Empire Company Ltd
TSX:EMP.A
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Empire Company Ltd
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Good morning, and afternoon ladies and gentlemen and welcome to the Empire First Quarter 2022 Conference Call. [Operator Instructions] Also note that the call is being recorded on Thursday, September 9, 2021.And I now would like to turn the conference over to Katie Brine, Director Finance, Investor Relations. Please go ahead.
Great. Thank you, Sylvie. Good afternoon and Thank you all for joining us for our first quarter conference call. Today we will provide summary comments on our results and then open the call for questions. This call is being recorded and the audio recording will be available on the company's website at empireco.ca. There's a short summary document outlining the points of our quarter available on our website.Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer; Michael Vels, Chief Financial Officer; and Pierre St-Laurent, Chief Operating Officer, Full Service. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause action results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors.I will now turn the call over to Michael Medline.
Thanks, Katie. Good afternoon everyone. We are pleased with our first quarter results especially as we cycled extraordinarily strong COVID heated sales and earnings last year. We continue to perform strongly and consistently. Our sales and market share were solid. Our margins matched last year's outstanding performance which had limited promotional activity last year and are actually up strongly when you exclude fuel. Our SG&A is solid even as we invest in Horizon and our bottom line is strong especially when back out last year's real estate games.These are good results driven by great work from our team and we expect more of this as we progress through Horizon. I don't have much to say actually. We're happy with our results and focused on delivering Horizon. We continue to lap last year's COVID driven sales bump and are seeing the behavior changes we expected as vaccine rates increase. With that in mind I'll cover 2 topics today. Our performance this quarter and the trends we're seeing in the market. First, our results, as I said last quarter 2-year sales stack are the more meaningful indicator of sales as we lap COVID.With that in mind our 2-year sales stack for Q1 same-store sales was 8.1%. Our same-store sales versus last year were negative 2.2%. Total sales increased 3.7% as we added Longo's and fuel pricing and consumption rebounded. E-commerce sales this quarter were up substantially. We continue to believe that winning the e-commerce channel with the right business model combined with strong bricks and mortar offerings is critical -- is critical to success in grocery here and as you can see around the world.We are particularly pleased with our progress in Ontario, Canada's largest grocery market where we have gone from zero to hero in a very short time as we saw significant increase in Voila sales as it grew rapidly in its first year and added Grocery Gateway through our Longo's acquisition. We continue to deliver the best e-commerce experience in Canada to our customers and believe we have the winning formula. In Ontario we are now closing in on achieving a leading market share in a remarkably short period of time. We continue to be extremely pleased with our gross margin performance delivering a gross margin rate of 25.1%.Just like last quarter we continue to match last year's outstanding margin performance even as promotional activity has picked up again. Our food margins are strong. This is a direct result of the progress we are making on Horizon, as well as the addition of Longo's and recovery of our service departments. Our sales mix especially increased fuel sales, created some noise in our margins, even as our Horizon benefits provided strong margin support. And Michael will speak about that more in a moment. With our strong sales and margin performance we delivered EPS of CAD 0.70 this quarter. Last year our EPS had a CAD 0.04 net benefit from unusual impacts, including a gain in real estate and payment tied to collective bargaining.Removing these EPS actually increased a noteworthy 4.5% over the prior year even without last year's large COVID bump. As I've said before returning capital to our shareholders is an important part of our strategy. Results like these allow us to deliver on that. Over the last 3 years we have grown our dividend per share at a compound annual growth rate of 10.9%. We increased our NCIB in April after we announced the Longo's acquisition and renewed it in July. After only 1 quarter with Longo's, we have already repurchased all the shares we issued as part of that transaction. Next trends we are seeing in the market. Last quarter we spoke about our future expectations as vaccinations accelerated.We have seen those expectations play out in the market through the quarter. First as others in the industry are experiencing, customers are shopping a bit more as restrictions ease and vaccinations increased. We're seeing traffic up and basket size is down. But these have not returned to the same levels as before COVID. Second, Canadians are starting to shift some spend back to the restaurant and hospitality industries. As we expected this means customers are spending slightly less on groceries than at the peak of the pandemic. Third, as others have mentioned, promotional activity is pretty well back to the same it was pre-pandemic.And fourth, we continue to believe customers are seeing the value in our full service offering more than ever. We are seeing more pre-pandemic customer behaviors returning such as customers returning to our higher margin prepared foods and service counter offerings. While we are seeing the split between full service and discount banners slightly stabilized, it's certainly not to the degree of pre-pandemic norms. Altogether, we expect same store sales will continue to be elevated when compared to pre-pandemic levels, but obviously a bit lower than the unusually high industry sales of fiscal 2021. As we expected, the grocery industry is in a period of transition.While the industry undergoes these changes, we remain focused on delivering against our strategic objectives as this team has done for the last 4 plus years. By keeping this focus, our team has achieved an impressive amount in that short period of time. A few examples, at the start of sunrise we were honest about 2 important issues that we needed to resolve. One we needed to fix our big Western Canadian businesses after the Safeway integration. And 2, we needed to grow our share in Ontario, Canada's largest and fastest growing market and the region in which we had the lowest share.Today, I can say to you that we have fixed our Western business, turned it around. Operational performance, sales and profitability have significantly, significantly improved and we have more upside to go. And in Ontario, we have materially grown our market share by improving execution in our existing stores, expanding Farm Boys' presence, launching Voila and partnering with Longo's Our market share in Ontario has grown roughly 30% since fiscal 2017. Finally, 2 accomplishments our team is very proud of over the last month. First, if you live or work in Quebec especially, I'm sure you're aware of the newest member of the IGA family, Ricardo Media.After working together for many years, I'm pleased to officially welcome Ricardo Larrivee and Brigitte Coutu to the family. We're excited to see the innovation and growth fueled by this continued partnership in Quebec and throughout Canada. Second, we released our fiscal 2021 Sustainable Business Report. Our Sustainable Business Report outlines our journey and shares much of our progress. It also, for the first time, includes disclosure against SASB, a world-leading disclosure framework to improve visibility and comparability of our performance. At Empire, sustainability and diversity equity inclusions have been on our agenda for many years. And while there is more to be done, I'm very proud of the progress we've made and where we are going.And with that, I'll hand it over to Mike.
