Empire Company Ltd
TSX:EMP.A
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
31.67
41.9
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Empire Company Ltd
You don't have any saved screeners yet
Good afternoon, ladies and gentlemen, and welcome to the Empire Company's Second Quarter 2019 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, December 13, 2018.And I would now like to turn the conference over to Katie Brine, Director, Investor Relations. Please go ahead.
Thank you, Joanna. Good afternoon, and thank you all for joining us for our second quarter conference call. We will provide some short summary comments on our results and leave as much time as we can for questions. This call is being recorded, and the audio recording will be available on the company's website at empireco.ca. As well, 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; Lyne Castonguay, Executive Vice President Store Experience; and Pierre St-Laurent, Executive Vice President, Merchandising and Québec. 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 actual 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 gaining traction. We are pleased with our results this quarter. We had strong same-store sales, 2 consecutive quarters of positive tonnage, stabilized margins and Sunrise cost savings continue to manifest themselves on the bottom line.Sales momentum continued in Q2. Same-store sales were 2.5%, the highest in 15 quarters. And food same-store sales, excluding pharmacy and fuel, were 3.0%.Internal inflation was 1.3%. Food tonnage was 1.7%. Sales were solid across the country but most notably in Québec, FreshCo, Safeway and Sobeys, Ontario. Customer count and basket size were both up. We saw inflation on food prices accelerate due to tariffs, transportation and produce cost during the quarter. As we have stated previously, we will resist cost increases to the degree possible but are starting to see the inevitable price inflation.We have successfully stabilized our margins. The variance in gross margin rate over prior year is largely attributable to an increase in lower-margin fuel sales and banner sales mix. Our food gross margin held steady. EPS was $0.40, up 48% over last year. Our EBITDA margin increased 50 basis points over prior year due to lower SG&A. We realized these SG&A improvements even after the impacts of store closure costs and headwinds facing the industry. And Mike will take you through this good news cost story in more detail in a few minutes.We are often asked if there's any reason why our EBITDA margin cannot reach a comparable rate to our major competitors. The answer is there is no reason. There will be slight differences due to structure related to real estate assets and the relative size of pharmacy, but we're confident we can achieve comparable margins over the long haul. We're excited about the steady and ongoing advancement we are seeing in our business. But as we ameliorate our execution of results and see tangible short-term gains, we are particularly proud of the moves we have made over the last year to set us up strategically for medium and long-term success. We are very pleased with the progress we're making across all of our key strategic initiatives: Project Sunrise, FreshCo 2.0, Farm Boy and Ocado. We are halfway through Project Sunrise, and this initiative continues to progress exactly as we anticipated: on plan, on time. Again, this quarter, we are more confident than ever in our ability to reach our Sunrise target of at least $500 million and expect to see the vast majority of these costs and margin improvements fall to the bottom line.Category resets drive a large portion of our Sunrise savings and, coupled with improved execution, will position us to win in our stores by ensuring our shelves are stocked with the items that customers want most. As we realign our stores wave by wave over the next year, we will see some slight changes to the brands we carry but no material changes to the layout of the store. These changes may mean some minor disruption to store as with any realigns. We are looking forward to seeing the very beginnings of category reset changes in our stores at the end of the third quarter.The strong progress on our category reset program can be attributed to close collaboration with our supplier partners and the hard work of our team, especially our merchants. We are exceedingly proud of our merchants. We have imposed upon them a significant amount of change, and they've risen to the challenge. They are getting better each day at the blocking and tackling involved in executing as a national food retailer while bringing home the savings on category resets. I should also point out that we are seeing improvements in our stores in terms of in-stock, customer experience and shrink levels. We still have plans to improve our stores, but we are increasingly proud of the efforts of our operators and teammates in our stores. Another of our key strategic priorities is the expansion of our FreshCo banner to the west. We remain on track to open our first 2 FreshCo stores in Winnipeg in spring 2019. Our expansion of FreshCo to the west will allow us to convert some of our underperforming Sobeys and Safeway stores in markets which are better suited to discount and to participate to a greater degree in this high-growth segment.As I mentioned before, our FreshCo stores will