding specific items described in more details in our MD&A, the adjusted EBITDA for the fourth quarter of fiscal 2022 increased by $50.8 million or 4.7% compared with the corresponding quarter of fiscal 2021, mainly due to the higher road transportation fuel margins in the United States and Canada and organic growth in our convenience store operations, partially -- sorry, offset by operating -- higher operating expenses. The translation of our foreign currency operations into U.S. dollars had a net negative impact of approximately $15 million.
During fiscal 2022, the adjusted EBITDA increased by $261.3 million or 5.2% compared with fiscal 2021, mainly attributable to factors similar to the one described for Q4. The variation in exchange rate had a net positive impact of approximately $27 million.
From a tax perspective, the income tax rate for the fourth quarter of fiscal 2022 was 22.6% compared with 18.5% for the corresponding period of fiscal 2021.
The income tax rate for fiscal 2022 was 21.5% compared with 19.5% for fiscal 2021. The increase is mainly stemming from impact of gain and losses taxable or deductible at a lower income tax rate between current and prior year, and a different mix in our earnings across the various jurisdictions in which we operate.
As of April 24, 2022, our return on equity remains strong at 21.8% and our return on capital employed stood at 15.4%, which includes an unfavorable impact of 0.3% caused by onetime impairment costs incurred in Q4.
During the quarter, we continued to generate strong free cash flows, and our leverage ratio stood at 1.39x, only 6 basis points higher than Q3 despite having repurchased more than $800 million during the quarter under our NCIB. We also had strong balance sheet liquidity with $2.1 billion in cash and an additional $2.5 billion available through our revolving credit facility.
Turning to the dividend. The Board of Directors declared yesterday a quarterly dividend of CAD 0.11 per share for the fourth quarter of fiscal 2022 to shareholders on record as at July 8, 2022, and approved its payment effective July 22, 2022.
With that, I thank you all for your attention and turning the call back over to Brian.
All right. Thank you, Claude. In the context of a difficult year in so many ways, we had clearly one event in the year that was a highlight for me. Gallup, who we've used as a partner to work with us and measure our engagement, named as an exceptional workplace, the only convenience retailer on this year's list.
According to Gallup, its workplaces worldwide faced continued historic upheaval. We stood out in our ability to engage and develop our people amid disruption. We're far from perfect. We do have a clear goal, that's a goal to create a culture in which our team members feel valued, heard and respected and have opportunities to grow together within the business. It is through their hard work and engagement that we're fulfilling our vision to be the world's preferred destination for convenience and mobility.
My sincere gratitude goes out to all of our team members, our customers, our partners and shareholders for another record-breaking year and continued commitment to our business. And with that, I'll take some questions from the analysts. Operator, over to you.
[Operator Instructions] And your first question will be from Peter Sklar at BMO.
Can you talk a little bit more about how cost of living inflation and these high fuel prices is impacting consumer behavior as you see it in your business? What do you -- how is it impacting your in-store sales? Have you adjusted your assortment, the impact on fuel volumes? And what trends you're seeing in the current quarter, the first quarter to date?
Yes, Peter, thanks for the question. I'll take a shot at it and welcome Claude to chip in. Inflation is taking different forms depending on where we're at in the world. When we look at Europe, really, our wages have been relatively flat compared to what we see in North America, but we've seen significant spikes in food and energy, particularly from the Ukraine situation in Europe.
In the U.S., we all read the same papers, we're seeing 7%, 8% hourly rate inflation on top of commodities and fuel. In terms of what we're seeing, I would say that we are clearly seeing an impact on fuel demand that's taking shape in a couple of forms. I think the most recent data is showing that we are seeing some softening in miles driven. We certainly view this as temporary, but a fact.
And then as you look at the consumer behavior, our average bill pre-COVID and really up until recent quarters would have been 10 to 12 gallons per visit, that's declined to 8. So that's a signal to us that there's some pressure on consumers. Likely results in increased visits, but I think that's a sign that there are some pressure. And we're very fortunate to see unemployment levels remain at historic lows. So we think the consumer, relative to where we were in '08, '09, is in a much better condition. Inside the box, traffic actually remains pretty robust. We're happy with what we're seeing, both last quarter and what we're seeing into this quarter.
