Empire Company Ltd
TSX:EMP.A
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Empire Company Ltd
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Good afternoon, ladies and gentlemen, and welcome to Empire Company Limited Fourth Quarter 2018 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, June 28, 2018.I would now like to turn the conference over to Katie Brine, Director of Investor Relations. Please go ahead.
Thank you, Brittney. Good afternoon and thank you, all, for joining us for our fourth 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 www.empireco.ca. As well, there is 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 Quebec.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, and good afternoon, everyone. On May 4 last year, we set out to rewrite the fundamentals of our company and what a difference a year makes. We have found our bearings. Our first year of Project Sunrise was a success. We have transformed our structure, sharpened our leadership team, stabilized our margins and taken costs out of the business. We also set our ecommerce and discount strategies.In Q4, adjusted EPS was $0.35, up 94% from last year. Adjusted EBITDA margin was 4.1% this quarter, up 80 basis points over the prior year. Against the backdrop of restructuring the company and industry headwinds for the fiscal 2018 year, we have generated 81% more adjusted EPS and an additional 90 basis points of adjusted EBITDA margin.Same-store sales were flat this quarter. Internal and external inflation have slowed down somewhat since last quarter. Our internal inflation landed at 0.8%, which is in line with CPI's food purchased from stores inflation of 0.9%. However, when we take out sales from our related businesses and look at food sales in isolation, comps were up and tonnage was almost flat. That's not too bad given the environment we were facing.We expected challenged same-store sales this quarter. First, an aggressive industry promotional environment. This has been a reality for most of us in the industry, but I think we may have been more affected as we were busy reorganizing and stabilizing our margins and were likely a tad slow in reacting to the increased promotional intensity of our competitors. Second, 2 of our competitors were giving out $25 gift cards. And third, there was a negative 13 basis point impact on same-store sales of winding down the 10 stores that will close in BC. This impact will cease very soon as 9 out of 10 stores will close on July 5, with the 10th store closing at the end of July.As I said before, the biggest challenge we faced in Q4 and continuing into Q1 has been the material organizational restructuring changes we have seen, especially in merchandising. Almost every single person in merchandising is in a new and/or expanded role. It is not reasonable to expect we would be on top of our game through this time. However, this was all expected as we discussed with all of you ad nauseam over the last 13 months. In fact, we are exceedingly proud of our people. In the midst of a great deal of disruption, they grew food comps, improved margins and took out costs in this disruptive period.In Q4, our gross margin was up 20 basis points and 40 basis points over fiscal '18. Our success on the bottom line this year was in part due to a focus on stable margins and it was good to see them grow slightly in the period. Mike Vels and I have taken a lot of time over the past year discussing with you the risks facing our business as a result of Sunrise. Well, we're almost out of that phase. It's not so much risk now as it is a distraction from a day-to-day sharp focus on the business fundamentals. We continue to see that type of distraction in Q1. As we move into Q2, we expect our team to be more settled down from the restructuring. That's the process and the timing we expected when we started Sunrise. And our new structure will now allow us to go for sales, for tonnage and for market share.It's nice to stabilize the company as we have accomplished over the past 18 months, but it's time we go for the big prize, sales. We now have the strategy, tactics and most importantly, the team to take back sales. We are improving our flyer promotions. We are investing capital to refresh many of the older stores in our network. We are closing and will, if necessary, continue to close stores that are underperforming. We are revamping our customer value proposition through our category resets work to ensure that we carry the items that customers want most. We are redesigning our private label brands and enhancing our offering. We're expanding discount to the west to participate in this higher-growth segment, which is important to Canadian grocery shoppers. And we are building the finest ecommerce solution in Canada. We will take back our market share.Our FreshCo expansion to the west is on track. We expect to open our first stores in the west by the end of this calendar year. This conversion to a format that is a better fit to certain markets is one of the keys to fixing our underperforming Safeway and Sobeys stores in the west.Back in Q2, I told you the western FreshCos will have evolved branding, product offering, look, feel and marketing to reflect the learnings we've had in Ontario. The new branding reflects the stronger discount tone while retaining our commitment to quality fresh foods. It includes a change to our logo, our tagline and our store décor. We launched 4 pilot stores in London, Ontario with the new branding on June 21. I was out there on Friday. Two of the pilot stores have a more open concept and they look great, sending a clearer message on value and fresh.We're on track to launch our game changing ecommerce solution in the GTA in the spring of 2020. Ecommerce is a key part of our strategy to win urban centers. We're also excited to see our friends at Kroger sign on as the second North American company to partner with Ocado.Last year, this time, we said we're putting capital spending under a microscope, and