have evolved branding that more strongly signals discount and value. We piloted this refreshed branding in 4 of our London, Ontario FreshCo stores in June, and we continue to see extremely positive results and customer feedback.Winning in key urban and suburban markets like the fast-growing GTA, where our market share is frankly too low, is another one of our key priorities for growth. I am confident in the three-pronged approach we are taking to win in these markets. First, our acquisition of Farm Boy gives us a winning format that will allow us to accelerate our growth in urban and suburban markets. We believe we will be able to build on Farm Boy's industry-leading growth, operational and customer metrics and expect to double the size of the business in the next 5 years. We welcome Jean-Louis and Jeff and their exceptional team to the Sobeys family. We look forward to freeing them up to do what they do best.Second, our smarter and higher-return capital investments in our discount and conventional stores will revitalize our existing store network in urban and suburban markets. And third, our Ocado-powered e-commerce solution, which remains on track to launch in the spring of 2020, will position us well to expand our presence in the GTA and beyond.The progress we have made over the last couple of years is thanks to the hard work of my teammates, especially our executive team. I find myself surrounded by a team that is committed to accountability, execution, velocity and innovation. We are making strides in all of these areas. We have great talent at Sobeys, which we are now starting to unleash. And we are very fortunate to be able to continue to attract strong talent. Sandra Sanderson joined us as our new Senior Vice President of Marketing a few weeks ago. Sandra is an exceptional marketing leader with a deep understanding of brand, customers, loyalty and digital. Yan Branco also joined us 2 months ago as our Vice President of Produce Merchandising, obviously, a key area for us. Yan brings with him over 25 years of experience in produce. Given where we are in our transformation, we are extremely pleased with our results this quarter and our overall trajectory. I've always said retail is a simple business: sales, margin, cost and capital allocation. The trick is executing on these quarter after quarter, year after year, and we still have room to improve on our execution.We are putting the foundation in place and gaining traction, but we still have ways to go to extract this company's full earnings potential. So for any of my 120,000 teammates listening to this call, let's not get ahead of ourselves. We still have a long way to go. And with that, over to Mike.
Thanks, Michael, and good afternoon, everyone. Firstly, some additional color on our margins, Project Sunrise and SG&A. Gross margin dollars for the quarter increased primarily as a result of increased sales and would've been higher except for 3 items: first, the closing of the 10 underperforming stores in Western Canada and the associated reduction in gross margin; secondly, pharmacy gross margin was lower due to health care reform and the Alberta air miles inducement ban that was effective September 28 of last year; and third, increased transportation and other costs continued to have an impact, although some of these inflationary increases began to be reflected in the shelf price during the quarter.The gross margin rate was lower than last year, impacted by a higher proportion of fuel sales which carry a lower margin, with the fuel price increasing materially but with a lower margin than last year. The sales mix between banners also had some impact on the gross margin rate as margins vary between discount and conventional formats and franchise versus corporate stores. Overall, our food margins were very consistent with last year and improved from the first quarter.We are halfway through Project Sunrise, and as Michael said, it's on track. As we've mentioned previously, we estimate up to a further 30% of our $500 million target can be achieved during fiscal 2019, with the majority of this in the second half of our fiscal year.As we begin to generate benefits related to our category resets, we expect these to be improved -- reflected in improved gross margin as well as sales.Adjusted selling and administration expenses as a percent of sales was 21.3% this quarter, 130 basis point improvement. We're very pleased with this progress, and a large portion of this improvement reflects the achievement of our Sunrise targets for the first half of the fiscal year.There were also several other positive impacts on SG&A during the quarter. First, we had lower incentive compensation costs this quarter compared to higher accruals in the prior year; and secondly, several more stores returned to consistent profitability in the second quarter. As a result, we were required to reverse additional impairments that the company had previously recorded related to underperforming stores, primarily in Western Canada.This is a good news story. For the remainder of fiscal 2019, at this time, we expect impairment reversals to be immaterial.Minimum wage increases had an effect on the quarter, although we were able to partly mitigate this impact. Due to recent legislation in Ontario passed into law on November 21, we have reduced our fiscal 2019 estimate of the unmitigated impact of Bill 