But we're seeing some trade downs. We've seen conversions from premium beer to budget beer as an example. Same in the cigarette category, where people are looking for value. And we're pleased we've really worked on private label over the last 3 years, and we're seeing very, very strong growth in private labels. Again, people are looking for value. So with our private label program, we've been able to provide good value to the customer and actually have a higher penny profit typically on most of those items. So we're seeing private label up in the U.S., strong double digits. So that's, again, a sign that consumers are heightening their look for value. Claude, anything to add?
Yes. Maybe one thing on Canada, when [ we're seeing ] the performance in Canada, we've seen a bit more pressure on our cigarette category. There seems to be a shift down to -- back to the black market in Canada.
Next question will be from Karen Short at Barclays.
I wanted to just see if you could talk a little bit about what the actual inflation contribution is to your in-store comp in the U.S., and how you're thinking about overall pricing going forward in terms of narrative on maybe pushing back on vendors on price increases, a little bit more than you maybe have in over the last couple of months. But -- so it's contribution in the comp in-store and then thoughts and philosophy on how you're having conversations with the vendors.
Yes. I'll start with the vendor piece first. One, I think COVID has certainly changed our view a little bit from transactional to -- they're so important just from a supply chain and reliability standpoint, truly been partners during COVID. But that said, they've got pressures, and we have pressures. So as we have a dedicated procurement group largely based in Ireland, we get to see globally what vendor behavior looks like. And we, I think, have views, maybe some other retailers don't, around what the underlying cost structures they have, whether that be transportation, aluminum, corn syrup.
So we are pushing back. We're trying to be fair, but at the same time, if we see suppliers getting greedy, that conversation is being had. So there's a fair amount of tension. We're focused on being able to provide a good value for the customer, at the same time recovering the cost increases. So it's a fine balance and daily conversations around that.
In terms of the basket itself, we've actually been pleased we've more than recovered the cost increases inside the store with our price moves. We kind of have an artificial basket that we create, and we measure that on an ongoing basis. So our gross profit dollars are intact. If you kind of break it down, you would see, on average across the world, our basket is probably up in the 3% to 4% range while our traffic is relatively flat to maybe down a bit in Canada, where we've got, as Claude said, some pressure in the tobacco transactions.
Next question will be from Patricia Baker at Scotiabank.
I just want to ask you on the labor shortage and you called out the costs associated with retention activities. Just curious about how you're looking at labor going forward. You indicated that you're looking to hire another 25,000 people. Should we think about the extra costs associated with employee retention is something that will be ongoing?
I would say, I should knock on wood, I think we see the light at the end of the tunnel. We've really rolled back a lot of the retention products that we have in place. We're currently contemplating some variable products, programs. Take, for example, gift cards with fuel for some of our customers attempting to keep this pressure on wages on a variable basis and maybe moderating the wage rate increases that we're pressured to give in the marketplace.
But as we've seen in the last really few weeks, our hire rates are significantly higher than our termination rates. So staffing is returning to normal levels even as we go into the summer season, and that should result in a significant increase in overtime as we look at the coming quarters, which has been another key part of the inflation. So Claude, maybe a little more specifics on the numbers there?
Yes. So when we are talking about the impact on our costs, there's probably 1/3 of it -- from the 15% that's due to the inflation and 3.4% of that 5%-ish is due to wages. So -- and we understand that 1/3 of that is overtime and as you're saying, so that trend might be reduced in the future with better workforce in our stores.
So I would add 2 things. We continue to work on efficiency in the store. So if you look at our hours used, we're actually negative versus prior year on a same-store basis. And then with the Smart Checkout rollout that I commented on earlier, our focus on that product is really around the customer experience. It's faster, it's easier. We're seeing really strong uptake on eligible transactions, but there's also a labor mitigation opportunity.
If we can get 30%, 40% of the transactions going through those machines, we're able to either reduce labor or reallocate that labor to other things. So that will take quarters to show up, but it's a big push and a big initiative on our side.