we did. We came in at $288 million. And that rigor, along with solid cash flow from operations, helped generate significant free cash flow of $857 million. For fiscal 2019, we will increase our capital spending to $425 million to support our growth strategy.After having spent the last year scrutinizing every dollar of capital we spend, we have now cemented at Sobeys a disciplined approach to capital allocation. We're investing in better projects that generate solid returns for you, our shareholders.As we now look to the next phase of our transformation, we are sharpening our leadership focus. A few weeks ago, I announced a number of key changes to our executive leadership team. This change has placed strong leaders in key operations and merchandising roles, create a truly national merchandising team and build Empire's ecommerce and discount leadership for the long term.Most importantly, I personally felt that putting Lyne Castonguay and Pierre St-Laurent in their new roles would make us more aggressive and act with greater velocity in improving our store sales and promotional sharpness. Lyne, our EVP of Store Experience, is a passionate leader who will deliver an exceptional retail experience to our customers. Pierre, our EVP of Merchandising and Quebec, is a results-oriented leader who will bring best practices from our strong Quebec business to our now national merchandising team.Mike Venton, one of the most experienced discount leaders in Canada, will focus on running our FreshCo business in Ontario, while Rob Adams leverages his experience launching FreshCo in the west. Finally, Sarah Joyce, our new SVP of Ecommerce, joined our team this week. Sarah is a strategic new world retail leader. We now have the right people in the right seats to drive growth.Today, we announced an increase in Empire's quarterly dividend per share from $0.105 per share to $0.11 per share, commensurate with our significantly improved cash flows and our improving confidence in our business. This marks the 23rd consecutive year of Empire dividend increases. I am proud of what we have accomplished over the last year. We are laying the foundation for our future as we shift from a position of defense to one of offense. The best days of Sobeys are yet to come.With that, over to Mike.
Thank you, Michael. Good afternoon, everyone. I'll focus some short remarks on a few key areas: Sunrise progress, cash flow and thirdly, transactions this quarter that affected our tax rates and earnings per share.Firstly, some comments on the Sunrise transformation program. Project Sunrise continues to be on track. We booked the final costs of our organizational redesign this quarter, including consulting fees and final provision for severances. We've expensed $23.5 million this quarter and a total of $209 million in fiscal 2018.For the first year, Sunrise benefits are mostly reflected in our selling and administration expenses. For fiscal 2018, we realized about 20% of our total $500 million target. SG&A as a percentage of sales was 23.4% for the quarter and 23.5% for the full year. Included in SG&A are higher incentive accruals for our entire company including our store network, reflecting the company's sharply increased results and also onetime costs mostly related to Sunrise. Excluding the onetime costs, SG&A for the year represented 22.4% of sales, a 50 basis point improvement over last year even after the effects of minimum wage increases, which are also reflected on the SG&A line.The incentive cost that I referred to are expected to normalize next year. We would not normally highlight an item such as this, but the year-over-year effect is relatively higher because incentive payments in fiscal 2017 were quite low due to poorer results, and this year because of the good outcomes are higher than normal this year.Reflecting the progress on Sunrise and also improvements in stabilizing margins and the positive effect of increased sales, adjusted EBITDA margin increased in fiscal 2018 by 90 basis points to 4.2%, which we believe is a strong result considering that it also includes the early impacts of minimum wage increases.For fiscal 2019, we are focused with our new structures in place on continuing the early traction on operational improvements and starting to implement category changes that are expected to lower costs and improve sales through better category performance. We believe that we can achieve approximately another 30% of our total $500 million Sunrise benefit before taking account of headwinds such as minimum wage and drug reform during 2019. These incremental benefits would mostly be realized later on in the fiscal year as that is when we will be implementing the first rounds of category changes and finalizing the initial rounds of negotiations with our supplier partners.So at the end of fiscal 2019, 2/3 through Sunrise, we're estimating that we will have achieved about half of the Sunrise target, confirming our prior comments that the third year is when most of the benefits become realized.Secondly, there are a few transactions and impacts that I draw your attention to for the quarter. In the fourth quarter, we sold 11 properties to Crombie REIT, resulting in a pretax gain of $13.2 million, which is included in other income in the food segment. And that increased our earnings for the quarter by $0.03 per share. Previously, we told you that we had announced the closure of 10 underperforming stores in British Columbia. The wind-down of these stores, as Michael said, had a 13 basis point impact on our same-store comps. And as previously disclosed, we recorded $21.2 million in expenses related to these closures in prior periods, including asset and inventory write-offs and severances.The effective income tax rate for the quarter of 13.7% compared to 4.2% last year. In this quarter, taxation expense was impacted primarily by an internal reorganization that the company undertook to simplify our corporate structure. Excluding this adjustment, the effective