Thanks, Michael. Good afternoon, everyone. I have a couple of comments on the quarter performance, and then, we'll move straight to questions. Our gross margin rate was strong this quarter, even against a tough last year. And if you remove the impact of fuel, it was 40 basis points stronger than last year. Overall, we continue to be very satisfied with our margin discipline throughout the business and the positive impact that Horizon initiatives such as our promotional optimization program we're having on margins. SG&A, as a percent of sales, was 38 basis points higher for a few different reasons.We now include the Longo's business that has higher costs and margins than our average and we'll continue to see this effect until we comp their results next year. Both our management teams both at Empire and Longo's are working to unlock synergies and are making good progress. We continued our expansion of Farm Boy and Voila in Ontario both of which resulted in higher SG&A. And finally our depreciation is higher largely due to an increase in right of use asset depreciation under IFRS 16 reflecting an increase in occupancy costs. These SG&A increases were partially offset by reduced covered costs in the current year.And the non-recurrence of the prior year costs related to the Alberta Labor Agreement. Effective income tax rate for the quarter was 24.5%. And we estimate that the effective rate for fiscal 2022 will be between 26% and 28% excluding the effect of any unusual transactions or differential tax rates on property sales that we may have. The effective income tax rate for the quarter was positively impacted by non-taxable capital items and differing tax rates of various centers. Earnings per share this quarter was net of CAD 0.05 per share of Voila dilution, the same as last year. Total Voila costs will increase as CFC 2 in Montreal begins operations.We built CFC 3 and we continue to expand our store tech e-commerce solution across the country. As CFC 1 continues to earn the respect and loyalty of our customers we're welcoming and welcome new customers and expand this geography we expect it to reflect positive EBITDA results towards the end of its third year of operations which will partially offset the impacts of opening new CFCs. Equity earnings increase year-over-year due to higher earnings from our Genstar real estate development and higher Combi REIT earnings due to improvements in their bad debt levels post the COVID impacts last year.Free cash flow continues to be strong this quarter and we have great projects to invest in. We improved 25 stores this quarter through renovation, redevelopment or conversion. And also as of this week in fiscal 2022 year-to-date, we have repurchased approximately 3.3 million shares for a consideration of CAD 133 million. So our fiscal 2022 is off to a good start. Q1 was a solid quarter especially when compared to COVID-driven results last year. We know that we will be up against the tough comp of COVID for the next few quarters.But Horizon is on track, our team is already engaged and working hard. And we are ready for what the remainder of the year has to bring. Before we get into questions, it's hard to imagine that we spent a little over a year talking to Longo's, first in partnership talks, and then for the past 5 months as part of the Empire family. We've had great early interactions already and there's been significant work between the 2 management teams reviewing synergies and growth opportunities and we're so happy to have them part of the family.And with that Katie, I'll hand the call back to you for questions.
Great. Thank you, Mike. Sylvie, you may open the line for questions at this time.
[Operator Instructions] And your first question will be from Karen Short at Barclays.
I had 2 questions. The first question is just when you think about the competitive environment today versus pre-pandemic, it sounds like you're trying -- you're saying that it has returned to normal. So, the question I had is how is the actual environment from an in-stock perspective because one of the things that's happening at least in the US is that in stock levels are still not back to normal, which is making the promotional environment remain much more muted for a much more extended period of time. So I was wondering if you could kind of contextualize that? And then I had one other question.