Next question will be from John Royall at JPMorgan.
Can you talk about the M&A market in U.S. C-Stores right now? I know you've been taking a more disciplined approach on multiples than some others have. And with the uncertainty building in the economy today, are you starting to see valuations come down to levels where you might consider transacting?
Thanks for the question, John. I would say, in theory, what you said should happen. We've got certainly higher interest rates, high-yield markets, much higher if not closed. I don't think we're seeing a lot of private equity opportunity or activity. But there's not been a ton of deal flow either. So I think we need to see a couple of quarters to see what happens. There is some activity. But on our side, we're seeing more right now in Europe and in Asia than we are in the U.S.
But that will come. I've been waiting 4 years for this. The balance sheet is ready, and we're confident there will be some opportunities and probably less competition than what we've seen over the past few years and, I think, lower multiples as a result.
Next question will be from Bobby Griffin at Raymond James.
Brian and Claude, just curious, fuel margins here in this quarter materially outperformed the industry average and even you guys have typically been outperforming, but the performance is really notable. So I'm just curious if you could unpack was there any drivers or anything unique in this period? And when we look at the May period, we've seen some pressure. So maybe just any comments on what you've seen in May and June in fuel margins?
Yes. Thanks, Bobby. Really, there's a few things happening. One, I think there's a few players in the industry that have the supply capabilities we do. When we look at the industry, it's still largely independent in the U.S., Canada and maybe a little more balanced in Europe. And when we look at the -- continue to be able to procure fuel better, and I think that really manifests itself when you see volatility in the market. That's both in location arbitrage and also just a construct of our contracts.
So I think that delta that we've seen versus the industry has been strong, and we expect it to continue to pay benefits as we invest and realize benefits from our partnership with Musket. It's really extraordinary when you look at the quarter and you think about crude going from $80 to $120 during the quarter. And normally, that is just the worst environment we could have.
So to deliver this level of margins, I think, really shows the market's disciplined, first of all. And then two, there are some things underneath that, I think, need to be thought about. One is credit card fees. As you look at, let's call it, $5 gas just for easy math and, let's say, the average independent is paying 2% on a Visa or Mastercard, that's $0.10 a gallon they need to recover just in credit cards.
So some of the scaled retailers like us will be able to source credit cards a little more economically than the average dealer or independent out there. So I think that also widens our advantage a little bit in the market. But it also supports the need for higher than historical margins as we face these higher retails because not only the inflation we all see every day, but that credit card fee is very material, particularly the independent operator.
And when you talk about recently, I do see the OPIS data. We feel good about our margins. We feel good really across the network, how we've held up during the -- again, a very volatile period. So in recent weeks, we've been pleased.
Next question is from Irene Nattel at RBC Capital Markets.
Thanks and good morning, everyone. I want to come back to the double again target of $5.1 billion in F '23. Can you walk us through the key pieces in your mind that will underpin your ability to achieve that number despite everything that we're talking about on the call, fuel volatility, pressure on wages, pressure on spending, et cetera?
Well, Irene, thank you for the question. I have to say that we're optimistic about our ability to reach our $5.1 billion target. Our organic initiatives are going very well in our stores. Fresh Food, Fast, we're really happy about the performance of the program in the last quarter, and it continues to grow and be stronger as traffic is back into our stores.
So we think that we're going to do well and achieve what we committed to do on that Fresh Food, Fast program for fiscal '23. Merchandise pricing, promotion, local pricing, that's all on track with what we shared with you. So that's another initiative also that despite all the challenges, you see the improvement in our margins, gross margins for merchandise, and they're there. Brian just talked about fuel and the ability for us to continue to deliver good margins and also the improvement that we're doing in procurement. That's still there.
And I would add to what Brian mentioned that our rebranding also is contributing also to our improved margins when we're looking at our margins compared to history. So that is a good thing as we're continuing our rollout and rebranding our stations. We're benefiting from that upside and that's in line with our expectations when we did our strategy.