tax rate for the quarter would have been 23.5% and earnings per share would have been $0.03 lower. The effective income tax rate for the full year was 23.8% compared to 19.8% last year.For fiscal 2019, excluding the impact of any unusual transactions or differential tax rates on property sales, we're estimating that the effective tax rate for the next year will be between 27% and 29%.And finally, some perspectives on cash flow and capital investment. For the quarter, free cash flow was $350.6 million, a strong increase from last year. Even after excluding the sale of those properties to Crombie, our free cash flow increased by $92 million as a result of strong earnings and lower capital investments.As Michael noted, we're anticipating our investment levels for next year to increase up to approximately $425 million. This will include approximately $30 million for launching our ecommerce solution in the GTA and $40 million for the expansion of our discount banner to the west. About 40% of our total spending will enhance and renovate existing stores to improve our brand image and customer proposition as we turn our focus towards increasing sales and market share. We are currently estimating that net square footage for Food Retailing will be flat to less than a 1% increase in fiscal 2019.As the fiscal year comes to an end, our balance sheet strengthened considerably driven by consistent operating cash flow improvements and cash and investment controls. Liquidity continues to improve and all of our significant credit metrics are moving in the right direction. This supports our expectation of reestablishing the company's investment-grade credit rating over time.As we all know, minimum wage continues to be an impact in the retail industry. This quarter, we had the full impact of minimum wage and 1 month impacted by the wage parity element of Bill 148 in Ontario. We are monitoring ongoing developments and continue to work to develop plans to mitigate the full year impact of minimum wage and other Bill 148 increases that will arise in fiscal 2019.In summary, fiscal 2018 was a solid year. We're pleased with our results to date and our traction on the Sunrise benefits. With that said, in Q1, we are up against a tough comp of Canada's 150th and our 110th anniversary. We're comping our first better quarter of earnings per share last year. And there's still a significant amount of work in front of us as we continue to make strides in returning the company to its full earnings potential.With that, I'll hand over to Katie for questions.
Thank you, Mike. Brittney, you may open the lines for questions at this time.
[Operator Instructions] Your first question comes from Irene Nattel from RBC Markets.
Michael, in your prepared commentary, you said that you guys are now going to be shifting from defense to offense. So what does that playbook look like for those of us who are outside in the marketplace? How should we be thinking about you coming to market? Just really how does that all play out?
Well, I'll answer as much as I can without giving away our entire playbook to our competitors. But I got to tell you, in the first 16 months, we had to get set in terms of our infrastructure. We said you can't build on sand. With the work we've done in taking out costs, restructuring our company, absolutely sharpening our focus on running a retail organization, especially a grocer as big as we are. We have made immense and actually probably faster than I would have anticipated improvements. We couldn't really do the kind of things we want to do in terms of exciting the customers and going for sales in a smart manner. And it's always going to be in a smart manner. And now with the work we've done in terms of sharpening our, for instance, our flyer focus in terms of putting a new team in place, in terms of the people we changed a year ago, so most of them being in their role longer time. We can now do all that. So we're going to improve our flyer promotions. We're really going to invest capital in some of our stores which, touring so many of them across the country outside of Quebec, are getting too tired, some of them. And I really think that we can do a good job and apportion our capital to be able to get better returns and better sales out of those stores. The category reset work that we talk about a lot as part of Project Sunrise is not just a cost cutting or a winners and losers in terms of our supplier partners. The big prize at the end of the day, in addition to the costs, are that we are going to be, over a period of time, smartly resetting our stores. And we've been obviously doing work for over a year now in terms of what categories we want to expand in, which products we want to accentuate. And you're going to be seeing over the next 9 to 12 months significant changes in terms of exciting customers in our stores in terms of our categories and our products. I really like the work, although it's not all complete yet in terms of what we're doing in private label. We're at a place where we can make all sorts of changes. But I always go back to, we're doing all these things. What I'm seeing as I tour stores across the country, as I speak to our merchants, what we're seeing is just a company that is getting back to, as I said at the beginning, we're getting our bearings in terms of being able to run a great retailer. We're not where we will be, but there's significant improvement over the last year from what I've seen in everything we're doing, in the way we measure our business, the way we question our business and in making continuous improvements. So this is the time now. That's what we mean by going from defense to offense. We had to get ourselves set. That doesn't mean that we don't have a few defensive plays still to go, but we're not going to just continue to wait until everything is in place. I think we can be far more intelligent on how we serve our customers and grow sales in a smart way and take back that market share that we lost.