148 on our fiscal 2019.We initially estimated an unmitigated impact of up to $90 million, and we have decreased this estimated impact to be up to $70 million, a net $20 million improvement.Wages included in SG&A were also increased in addition to minimum wage as a result of higher sales increases.Although capital expenditures were lower than last year, we continue to expect total capital expenditures of approximately $425 million for the year based on significant planned activity in the second half of the year. This includes construction of FreshCo stores in Western Canada, rollout of the new FreshCo designs in Ontario and multiple store innovations and improvements in the rest of the country. This capital estimate for the year does not include Farm Boy capital estimates. We will update our estimates to include Farm Boy in the third quarter.The Farm Boy acquisition closed on December 10 and has been set up to operate as a separate company with an Empire structure under the leadership of Jean-Louis Bellemare and Jeff York, who, together with members of their management team, will continue to own 12% of the company. The acquisition was financed through a combination of cash on hand and a new $400 million senior unsecured nonrevolving 2-year credit facility. Farm Boy has significant and continuous growth in same-store sales and EBITDA, which we expect to continue as we seek to double the size of the company in the next 5 years.Cash flow generation continues to be strong. The sustained strength in our sales along with the continuous cost reductions, due largely to Project Sunrise, maintain our confidence that the company will return to its investment-grade rating in the near future.Lastly, on November 20, we pulled romaine lettuce off our shelves in response to a notice received from the Public Health Agency of Canada, linking several confirmed cases of E. coli. We have now sourced romaine lettuce from a different unaffected region, and it is back on our shelves. While this did not impact results for the second quarter, we do expect some impact on gross margins in our third quarter.As we look forward to the second half of the year, we remain confident that our work related to the category resets will be reflected in expanded margins. Our merchants have been in their new roles for a while now and are gaining traction. The risk we identified related to our merchandising is much lower as time has passed. In terms of timing between the next 2 quarters, we are still in the process of finalizing arrangements with all of our suppliers, but based on our store execution plans and our latest view of supplier arrangements, we expect significantly more benefits to be reflected in the fourth quarter of the year, with some of these benefits beginning towards the end of our third quarter.I'll also note that historically, our third quarter has not been as strong as our second quarter.Our most significant risk and focus for the next few quarters is ensuring that we execute on the category reset plans in our stores with minimum customer disruption and cost. This is a great deal of work, and we're relying on our teams in the stores to execute with excellence. We're not yet in the clear, but we are very satisfied with our momentum to date. And with that, I'll hand over to Katie for questions.
Thank you, Mike. Joanna, you may open the line for questions at this time.
[Operator Instructions] And your first question is from Patricia Baker from Scotiabank.
I have 2 questions. We talk about the business on a year-over-year basis when we look at the quarters. But given what you're trying to do, I'd be very curious if you could share with us, if we compare Q2 to Q1, so on a sequential basis, what kind of improvements did you see, what -- where was the progress if we look at Q2 versus Q1 as we proceed through -- into the back half of the overall transformation plan?
Patricia, I think, I'd really point out 2 things. First of all, the momentum that we had in the first quarter related to same-store sales and tonnage improved over the first quarter, and we feel we have some momentum on those lines. Secondly, I think we were fairly clear that we -- while we felt our margins were stable in the first half, we would have preferred that we passed on some of the cost increases into our pricing and felt that we had some compression in our margins in the first half due to that. That has significantly improved in the second half as we started to pass along costs, and that's been reflected in our internal inflation. I'd point to those 2 items as being probably the 2 things that we're most happy about. And of course -- and while we keep saying we're on track with Project Sunrise, that's not a small feat. People are working very, very hard to remain on track and to generate the improvements quarter-over-quarter on a consecutive basis. So those would be the 3 things that I would point out.
Okay. That's an interesting point that you make about the Project Sunrise. A very, very big, 3-year transformation plan, very ambitious to get out at least $500 million in costs. And to date, to be fair, you guys have delivered exactly to everything that you've promised, and as you say, very much on track and on plan. Is there any one thing that you would attribute to the fact that you've been able to do this without, so far, knocking on wood, any hiccups in the execution?