Finally, like North American development, you've seen in the quarter, for us, it's a record year in terms of new stores even if at the end of the quarter we maybe have been challenged a bit on the opening of NTIs, but we've opened a record number of NTI this year with 133. So this target also is in line. And finally, cost optimization, we are pressured on costs, but we are still working hard on our program to deliver all our cost optimization initiatives. So we're -- overall, we feel pretty good about our objective and what we shared with you and optimistic about achieving our $5.1 billion.
Yes. I'll just add. I share Claude's optimism for hitting the target. Certainly, we think a lot about the consumer out there today with the prices at the pump. Again, I view that as transitory. What fixes high prices is high prices. And so these 2 will pass. And then is there a recession or not? We have to remind ourselves, we've gone back and looked at our performance over the last couple of recessions, and I would never say our industry is recession-resistant, but we're pretty resilient. We're pretty much a part of people's everyday lives. And so as we look back at the last 2 major recessions, we actually performed very well. So again, I think I share Claude's optimism that we're on a good track.
Next question will be from Bonnie Herzog at Goldman Sachs.
I wanted to circle back to OpEx since it really was quite a bit higher than expectations in the quarter. So I just -- I guess I wanted to better understand the key drivers behind the pressure. So if you could walk through those drivers, that would be helpful. And then also, could you talk about your expectations for OpEx this year, given your comments about the labor market and certainly the broader inflationary environment? I guess I'm just trying to get a sense if we should think about normalized OpEx to remain as elevated as what we saw last year? Or do you have any levers you can pull such as the cost optimization program that you just mentioned to help offset some of these pressures?
Thank you, Bonnie. If we start anew, we want to understand a bit the 15.6% increase that we have in our SG&A. I think we need to break it up in 3 buckets, which would be 1/3, 1/3, 1/3, let's say, 5% each. The first bucket is really how we performed last year. And remember, last year, on SG&A, we were minus 2.5% in terms of growth for the quarter. So we are facing a quarter where we were very low in expense, and that was mostly driven by COVID-related subsidies and also retention measures.
So when we're comparing them, there's a 5% in our growth in SG&A that's coming from countering a really good quarter last year and also measures that were there and that benefited from -- with COVID.
The second 1/3 of it or the second bucket is inflation. So we have -- we've talked earlier about 3.4% inflation on wage. Third of it is inflation. We see that potentially being better in the future. Expenses also are under pressure. Like everyone, I think you need to take about 2% maybe of that coming from expenses. We're challenged in expenses in Europe. Energy prices are very high in Europe, and it's been like that for a couple of quarters. And also maintenance and all the contractors are increasing prices. So that puts a bit of pressure also on our expense.
Finally, the last 1/3 of it in our increased expenses is really composed of 2 things. One is our organic growth initiatives where we're pushing a lot on our data and workforce and putting our workforce together, having help also of professionals to put that team together, but also fuel marketing. We've talked about the rebranding earlier and the positive impact on margins, while you need to think about us branding also and selling our own fuel and putting marketing at work also to support that effort. So -- and overall, for...
Just to emphasize that one, I mean, that's material. When we look at the brand fees we would pay to a Shell, a BP and Exxon, they were very material. So if you said 5 billion, 6 billion gallons, it was a big number. It was over $100 million for sure. And now we've got largely Circle K fuel brand out there. So our -- and that was always in cost of goods, right? It was just part of our cost of the fuel. So now as we spend money to promote our fuel brands, whether that be loyalty, fuel promotions, other things, that is showing up in OpEx. And so that's something that it's not changing the bottom line. Actually, it's very positive to the bottom line for us, but it just shows up in a different way in the P&L. So sorry, Claude, go ahead.
Yes. So net positive on this. So going back to it, so if you think about it, one 1/3 is really COVID related and a low quarter last year, the other 1/3 is really wages and expenses, so 5% is the impact and the other 5% is fuel marketing and the initiatives that we have. So in terms of mitigation, I think our -- we have a lot going on. We've talked about Mashgin, our point-of-sale self-checkout that we were deploying in 2,500 stores.
We have also a program that we've called the Easy Office. We were able to reduce the number of hours worked in the back office with automation. We have those initiatives also going on. So we have another goal on that this year to reduce by further more this year. And also our Smart Save program. We're reaping the benefits, having rolled out this program in our network last year.