That's a good question. You're absolutely, right. We're not back to where we were before pre-pandemic in term of supply from and even from big suppliers. So, but we are able to manage it efficiently, I don't think it's visible for customer, our shelf are full, but you're absolutely right. Some supplier are -- we're still in allocation with major suppliers. So the service level is not back at the same level. But once again, I don't think it will compromise the customer experience in our store.
Thanks for that but going forward you do expect the promotional environment to be more or less relative to 2019 levels?
Like Michael said we're almost back to the same level of promotional activity. I think as we're more back to the normal like we said last year it was less promotional for all the reason we know. And this year, we're almost back to the same level than we were pre-pandemic. Nothing major to call here.
Okay. And then with respect to the remainder of the year, maybe could you just give a little color on puts and takes to think through on both gross margin and operating expenses as we go through the year?
Sure. I see the effect of the, the increased fuel sales continuing to create some mixed impacts on our gross margin rate because, you know although fuel sales did increase, so I see there's more room for them to increase this as reopening occurs. So you should expect that mixing back to reoccur in our gross margin line. We're comfortable and actually very happy with the progress so far on our Horizon initiatives, which do come through and have come through mostly really in margin expansion and so far as we're working on promo optimization and that sort of thing. We expect that to improve and continue through the year.The sales lifts and the impacts of our renovations have been strong. We've been happy with those. The Farm Boy stores and we've opened a lot of them over the last months, 18 months, are all performing strongly. And we expect those to be residual and continuing improvements through the rest of the year. And our discount business is managing its margins very well. And we're continuing to see market share increases in discount in Western Canada as we open new stores in western Canada. So those are all positive impacts that mostly internally generated. We do, yes, we do expect to see some mitigation in our ongoing COVID costs, but they're now down to a relatively low level. Other than that I'm not sure I'd call out anything beyond that
Okay and then just last question for me. I think the comment was it specifically you have leading e-com share I think in Ontario is what you said. Maybe can you just clarify or if you could provide what you think that share is? And then when you make that comment are you including click and collect in that calculation or what's -- how are you defining the market?
Yeah, it's Michael. We include everything in that calculation and we are accelerating on everyone in the market and we will be a leading e-commerce player if not now very, very soon. We started from zero e-commerce in Ontario basically 12 months ago and the combination of Voila and Grocery Gateway puts us in a great spot. And I think people sometimes don't look at e-commerce the right way. If you look across the globe you cannot succeed in the long-term without being great at bricks-and-mortar and e-commerce and it's a key part of our strategy not just on the e-commerce side but to drive our business going forward. So I can't wait to get the other 2 CFCs open as well and we can see the kind of success we're having in Ontario.
Next question will be from Kenric Tyghe at ATB Capital Markets.
Gentlemen, I wonder if you could provide some insight just from your seat, the ebb and flow of the sort of working through the pandemic here and just directionally even some of that consumer behavior and again how that could evolve I mean we're all sitting in different seats and have different prospective but it would be really useful even directionally just to understand how you see the range of outcomes through the balance of this year which you're scaling to do the same-store sales and same-store sales comp just trying to get some a better feel and I will triangulate a little more accurately than we can now.
Kenric, it's Michael. Great question and I'll start this like I started and answered 6 months ago that I'm no soothsayer but we've been relatively -- we've been pretty darn accurate in terms of what we thought ever since the beginning of the pandemic in terms of at least customer behavior. And we're still seeing -- I think people talk too much about the difference between conventional and discount. That's not the main driver here. The main driver is customer behavior and trips to the grocery store and basket size. It's not so much conventional discount that's on the margin compared to some of the other things like people talk about that way too much. And it's not what we see in the market, it's for sure. I don't know where it's going in terms of waves throughout the country and hopefully this starts to dry up. But I'd say that the -- each wave has a smaller impact on this industry than the previous wave.And that's what we've seen throughout. That's what we thought would happen. And we continue to see that. Compared to 2 years ago this is a different industry. We're seeing elevated performance in our stores and online. But I don't think that unless there's some strange phenomena that I can't foresee right now. I don't think there's going to be, I hope there's not a sudden rush on the grocery and everything starts to get better. But I wouldn't also, I've talked about this before, although behaviors are getting back to normal, they may never get totally back to normal. And that's something that we've got to watch even in markets where there is relatively few cases and not too much worry about the pandemic. We're not seeing exactly the behavior we saw before we're seeing more people, who are at the grocery store and spending more money. Does that help, Kenric? Is that what you were looking for?
That was great. Some really good insights. Just one quick a further question for me, just on the margin profile, can you sort of speak to -- are there any learnings and which way are those learnings flowing in fresh sort of first quarter and on Longo's? You have clearly a higher gross margin profile in that business and a very fresh forward business. But any insights you can share whether there have been any learnings or whether you see any real opportunity there on the sort of margins in fresh and your fresh profile going forward?