Yes. It's -- thanks, Patricia, it's Michael. I think it's that the company is becoming more and more disciplined and much more process-driven, and that when you do these types of projects and -- then basically, everything we're trying to achieve here, that we do them in a far more thoughtful and planned manner and that we hold ourselves and our teammates accountable for every single deadline and every single number. And if there's any slippage, we get it back on track very, very quickly. And so I think that's a credit to people on this call with me and -- but also to our teammates across the country. But that's what it is. It's just every single day, being able to execute. And that's very difficult for companies to be able to do, and we're getting much better at it.
Okay, sounds like there's a lot of vigilance.
Oh, yes.
Your next question is from Mark Petrie from CIBC.
On the SG&A, you called out a couple of sort of onetime items or nonrecurring items there. What's your sense or estimation in terms of the organic SG&A growth in the business today? And what's your expectation for the next sort of 12 to 18 months?
So we did point out elements of our SG&A, Mark, that we expect to be nonrecurring and which you shouldn't annualize. So you picked up on those. Moving forward, we feel we've mitigated, to the extent possible, most of the minimum wage increases that we can. So we'll -- I think the wage costs that we're seeing in our quarter are probably pretty consistent where we'd expect them to be going forward. Beyond that, we continue to see annualized impacts or positives related to some of our indirect sourcing initiatives that do show up in SG&A. And we are continuing to fine-tune our organizational design and probably expect to see some minimal improvements on that going forward. So I hope that gives you the color you are looking for. We're not projecting a particular target on SG&A as a percent of sales or anything like that. But I think we're stable on our wage line. I think we still see significant improvement in, call it, nonlabor costs in SG&A that we're still getting at with indirect sourcing and probably some fine-tuning on our labor as well -- on our backstage salaries as well.
Okay. Yes, I guess that second point was sort of what I was trying to get at, which is kind of the benefits still to flow through from earlier achievements or earlier progress related to Sunrise. I mean, how much of that is sort of embedded in the business today versus incremental from here?
I think a significant amount is embedded in the business, is the short answer to that. But the elements that we haven't really started to address as a national company, all those natural optimization opportunities that you can generate with a well-functioning purchasing team, improved systems that help you with your processes and just help you make -- help make you more efficient. If you sort of step back and just think about what we've been doing over the last 2 years, we revised our organizational structure, and now we're heavily into category resets. And that's -- those are hard things to achieve, but they've got big returns associated with them. As those are behind us, we're going to put our minds very much to optimizing the remaining structure. And as I said, there's all kinds of purchasing savings that we think we can access. But those are in the future, and we expect to see some of those reflected in SG&A for sure. So after we finish achieving at least our $500 million, we're going to turn our minds to what else we can do.
Okay. And then I just wanted to ask about FreshCo and sort of the pace of rollout that we should think about for 2019 after the 2 initial stores in Winnipeg and also in terms of pace of the renovations or refreshes in Ontario. And then I guess also just any update with regards to your labor negotiations in B.C.?
Okay. That's a lot of questions. So for 2019, as we have outlined, we're heavily engaged in getting our Winnipeg stores on the ground, and we're on track to get those done in the spring of 2019. On labor negotiations in B.C., those are progressing. We're almost complete, and we believe that resolution on that will be achieved in the short term. And we will, obviously, progress immediately with our plans in B.C. Too early at this time to give you a definitive answer on when those stores would land in B.C., but we actually feel pretty good that we'll be in action there fairly soon. And on our rollout in Ontario, our real estate group is in process today and targeting the first stores that we'll be rolling out over the next sort of second half of the year. But we'll update those plans, probably in more specific detail, as we report our third quarter results.
Your next question is from Peter Sklar from BMO Capital Markets.
On the retail food inflation you experienced in the stores, as I recall, I think you disclosed that, 1.3%. Can you talk about -- and then you've talked about that like it was more of a Q2 effect that you're able to pass through costs. How is that unfolding as you exit the quarter? And as you are in the early part of Q3, are you -- does that ability continue as you continue to pass through costs? Is inflation accelerating, decelerating? Any flavor would be welcome.
Yes. Peter, yes, we're -- we continue to monitor and push back on price increases. But at the same time, some of them are merited by our supplier partners and that we're passing on those costs as we said we would.
Okay. And is the level -- is your expectation -- the level, is it about the Q2 level, or it's increasing or decreasing, or it's difficult to comment?
It's about the same.