So we are continuing to push on our cost optimization program. I want to say that we're really looking into it with the new situation, the new pressure that we have to really relaunch our program and bring it to another level.
Okay. So just to summarize -- that was super helpful, but just -- so the pressures will remain elevated but not probably as much as what you saw last year given some of the factors you just talked...
Yes, exactly. So yes, to your question...
Second quarter will cycle comps. So we expect that pressure to mitigate a bit. And again, if we can get over time down, that's -- as we faced and industry faced staffing shortages last year, we expect that to moderate if labor trends continue.
Next question will be from Mark Petrie at CIBC.
You've touched on it a few times today, but given the importance of tobacco in your business, can you just give us some more detail about the performance by region, basket and traffic, the impact of trade down there and as well the specific performance of OTP and the impact thus far and what your view is on the potential impact of regulatory change?
Yes. A lot in there, Mark, but thanks. Just in terms of overall trends, we're actually growing share in Europe. Our business there just continues to click really on all cylinders. In Canada, I think Claude mentioned, we've seen -- really as the markets have reopened, the Indian reservations in the dark market have regained share. And I think there's temporary pressure there. You see inflation prices -- price pressure in general on the consumer. They're probably gaining a bit of share from the marketplace.
And then I think the second thing in Canada, and it's the same in the U.S., is we certainly saw consumption rise a bit in COVID and now that COVID's open, I think people are smoking a bit less. And when you look at Reynolds and Altria's reports, I think you would see the same thing broadly.
Both in Canada and the U.S., when we look at our trends, we're holding market share. So while units are down somewhat significantly in Canada and a little bit in the U.S., sales continue to be positive and, again, maintaining share. In terms of behavior, we have seen lower tier brands gain in strength. We have a product that we're really focusing on the U.S. called [ Seneca ], which provides really one of the lowest costs to the consumer of anyone in the United States selling tobacco. So we believe we're in a good place to help that consumer find good value if they do choose to trade down.
And then the last thing on the noncombustible, if you will. You'll continue to see that grow, whether that be the white nicotine space. And then the vaping, there's been some noise with Juul being taken off the market for a few hours and now back. We're working hard with our suppliers to make sure that we've got adequate inventory of alternative brands and also working with Juul to make sure that we're providing inventory and those products as long as it makes sense for both of us.
So again, I think when we think about nicotine delivery, I think our expectations align with what we see in that industry as combustibles will continue to have pressure. But there's good uptake on a much higher-margin product around white nicotine, vape and moist. And so we continue to focus on making sure that we've got the right selection in pricing in those areas.
Next question will be from Michael Van Aelst at TD.
You've covered a lot, but I'm just wondering on the fuel volumes in North America and particularly in the U.S., where it still seems to be trending kind of mid-teens below 2019 levels and getting a little bit worse in the last few quarters. Wondering if you could talk a little bit about the competitive challenges within that market? How much of this is just people not buying as much fuel and are not driving as much? And how much is it the discounters like Costco and Walmart gaining share? And do you see any pressures or any cracks in some of the traditional C-store operators and starting to maybe discount themselves to try and maintain some volumes?
Yes, it's a good question. I think there's a couple of things going on when we focus on the U.S. One, we do see -- one, I'd say, we measure our competitiveness in a pretty sophisticated way with deltas to main and low competitors. So we understand our price position side-by-side at all times, and we remain very consistent in our price position. I think it's fair to say that when you look at high prices, the focus that the Costcos of the world would receive are real, and I would expect they're gaining a bit of share. There's only 500 Costcos or so, and they've only got so many pumps.
And so I think that impact while real is limited. I think, third, in terms of our performance, when we look at it, we've got markets that are better than 2019, and we've got markets that are worse than 2019, as you alluded. So it's not a consistent story across the U.S. And I'd say the fourth thing in there is our fuel rebrand has had an impact. We've got significant disruption at site when we rebrand our sites. Again, this economic equation is tremendously profitable for us. We make more money, and it's the right thing to do long term for our brand and consumer awareness.