Well, we're very familiar with Longo's. Of course from -- we've been watching them for a long time and we've respected them for -- for all that time and they do have, to your point, a different mix and different format. And the customers are very loyal. So in terms of learnings between the 2 businesses, for sure, similar to Farm Boy, pooling all of our expertise relative to private label is something that all of the management teams kind of immediately looked at as an obvious.And that's all about innovation and new products and positioning private label also. So that's been something that's been a great area of cooperation and collaboration. We are looking at how we all buy fresh and we will have different ways of buying of fresh particularly for produce. And there's a little bit that each business can teach each other on that one. And we have particular suppliers, sometimes locals, sometimes not that we can leverage. Beyond that I think it's still -- we're still getting to know each other and exploring other areas of opportunity.
Next question will be from Patricia Baker at Scotiabank.
I've got a couple of questions. First of all Michael for you. I'd really like to talk a little bit more about the progress that you made in Ontario with those market share gains that you shared with us. So obviously, Farm Boy plays a role here, Voila plays a role, Longo's, FreshCo 2.0. Those are big changes in the market in Ontario strategically that you've addressed, but can you also point to work that you've done on the brand and perhaps the early days with Horizon on store renovation and expansion, the seizure to the higher share at the organic Sobeys business in Ontario as well?
Yeah. Thank you. And the last part is really important because obviously we've -- we set out as we are pretty clear on that. We had some weaknesses 4.5 years ago in Ontario in the GTA and in e-commerce and we set out to fix them and we've more than fix them, but we shouldn't. And my colleagues would be mad at me if I didn't also point out the incredible progress we've made at Sobeys and FreshCo in Ontario. And the banner we don't talk a lot about which has been on fire even before COVID and during COVID and now is Foodland where the performance there is, it's just been extraordinary led by 3 of our great individuals that are coming up through the company.And so I think a lot of it has to do and it always comes down to execution in store by our merchants and especially our operators and our store operators. And it is night and day in our stores across the country, but especially in Ontario in our stores. But the brand investment that we began in 2017, which is as you probably know takes time and work over and over again is paying off the perception of our brands in terms of how they're situated, how they are in the community, what the pricing is, we haven't seen better price perception in our banners, well, certainly since I've joined as we have in the last 3, 6 months.All of this contributes and I've never said this before retail detail, it is true. And it's a bunch of different things coming through to put us in this position where we are so much stronger and I'm sick of talking about COVID for many reasons but, one reason is because it is -- I think it's -- we performed really well in COVID and now we're lapping that performance and it's -- and then others might not have performed as well and now they're laughing that and I think it's overshadowing the huge change at Empire Company that we've seen and that will shine through very, very soon.
Okay. And then let me follow-up on that Michael, 2 quick things. So would it be fair to say that when we look at the whole project Horizon and that's all about -- not all about but a big part of that is driving further market share gain and driving the top line. So with respect to the important market of Ontario, you believe that the share gains that you've got are for the most part sustainable and that you actually see a path -- this is not the end game there's a path to further market share gain?
Oh, yes. Oh, yes. This is -- we're on the move in Ontario and it has nothing to do with COVID, that's just small. I really think people are overemphasizing some of the things now from COVID and they're overemphasizing this conventional discount thing instead of looking at execution out there. And I have great confidence across the country. And you didn't point out the west, where I think we've made the biggest gains of anywhere in the country and we had the farthest to go. But we have strength all through the country. But we were really not a player in Ontario. And we're a very important player on the move in Ontario now.
Okay. Just want to follow-up on the point that you just made that you said the brand investments is paying off and maybe it's too early to tell, but I know that in the quarter, Sobeys was the sponsor of the Olympics. And I'm just curious, what the impact of that campaign was on your brand? Do you have any indication that that was a successful spend for you?
Yeah. We're really happy to -- our first time, we're the first official grocer of the Olympics. We had great exposure, as you saw, and can't wait for the Winter Olympics, which is even bigger in Canada, coming up. And we'll be big there too. We 100% saw positive impact. It is -- the Olympics is the most powerful and exclusive platform. And so, we're lucky to be there. It's hard to quantify these things always financially, especially in the short term.But we have really, really good ways of tracking impact of our campaigns in markets. And this is our first campaign, our first time we put the brand on this. And we -- Sandra Sanderson and the whole marketing team plus our operators, merchants hit it out of the park. We were right at the top of impact among the sponsors with the viewing public. And I think if you saw our sponsoring the games, you'd probably agree. I thought they were -- probably one of our best spots, if not the best spot we've ever had. So, now Sandra's got to beat for Beijing, so.
Well, good luck to her. Mike, if I could just ask one more question for you. In the release, you indicated that a reference to the fact that Voila -- the metrics that Voila are going better than planned. Can you speak a bit to this? And then just, I'm sure as what how that experience with the Toronto CFC is informing your plans and expectations for what you're looking for out of Montreal?