Okay. And then lastly, on your tonnage. I think you disclosed the tonnage growth was 1.7%, which is quite a robust tonnage number. Obviously, you'll be taking market share with that kind of tonnage growth. I'm just wondering if you can talk about why you're having that kind of success on your tonnage. Is it -- you like your promotional program? Are there other things you can point to? And I know you can't talk about who you're taking share from, but is it coming from regions or certain competitors or it's a little bit here, there and everywhere that you're taking share?
It's here, there and everywhere. It's always hard to -- it's easier when you're not doing well to explain it, I think sometimes when you're doing well. I'd say that in almost every area of our business, we're just performing a little bit better. So the stores look better. There are fewer holes. The teams across the country are in their jobs a little longer, they're getting sharper. But I would say that our flyers are smarter, and they're better presented. And the team there is doing a good job. And -- but it's overall just -- retail, as you know, a million little details, and we're just getting a little better at everything. And there's no -- there's not usually a silver bullet, and that's not here. Just doing our job better. And the other thing I would add, I guess, is that we've been -- all the regions are starting to pull their weight as well. And we're proud of the performance across the country. But you can't have -- you can't be gaining tonnage, you can't be seeing the kind of comps that we saw if -- with too many outliers. So it's just good, consistent performance across the country.
And Michael, how does the west feel to you, given what's going on in the energy? Does it feel a little bit light?
First of all, yes, I mean, for the people in the west, I wish the economy was doing better out there and things were easier for them. But honestly, we haven't seen them. I said that we've seen good sales in Safeway. We're seeing much better performance out west than we have been for some time, which is admirable in the face of what some of the economic challenges that Canadians out there are facing.
Your next question is from Vishal Shreedhar from National Bank.
Maybe we'll just start, given that it's such a major focus for Empire right now, if you can just explain at a high level what these category resets entail? Why they are so significant to the company in terms of margins and sales potential? And what are the key risks associated with them?
Sure. Maybe I'll -- in terms of just providing some of the granular detail or maybe some examples, Pierre could maybe just give some color. But the overarching goal here is to -- having completed our organizational redesign and put people in their jobs and in places that now allow them to have a full vision and full control over the entire country and with one person or team of people now controlling each category on a national basis, we are now using our scale and our improved analytics to reset every single one of our categories based on the strategic plan that each of the merchandisers has put in place for that category. That is yielding several benefits: first of all, improved, simplified and in some cases, more innovative or better assortments for our customers; and secondly, a rationalization and improvement of our supplier base, which has led to efficiencies both in our assortments and cost reductions, as we've been able to negotiate new pricing and new costs with significantly larger volumes at play instead of what the company was doing in the past, which was working their categories and their negotiations on a regional basis. In terms of the risks and progress, a bit of color on that?
Yes. I think the bigger risk is to -- is the status quo. Because we're complex across the country and we simplify our business actually, like Mike said, the risk is more behind us. I mean, because the risk was more associated to the fact that we renegotiate everything, we redo every category in same thing -- in the same time that we have to drive the business. So with the result we've got in Q2, we're really happy to see that we're able to manage that program really well, and the same time, delivering results. So we're in the middle of reviewing every category. The next step is to land in store after Christmas, after a very key period for us. And -- but honestly, in terms of merchandising, the worst is behind us, and we see a big opportunity in the discussion we have with suppliers. And so far, we're very happy with the progress we're making with the plan we're designing with supplier. And then the next step is to land in store. But honestly, also doing -- redo planogram in store, it's a normal course of business. It's just that magnitude will be a bit higher. But we're working really closely with operation to land in store appropriately by waves, so without disrupting store. So that's where we are now. But I think in terms of merchandising, the worst is behind us, and the next step is to land in store.
I guess, given that there have been so many changes at store in such a short period of time, I mean, because you're doing a lot of things at once and I guess you're continuing to do them, have you noticed -- and Michael, you may have alluded to this off the top, but have you noticed improving customer perception of your stores? Do you see the net promoter scores or whatever metrics you track?
So we're not in position to provide statistics on that. But I'd say, the short answer is, yes. But I'm -- Lyne is here, and she's running the operations and she made material improvements in the stores. But maybe she can give you some more color to that.