But again, we're tearing our sites up, hundreds at a time. So there is some disruption that we're imposing on ourselves. And as we haven't transitioned by the customer. A customer that may be used to buying from a major and that's got a certain credit card or a loyalty program associated with that, it's up to us to make sure that, one, we're providing the right value, the right experience, but also with some urgency getting our loyalty products and payment programs in place and making sure that we engage those customers.
Long term, I'd liken it to what we did in Europe. We took Statoil, which is the #1 fuel brand in the majority of the countries we operated in, took it down and converted it to Circle K. Early on disruption, but long term, 5 years later, it's just been a tremendous success, and we're confident we can achieve the same thing in the U.S. over time.
So the U.S. competitors then -- they're kind of looking at the Costcos of the world and realizing their limited capacity and staying disciplined and passing through the higher costs?
I would think so. I would think that's how they're thinking about it. I can't speak for them, obviously. But when we look at the behavior, again, in the quarter, crude went from $80 to a high of $120. Normally, that is a very, very difficult margin for retail. But you've seen the margins the industry has continued to maintain. And as we look at the current quarter, as I mentioned earlier, we feel good about the margin profile. And again, I think we benefit when there's volatility. So we feel good about that.
Your next question will be from Chris Li at Desjardins.
Maybe just a question on the -- a follow-up question on the tobacco regulatory landscape. Can you share with us your thoughts around the FDA plans to reduce the nicotine levels? What do you think is the potential impact? And do you think people will simply just smoke more? Or could it push more people to other tobacco products?
Yes. Good question, Chris. I think I'm reading what you're reading there. I think it really depends on the approach and also the timing. I think my belief is the industry will fight back and there will be litigation, and there will be multiple years of conversation, negotiation before anything would really happen. That's my speculation based on talking to suppliers. And then I think there's a couple of different approaches out there. One is a gradual phasing of nicotine and the other scenario is a more significant drop in nicotine early on.
So I think it depends which way the industry would go. But again, in the coming years, I just think this is going to be tied up in conversation. So we continue to focus on the alternative products, which again, we're seeing strong growth, and it's, quite honestly, a lower risk way of consuming nicotine. So near term, we don't think it's a big threat, and then we're certainly watching for how do we think this is going to come into the industry.
Next question will be from Vishal Shreedhar at National Bank.
With respect to the European fuel margins, can you give us a sense of specifically what the issue was? Was it just the increase in oil price and was that a transient issue and is it behind us now?
Go ahead, Claude.
So for European fuel margins, obviously, there's a lot -- there was a lot going on in Europe last quarter with Ukraine -- this Ukraine situation. And so we need -- we had to reshuffle our supply to find alternative source of supply and also the volatility in the diesel market also in Europe was strong. So we had to reshuffle all that, and that had an impact on our margins in Europe for the quarter. So we see that as something that's temporary. It is for us to recreate those new relationship to procure our fuel for our network and the impact you've seen also in the margins for the quarter.
I'll add a little clarity. I mean Russia supplied a significant amount of both petroleum, particularly diesel into the market, and then you guys all read about the natural gas saga that continues there. So we, like many, had -- we moved away from Russia quickly. Today, we have no Russian product in our portfolio. But it caused significant disruption. When you think about the price increases we've seen in the U.S., it's been magnified in Europe just because of significantly more supply disruption and shortages.
And so the consumer price continued to rise more quickly. Retail did not move as fast as cost. So we did see a margin squeeze during the quarter, but we have no reason to believe this isn't temporary and that industry margins should retain -- should return to more normal levels as costs stabilize.
Thank you. And at this time, Mr. Lachance, we have no further questions. Please proceed.
Thank you, operator. Thank you, Brian. Thank you, Claude. That covers all the questions for today's call. Thank you all for joining us. We wish you a great day and look forward to discussing our first quarter 2023 results at the end of August. [Foreign Language].
Thanks, everyone. Have a great Canada Day and Fourth.
Yes. Have a good summer. Bye.
Thank you. Ladies and gentlemen, this does indeed conclude your conference call. We now ask that you please disconnect your lines.