Sure. I think, the first part of your question was, was just some insight into the metrics for the CFC?
Yes. Yes.
Yeah. Okay. In this respect I'd say probably boring is good. The CFC started off with exceptional metrics. And then it has just either kept those metrics up or has got better. So on-time fulfillment and no substitutions and all of the other customer metrics have resulted in a net promoter scores which have been remarkably high and remarkably stable throughout the entire process, which is I think is impressive because as you start repeating customers, they start to get more picky and it's important to keep a level of service up. So, all of the customer-facing metrics are exceptional. Inside the CFC, I've said this to quite a few people, I'm personally quite surprised at how quickly and efficiently it started up.Very few [ teething ] issues and that CFC is now operating from an efficiency perspective right at the top of all the Ocado facilities worldwide, so very smooth from that perspective. Yeah, they keep telling us that and they're quite, little bit surprised about it, but I think it's absolutely right. And then other metrics that are helping us and one of the reasons that we're improving those numbers is our shrink numbers are coming down as we get a better handle of our purchasing patterns. We're starting to get used to seasonality as we go through the summer, which is generally a lower time for e-commerce sales and how to manage that that capacity that frees up and how just to generate more sales through quieter periods.So yes, it's really on track. We're just -- now it's and how do we continue to -- through our customers, how do we increase the assortment? How do we improve price perception? How do we make sure that our promotions are on point, et cetera? On the CFC, just CFC 2, it's really -- it's not exactly rinse and repeat because it's a different place, it's different customers. We have an installed customer base but certainly from an operational perspective tons and tons of learning, which I'm not going to bore you with. The most significant difference really is that we have existing customers who are used to a certain level of service and assortment and they love their IGA stores. And we're going to have to make sure that what we give them is at least as good as that and certainly our aim is to be better. They're very discriminating. They know what they like. And we need to satisfy their needs right off the bat without any learning curve.
Next question will be from Michael Van Aelst at TD Security.
I wanted to follow up on the e-commerce side and maybe you could help me just understand some of the commentary because in the press release you say that online grocery sales in Canada have continued to grow. But then on the next sentence it says sales remain consistent in the -- for the company's 3 e-commerce formats excluding Grocery Gateway. So are we seeing -- is there another one kind of like a comment -- is the first one on the industry, a comment for like the last 12 months and then this one in the quarter with 3 divisions? What do you mean by the 3 e-commerce formats were consistent?
Thanks, Michael. And I do feel that that you're right that that could be somewhat confusing. So our first comment was more industry in general and referred to more of a long-term retrospective so obviously to a large extent driven by COVID. There's been a step up in penetration and we expect that to continue and we expect it over time to grow. Yes, there was a COVID blip in there. So we're not talking about e-commerce sales increasing over the COVID numbers. So I can see how that would have been confusing.What we're just saying is that e-commerce is a strong channel. It has increased materially and we think it's going to keep growing. In terms of our own performance, we've -- and maybe we shouldn't maybe talk about the formats. We have Voila, which is new to us at least and growing as it ramps up and gains new customers. We have Grocery Gateway that we purchased through Longo's. And we have our in-store performance format, which we started in Atlantic and we're rolling across the rest of the country.Our experience in e-commerce in total for the quarter would have been a net -- would have been a significant increase but a lot of that driven by Grocery Gateway. If you take Grocery Gateway out because it's an acquisition, it doesn't have a comp for us, we would have experienced in total for the country roughly flat e-commerce earnings. As I said we're in a bit of a lull because we're in the summer and secondly we also coming off some very material COVID numbers in our Quebec business from last year.
Okay. And last year you only had Voila up for I think it was half the quarter. So how would that have performed? Are you excluding Voila then in Ontario and BC? I'd assuming it was down a little bit given your lapping really tough comps.
No, Voila continue to grow.
Right. So, Voila grew but Quebec?
Quebec was off because of the very significant comp with last year's COVID numbers.
Okay. Yeah. That makes sense. Okay, great. And then -- I don't want to go straight to numbers but the outlook -- you say you're expecting earnings growth to be less than fiscal '21 but earnings growth in fiscal '21 was 25%. So that's a pretty wide range. Am I reading that correctly and are you expecting sales to be lower than last year but also sales -- earnings growth to be less than last year or is it earnings to be lower than year?
I'll try and clarify that. So, we outlined when we started Horizon that we would -- as management we were targeting clearly the EBITDA increase but also we felt that that should translate at the bottom line to roughly a 15% compound average growth rate in net earnings. And now here we are finding ourselves in F '22 with an F '21 number that was significantly inflated by COVID. And all we're saying is don't take the F '21 number and add 15%. So we're not saying that our numbers are necessarily going to be lower in F '22. We're just saying they're not going to be at a 15% growth rate if you take F '21 as a base.
Next question will be from Mark Petrie at CIBC World Markets.