Thanks, Vishal. We are seeing our scores move in the right direction, and we're very pleased with that. We are monitoring our stores, and it's something now that we are actually keeping top of mind and front of our operators to talk about our customer experience. And making sure that we are taking care of our customers. And then we're looking at their comments, and we're talking to our customers and staying close to the feedback. But we are indeed seeing improved scores, and we're pleased with the progress we're making. As Michael says, we still have some progress to be made, but we're moving in the right direction.
And just a quick one here. Just for our own modeling, so we can model a bit cleaner here. I know in H2, the Sunrise benefits will be weighted towards Q4. But in H1 of fiscal '19, were there Sunrise benefits of any magnitudes that when we think about H2, we should take that out?
Yes. We did have Sunrise benefits in the first half because we annualized the benefits that we generated the year previous. So...
All are incremental benefits?
Yes. Yes, that's right. So certainly, not -- we have incremental benefits in the first and second quarters, and that would be part of the net 30% that we talked about for this year. But the majority of that benefit really is in category resets and will be mostly in the fourth quarter, starting late in the third.
Okay. So I should think of the majority of that 150, not all of it, split towards Q4. That's a fair way to characterize that?
That's right.
Your next question is from Jim Durran from Barclays.
Just interested, you were mentioning that there was one region that was not performing as well as the rest of the chain. I assume that, that might focus to Alberta specifically. Can you talk about what improvements you've made at the Safeway business and the Sobeys business in that market and whether there's additional stuff you can do in that market to try and regain stronger momentum and catch up to the rest of the business? Or is there -- is the economy just too tough in Alberta to expect the business to be able to ramp up that way?
Yes. First of all, there wasn't a region that I was -- that we were displeased with, and certainly not Alberta. But we're seeing a lot of progress, but it's -- across the country, but in that region too, thanks to a lot of things that are going on. But our flyers are sharper. Our stores are much better. If you walk our stores, they are now -- compare to how they were, they're much sharper. And our marketing is better. And I think with Sandra joining the team, that will even get sharper. You saw that we reversed, for the second quarter in a row, some impairments in the west. Frankly, I've never seen reversals in impairments. Usually, you impair something, it's impaired. But that show -- I think that's tangible evidence of the improvement we're seeing in our stores where even stores that we didn't think could recover and see better results are seeing better results from, first of all, the stabilization of margin and also from exciting our customers more and better practices in the store. There's still some work to do to get back the share that we had lost, but we're working hard to accelerate the pace of that. And so I think the west with -- and there's a multipronged strategy, including conversion of some of the stores to discount is one of our actually most significant opportunities for success and improvement. So I am -- as a whole, I'm not going to say I'm pleased because -- but I'd like to see more. But I'm somewhat pleased in terms of the progress we're making, but a lot of it reflects the progress we're making across the whole country.
Okay. Going back to your comment upfront about margin achievement versus peers. Historically, one of the explanations that was provided was that, perhaps, Empire Company's sales per square foot across the country is not as robust as some of your competitors, and so that becomes an impairment in terms of SG&A leverage, et cetera. Would you say that your productivity on average is lower than your peer group, and that's part of the opportunity which isn't part of Project Sunrise specifically in the cost savings bucket is to try and significantly increase your productivity over the course of the next 3-plus years?
Absolutely. I mean, when you look across country in most regions, we have the best locations. We have great assets. And I think as we look forward and we see category resets, which are going to make the store stronger at the end of the day and better execution that we have a real upside to gain in sales per square feet, and that will be -- and that is -- that will really make a difference. So I couldn't agree with you more.And by the way, that's all regional. In certain regions, we have more to gain. And -- but you see a region like Québec, where historically, it's been strong, and it's even getting stronger. So there's ones that are below par that we'd like to get up there. And there are some that are incredibly strong that we still think there's room to gain.
And I know we're probably getting too far ahead of ourselves, but to what degree does consumer brand message and any materially different merchandising strategies play when you get into sort of latter part of next year in terms of trying to capture some of that upside?
Yes. I think that -- I think, as I said, that our brand messaging, our marketing has improved appreciatively, but it's nowhere near where it's going to be a year from now. And we have a lot of good plans, and we have some great leadership. Not only Sandra but [ Tranh ] and the leadership that Lyne brought in while she was double-dutying in merchandising marketing and operations and marketing. Lyne's got a bit more time now. But she's got a -- I think we're on a good path there. And I think there is some -- I'm not going to say what it is, but I think there is some market opportunities that we haven't fully taken advantage of that will connect us even closer to our consumers. And I'm getting more and more pleased and excited about how we're using data and how we're going to use data in the future to be able to serve our customers better.
Your next question is from Michael Van Aelst from TD.
Just back to Project Sunrise. So appreciate the color about being stronger as you get to the end of Q3. Can you give us a little bit more color though as to like the percentage of customers -- or vendors, sorry, that you're negotiating with presently? Are you basically negotiating with them all at the same time for the most part? And will we see the benefits of these negotiations all start quickly into the new calendar year? Or is it going to ramp up considerably throughout next year as well?
The short answer, Michael, is it's going to ramp up. So we are negotiating in, I guess, internally, we call them waves, I guess. Each of them is material. There's 3 big ones and 1 slightly smaller one, so a total of 4. And one of the reasons for that is we can theoretically, I suppose, negotiate with all suppliers at the same time. But we need to manage the operational impact and how we get to the stores. So we have scheduled them over F 2019 and F 2020. And that's why the Sunrise benefits are only annualizing the full $500 million by the end of F '20. So yes, we start seeing some benefits now. And that is slightly earlier than we'd anticipated probably when we started 1.5 years ago. But they do phase in, and they are spread over time.
And I mean, this is the last big bucket of savings, correct? You did the headcount reductions, and you've gotten a lot of the [indiscernible], right, okay.
Yes. Yes, that's right.
As part of Sunrise.
Right. Exactly.
Yes. We're not going to stop.
No, I hope not. And then on Ocado, I know we're still over a year away from the first one opening. But how far along are you in terms of determining where your next locations and when they'll be opening?
We were just talking about that today, and we haven't made a final decision yet. But I think in the next 4 or 5 months or so, we'll know when the timing is and what the next CFC will be.
Your next question is from Chris Li from Macquarie.
Just first question is, where are you guys in terms of implementing initiatives to reduce in-store labor cost with things like self-checkout or electronic shelf tags? And also, is improving your in-store labor cost part of the Sunrise savings? Or are they incremental?
We had -- in the first wave, I guess, of Sunrise savings, we had some immediate benefits that we accounted in the early going related to becoming more consistent with our standards for labor in store, becoming more consistent on processes and improving just some of the efficiencies within our stores. We -- I think we were satisfied at the time that we gained a lot of low-hanging fruit just through becoming more consistent. As we go forward, innovation in our stores through, whether it's self-checkout or anything else, is not really designed to reduce labor. It's designed to delight customers. So we're not -- and I -- and maybe all this talk of cost reduction gives people the wrong impression. The really significant benefit here is improving our sales, as I think one of you mentioned, becoming better from a productivity perspective. And that's going to require innovation and better merchandising. And if self-checkouts are one of the innovations we think about, it's going to be something that makes customer feel better about being in our store. It's not -- we're not going to be "reduce our labor at all cost" company. That's really not the way. We can't shrink ourselves to greatness. We're comfortable with what we've achieved in the first part of Sunrise. We're on to bigger and better things, which is customer experience and getting our resets correct.
Okay. Great. That's helpful. And just maybe on private label, where are your thoughts on that right now? I know next year, you're planning to do something with the program there. If you can give us an update on what you're thinking that would be helpful.
Yes. We're going to make some major changes next year in our presentation of private label, which we think is going to be great for the customer, and it's going to make it far more relevant. And I don't want to tell people who may be listening what those changes will be. So I'm sorry, I can't.
No problem. That's understandable. And maybe just a longer-term question. In my view, I mean, I think there is a pretty clear line of sights to your earnings growth over the next 1.5 years because a lot of the growth obviously will be driven by Sunrise. But it becomes perhaps less clear as we head into fiscal '21 because there'll be other things, the Ocado, and you expand out west. And I can appreciate that we're still a couple of years away, and so it's not easy to really quantify the impact. But longer term, Michael, what do you see as your sustainable earnings power over the longer term? I know some of your peers in the past have talked about 8% to 10% EPS growth. Do you think you can do better than that given the things that you are doing?