Yeah. Good afternoon. I just wanted to follow-up on your comments Michael with regards to the Western Canada business. And with regards to that now sort of being fixed and are you basing that more on sort of qualitative evaluations or is it more quantitative -- be it in-store level profitability, customer feedback? What are you sort of basing those comments on?
Basing on top line, bottom line, brand scores, including customer feedback and the work we've done to turn around our stores in terms of renovations.
Oh, that's it. Okay. Okay.
This is not just my opinion this is -- although my opinion is usually accurate on those ones. But the -- its top line and bottom line -- seen tremendous turnaround of our Western business and still have room to go.
Yeah. Okay, understood. Appreciate it. And then actually just one small one following-up on all of the Voila discussion, I know customer retention is something that Ocado talks about a lot and hangs their hat on. Is your customer loyalty still exceeding expectations?
Yes. It's very, very strong. Ocado model which we have here is best-in-class and we've got great customer retention.
And related to that, how have you adjusted your promotional spend as Voila has sort of built awareness obviously still room to grow that? But how have you adjusted your promotional spend and your tactics? And is that sort of online or in line with your expectations or how has that played out?
Yeah. I think -- I mean Mark I know you watched the industry pretty well and you're probably looking online and getting offers from us and you've seen that we've been trying different things to make sure that we keep our momentum and especially as we come into -- summer is usually slow in e-commerce, now back to school. We're back in the fall. Make sure that we continue the momentum we had before. It is -- we started off because we just wanted to make sure that we were operating well, not very promotional. Went more promotional and tried different things to see what worked, kept what worked, got rid of what didn't, and now we're very happy with the promotional mix right now. But Voila with the -- like, literally hourly data that they get, can -- is very, very agile in terms of attracting and retaining customers and doing what we have to do out there. You saw some of the monthly and annual passes that we put in place as well.So, with our -- with the things that we know what to do in Canada, plus probably daily contact with Ocado and talking to the other partners, remember almost all the great retailers on earth have tried to get Ocado, and so we now are open to best practices across Europe, United States and soon to be Asia. So, we're not too proud, we will take whatever works and we are trying all that. Canada is a little different and you've got to make sure it works for you, but I'm now happy with what they're doing in terms of promotion. It's right on.
Next question will be from Irene Nattel at RBC Capital Markets.
I just wanted to shift topics a little bit for a minute and just talk about what you are seeing in terms of cost push, both on the labor side around labor cost and availability, but also the kind of discussions that you might be having with suppliers, now that we're heading into this critical after Labor Day period and those conversations typically dry up?
Pierre?
It depends on regions or in some region it's more difficult than in others. Quebec is tougher than BC, but in the rest of the country, it's manageable. I know supplier has some issue in labor unavailability as well. It's why we are in a location with some of them. We believe that after summer, this situation will improve. And we have good tactics and plan to improve efficiency in store and making sure that our labor will be used for customer experience and production versus non-value added tasks.So, it was like that before the pandemic in some provinces, then accelerated through the pandemic, and now we believe that we will come back to more pre-pandemic situation, and we have a plan to -- we had a plan before pre-pandemic. We had to pause it, but now we're working on it to improve efficiencies at [indiscernible] and in [ ORIC ] as well. So, we have a lot of labor in [ ORIC ]. We are very lucky and -- not lucky, but I think it's a good decision we've made in the past. We have automated DCs and Calgary and Ontario and Quebec. And I think we're in good position because of it. But it's not enough. We need to continue to work towards that.
That's really helpful, Pierre. Which areas do you think have the most opportunity around sort of in-store -- improving in-store labor efficiency and eliminating non-value added tasks?
To be honest, it's a cultural thing and I think internally we can do a lot without compromising customer experience. As a backstage team, there is many opportunity we can improve our performance. So, doing the right thing for first time as a backstage teammate will change life in store. And we strongly believe that we have the control on it.
That's helpful. And then just on the inflation question, what kind of discussions are you having? And is it your expectation that we'll see another step-up in overall consumer pricing? And do you -- and what has been the consumer response to date?
Like you know, we had inflation in Q1, almost the same level, slightly lower than in the previous quarter, Q4. It's very volatile, depends on categories. So, into the Q1, we saw more inflation in there in seafood. Now, I think that talk of the town is meet. But I think customers adjust their spending behaviors as prices increase and often they will purchase other substitute products. And it's our job to showcase these different commodities at the right price -- at the price they are looking for. So, it's our job. It's a day-to-day job. It's not new, seeing volatility in prices, especially in the commodity side, and when it's getting too high, customers changing their behaviors and going after substitute.
And what about the center of store at this point? It sounds like that's not really been a big factor so far.
We have asked for cost increase from supplier. We didn't take many cost increase. It's very important for us to be selective on taking cost increase and we do our best for our customers all the time. But some of those increase are going to move to retail, for sure. Especially when -- we are challenging our supplier partner all the time. They know that. It's not new. But sometime it's commodity pressure, raw material is increasing. So, we have a [ robust ] processes to look at these task and most of the time we get -- we are able to reach an agreement with our supplier and making sure that it's -- well, I would say, it's good backup for these cost increase and most of those when we agree on are going to retail. And -- but, you are right, actually there is a lot pass from supplier for different reasons, but we continue to challenge these, protect our customers as much as we can.
That's very helpful. And then just finally, if I may, back to the whole subject of e-commerce, just wondering how you are measuring those market share numbers? And what your data is showing you around sort of new customers that you are gaining, or that you are, if you will, poaching from other e-commerce suppliers?
I'll start off by saying, Irene, that it's a remarkably difficult calculation, figuring out exactly what the e-commerce numbers are for each -- every participant in the market, not just the big player, is difficult. And so a lot of our work is internal triangulation and trending in addition to some of the data that we get from market research companies. So, that's all to say. It's not necessarily at point estimate and clearly something that we look at on more of a trend basis.But if you look at the numbers and you look in terms of what we have visibility, which is ours, we do fundamentally believe that we're gaining material share in the channel, and we're getting it from non-service customers. Now that's partly because we started with a relatively small share in Ontario, as Michael said, but I don't think people are discriminating. We're not getting customers because they used to -- or shop Sobeys. We're getting it because of the brand, standing for customer service, greater assortment, good pricing and people are getting turned on to Voila as a real option in their shopping in addition to what they do in bricks and mortar stores.
Next question will be from Vishal Shreedhar at National Bank.
Just with respect to the improvement that was -- that you've been noting for several quarters across the business, once upon a time for Empire, there was a perception that Quebec was the region maybe where Empire was the strongest, maybe the West, not the strongest. I'm wondering how all these regions stack up to one another? Now, is it more uniform, or do you still think there is disparity across the Company -- in the Company?
There is still some disparity, but they are closer.
And in terms of the net promoter scores that you're seeing, is there a consistent improvement along with these numerous initiatives that you're implementing? And along with your comments that the West is substantially repaired from the state that you inherited in, are those net promoter scores improving as well?
Yes, they are improving. And we think, I mean, it's been a long journey. But we're starting and -- it's starting to accelerate. And I said it before, it starts in the store and the people in the store and then all the other things we've been doing. We shouldn't underemphasize the changes we made at Project Sunrise are really starting to pay off, and now Horizon is just at the beginning.
And Empire has done a lot of work over the last few years at soaring up its market share in the GTA, and as you mentioned in your prepared comments, focus for the Company. Are you -- is the market share where you need it to be at these -- at -- with your multi-banner approach in the GTA? Or do you think there is still more work to be done there?
We're way better than we even could have expected in 2017, because of some of the opportunities like the Ocado, Voila opportunity and the ability to buy Farm Boy and Longo's, which we didn't count on, to be honest with you. So, we are way ahead. But we still have -- I mean, as you know, we are not stopping Voila, nor Farm Boy, nor Longo's expansion, that we still have plenty of opportunity in our more historic banners to grow those. So, I believe that if I were a betting person, which I'm not, I would think that we're going to be gaining market share for the next number of years.
Okay. And maybe just a quick numbers question here. The gross margin pre-fuel up 40 bps was a good result in light of the unusual quarter you had last year. And there are lots of moving parts in there. There is Longo's, there is Project Horizon, there is this service counters coming back, maybe other factors, is it possible -- are you able to prioritize maybe what the major drivers were to that gross margin?
Certainly, the expansion of Farm Boy and Longo's does have an impact on the net rate, but the largest positive for sure is Horizon and then everything else sort of beyond that is relatively small.
Next question will be from Peter Sklar at BMO Capital Markets.
On the -- for Voila, on the financial guidance you're providing, what you're saying is that you expect this year, fiscal '22 to be the peak dilution year. So I think that means you expect this year to be the peak year for losses from Voila in aggregate, and then the loss rate coming down in fiscal '23. So, how does that work? Because you've got the GTA CFC that should have less losses next year as you ramp it up, but on the other side of the ledger, you'll be in the peak of the losses of the Montreal facility as it begins to ramp and plus you'll be working on Calgary. So I just don't see how the arithmetic works for you to make that statement, unless you get a pretty dramatic ramp up in the financial performance of the GTA business. So, if you could just give us some flavor around that?
Sure. Well, GTA is consistently improving, which clearly on a consecutive basis, cuts into the dilution materially as you move towards a breakeven. Montreal starts with the -- with an existing base of customers. That's very helpful for the business, and helps us with a number of things including lower shrink, less dollar cost, that sort of thing. And -- yes, so those would be the 2 most significant moving parts. And we also -- sorry, there is a third one. We've also invested materially in our back office, supply chains, replenishment and all of the administrative and SG&A that we need to run what is really a separate self-standing business, we don't have to replicate to get into Montreal.