It's a bit of a mug's game. I mean, if I said 8% to 10%, you'd kill me because this company has the potential to do better than that. But we have not publicly said what we're going to do on that. I think you've got to judge the progress we have made to date and what your confidence is that we're going to continue to put up initiatives, especially on the top line and continue to take out costs and invest better than we ever have before. I think we don't talk about capital allocation a lot on these calls, but that is one of the places where, especially Mike and myself and the senior team, put a lot of our time in terms of where we're going to invest in the stores, in technology, in innovation, going forward. And so I think that this company is -- I mean, if you think about what our strategy really is, it's -- I'd like to just put it down in really simple terms, execution and innovation. And on both of those, we have a long way to go before we're worried about improvements in the company.
Okay. That's great. And my last quick question, just modeling, I guess, for Mike is, how much -- of the unmitigated minimum wage impact of the $70 million this year, how much of that has already been incurred in the first half of the year? Roughly speaking, is it half or...
Probably a little less than half I would imagine, but close.
Your next question is from Keith Howlett from Desjardins.
Yes, I had a question on the 4 waves of reset. Would you have completed negotiations on wave 1 and are just waiting to land them in the stores in January post-Christmas? Or are you still in the midst of first wave?
The former. We're basically finished wave 1 negotiations and are just going to put them in after our quiet period over the -- after the holidays. And they'll be going in a month or so after the -- at the beginning of the year. So wave 1 is generally complete. And then we're going to start working through wave 2 now.
And when you -- sorry.
So I just wanted to be clear that -- as Michael said, we're going to be going in after the holidays, but they're not all going in at the same time.
No.
So we are spreading all of the categories over a period of time, the first one due to go in beginning of February.
Yes, and when I said we have a lot more process, we have waves, we have tranches, I don't want to bore you with all the details. But there's a lot of precision and planning going into this to make sure that we do this right.
And when you characterize how it's going when you report Q3, I'm just wondering, will you sort of say we've negotiated with 30% of our dollar value of purchases and we have realized x amount of savings? Or how will you characterize the Sunrise benefits?
I think we'll deal with that when we get there. But I think we'll give you a good feel for how it's going, how it impacted our third quarter. I think we'd be comfortable once explaining that. But as I said, because of the timing, a lot of the benefits will be in the fourth, but we'll all be able to give you maybe a more precise update at that time.
Yes. And I mean, just a little bit -- maybe a bit more color. Wave 1 and 2 are the larger waves, and they're pretty close in size to each other.
And the benefit of Project Sunrise in the first half of this year, excluding the annualization of the cost savings of last year, do those relate in any way to reset or they're sort of another group of savings?
No, they're another group of savings. So not all of the Sunrise benefit is reset for 2019. We have the annualized effect of what we did last year, plus some new initiatives on indirect sourcing, for example. So the number that we provided is inclusive of all of those positive effects as well, many of which are being reflected in the first and second quarters.
And then just a question on the management incentive compensation. Was the peak quarter in fiscal '18 the second quarter? Or is there -- like, I guess, it depends on the share price performance, but is there likely to be any further year-over-year benefit this year on that front?
Yes. I think the short answer is yes because we were accruing last year to higher payouts, and that continued all the way through the year. So yes, you should expect to see a positive variance in our third quarter and I think probably also in our fourth, unless we overdeliver on our results and accrue for a higher incentive payment in the fourth. But yes, so all things being equal, you should see some continued positive variances for the second half.
Sorry, and just one last question on Western Canada. We'll have the 2 FreshCos this year in the spring. Would you anticipate the pace would sort of really step up to like a dozen in the next year? Or is it going to be sort of an ongoing ramp of those conversions of FreshCo?
I think we'll give you a little bit more color next quarter because I think you're owed that. But it will certainly be accelerating pace.
There are no further questions. I will now turn it back over for closing comments.
Thank you, Joanna. Ladies and gentlemen, we appreciate your continued interest in Empire. If there are any unanswered questions, please contact me on my phone or e-mail. We look forward to having you join us for our third quarter fiscal 2019 conference call on March 14. Goodbye.
Ladies and gentlemen, that concludes today's conference call. We thank you for participating, and we ask that you please disconnect your lines.