And when did the Calgary costs start, Mike?
Much later in F '23.
And then just my last question on different topic. Michael, you brought up a couple of times in your discussion today about the promotional optimization and that's been one of the factors in your financial improvement. What are you talking about there? Are you saying that -- like, what is -- are you hiring more skilled merchants or using new analytical tools, or you've brought in consultants who are looking at demand elasticity? What actually is going on there?
Sorry, for which element?
Promo optimization.
Just promo optimization. Sorry, I thought you're talking about the [indiscernible]. When you say what's going on, it's -- it really is informing our merchandisers across the board, so not just somebody use merchandising meat, right, it focuses on a category like meat, obviously. But it is the calculations and the outputs and the sensitivities that it reflects rolling the effects through the entire stores. So, it forces which is very new for our business. And I think it's a big part of becoming greater category management. It forces a category manager to really understand the impacts they are making on the store outside of the category, to start with. And that may sound really obvious, but it's pretty powerful.And then because of the fact that it's very rich in data and it enables us to do a lot of scenario analysis virtually almost real-time, it completely changes the discussions with suppliers. And we can talk about a CAD 0.05 or the CAD 0.07 difference on a promotion or a funding level with the supplier and show them almost in real time where they are incorrect as to what their impact -- the impact of their promotions is going to be on that category and our store in total, and it enables our more tactical negotiations on promotions with suppliers to be materially better.And the reason we think this is going to get better and better over the year and overtime is, we are only at the beginning of that. And we're still in the, call it, the trading period in many respects when you look at those higher level discussions and those improved negotiation. So, it is as simple as putting incredibly strong insightful data into the hands of people that were already pretty good at category management, but it's bringing it all together in an ecosystem and across stores and the processes that we're finding was most of the [ power ], where people are becoming much more businessman as opposed to just wondering about the next week's promotion.
Next question will be from Chris Li at Desjardins.
Can you update us on where you are in your journey with Own Brands? I know it's a huge initiative last year. How much of the benefits have been realized in the margin so far? And is there still a lot more benefits to come?
It's -- Own Brands is part of Horizon. We on track on benefit. We rebuilt Calgary. So, wave one is done. We are at the end of wave 2. We'll [ lend ] store in the next few months. So, we are on track to deliver the benefit from Own Brands into the Horizon projects. So, really pleased with the progress of re-branding. Like I said in previous quarters, the re-branding is completed. We are now building -- re-build the assortment, make sure that the assortment is relevant in every single categories and we are very active with the results so far. Penetration continues to be better. Margins continue to be better. And we see an improvement year-over-year. So -- and we expect to finish that rebuild this fiscal year and get all the benefit in the next fiscal year.
And then maybe another question I have is just your Horizon plan implies I think EPS of roughly CAD 3.00 a share in fiscal '23, which would imply a very nice ramp-up from this year's level. I guess my question is, how confident are you that this will be achieved since I think the back half of the Horizon plan is largely predicated on sales growth and market share gains, which are obviously a bit more risky because it's not fully within your control? Are there other levers you can pull to achieve that target even if, say, sales do not pan out the way you expect?
So, that's an interesting question. Chris. I mean I could be although flip it and say, this -- both myself and Michael and the team we have, I mean, we basically plan for success, right? So if you have to really ask because we're not going to accept failure here. So, in one way or the other, our goal and our job and our expectation -- it's been our expectation, is to hit targets. So that is -- that's our -- that is still our expectation and we don't feel we need to deviate from that whatsoever.But having said that, that's generic answer, doesn't help you much. Something Michael actually said to us and we're having a conversation about this not that long ago was, in a -- if you parse out the strategy into 3-year segments, right, like we have, inevitably the second year is the hardest one, because there's a lot of set-up and a lot of -- maybe easier, I'm not sure it's easier, but the first year goes according to plan. Your targets become a lot higher in year 2 and you have to hit them. But you need to have momentum heading out of year 2 into year 3. And so a lot of the heavy lifting and the foundations and the details of what you put in place in year 2 is the most important part of that 3-year period. And it's not quite like you're just harvesting in year 3, but you really need to get year 2 right. And so far, we feel good about it. We are on track. We have great plans. Our teams are engaged. And so far so good. So this is a matter of execution and we're executing on a number of items. That makes to some extent it's little bit lower risk because we're not just relying on one thing to happen. At the same time, there's a lot of balls to keep it the air. But so far, we're doing well from an execution perspective. So, we see no reason why we can't hit our goals and we expect to.
And at this time, I would like to turn the call back over to Ms. Brine.
Great. Thank you, Sylvie. We appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by email. We look forward to having you join us for our second quarter fiscal 2022 conference call on December 9. Talk soon.
Ladies and gentlemen, this does, indeed, conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.