That's helpful. And can you also just talk a little bit, you alluded to sort of maybe not being on your front foot with regard to some of the promotional activity in the marketplace. What you're actually seeing in the marketplace and where you think you maybe sort of gave up a little bit of ground?
Yes, sure. And all of this was, look, we don't ever want to give up market share. And by the way, we didn't lose market share on food, we held it steady. But what we saw -- and we're now on top of our business a lot more than we were a year, 1.5 years ago -- is that because we were going through Project Sunrise and we had so many people in new jobs, that in certain areas of the country we thought that our ability to offer the kind of products, especially on the front page of our flyers, and to be watching our competitors, I said it before, we were a tad slow. And I think that's extending until almost today. From right now, I have the confidence, where Lyne has taken our merchants and where Pierre is going to take them as well, that we are quite cognizant of what's going in the market. And we will, as I say, in a smart way, defend and grow our market share. I also am becoming more and more pleased, although we have a long way to go in terms of the handoffs between merchandising and operations to make sure that we're executing on many of our great programs in merchandising and marketing. And that was one of the reasons to put Lyne over in operations was that she had such a great grasp in terms of merchandising and marketing to be able to translate that into the stores and to be able to communicate that to the stores. Okay. Lyne's not a miracle worker. She hasn't fixed all that now, but she's getting at it.
Your next question comes from Jim Durran from Barclays.
Probably following along the same track, just wanted to sort of talk about magnitude of impact in terms of the changes you're going to bring to the market in your new fiscal year. So first of all, on stores, like how are you planning on approaching this? Is there a number of things you're trying to do across a broad swath of stores? Are you trying to do like a prototype store and see how that traction takes place and then roll those initiatives out? So like how are you planning on approaching what you see as the Sobeys of the future?
Well, Mike, start and then I'll take over if there's anything you haven't said.
I think the easiest way to look at it, Jim, is that we have a necessity to improve our performance and our stores on a number of fronts. So at the most basic level, there's a very significant amount of refreshment and brand improvement that is probably not as significant investment per store, but where we need to and will invest across the network in a relatively short period of time. Combined with some of the work we're doing on our categories and also our strategy around where we want to win in some of the other areas of the store, there's fixture redevelopment and capital changes and that sort of thing that over the longer term we will incorporate throughout the network. That is more capital, probably requires a bit more advanced planning, and we'll get to that over the next several years.
Yes. I think in the shorter term to medium term, Jim, you're going to see getting the basics right in the store is going to be key. But we are also starting work in -- you've known me for a while on -- I feel that we can make our stores, many of our stores, some of them are really good. Some of our stores are not as exciting as they can be. That there is a [theater] experience, you need to be a great retailer and a great grocer, can be sharpened. And we've tasked the team to be able to do that. And since you know me, and it'll be a little longer until we do that, but I want to see some lab stores where we're trying different things that we can extend across all of our stores across the country.
And is that investment spend skewing to any one market or is it broadly distributed?
No, it's not, except that the Quebec IGA stores would be probably in need of less investment on a pro rata basis, but the rest of it would skew right across the country.
And will there also be sort of a noticeable marketing initiative when you feel like you've got enough stores that are now sort of road ready?
Absolutely.
And do we have some idea about time frame that you're able to disclose in the public market?
No.
Your next question is from Vishal Shreedhar from National Bank.
Michael, in the past, you had indicated you had several key priorities. One of them was fixing the west. Just wondering where you are on that and maybe some comments on the backdrop, the economic backdrop in the west and how you see that helping your business, if at all.
Thanks for the question, Vishal. Look, it's a multipronged strategy. And we're doing what we said we would do to fix it. And I like what we're doing. I'm becoming increasingly confident. We said we got to close underperforming stores. We have 9 closing next week, with the 10th closing at the end of the month. And if necessary, and we haven't identified those yet, we'll continue to close any stores that we don't think will be strong enough in the future. A key portion of this strategy was to take stores which are better for discount market and convert them. And we believe that there's white space in the west for what we're doing, FreshCo 2.0, and participate in this higher-growth segment. And as well, we've increased our local product offering out west. So I think we made some really good gains out there on that, although it's still a ways to go. And in addition to all that though, as I've noted, a lot of the things we're doing across the whole country are going to benefit the west. We're improving the flyers. We're investing capital. We're revamping our customer value proposition through the category resets. We're redesigning the private labels, enhancing our offerings. And we're making changes in terms of how the operations team functions and empowering our stores more. So multipronged, like the progress, wish it was faster, but we're on the right track.
Okay, wonderful. Maybe this isn't a question that you can provide much color on. But as you look at your business, I guess my read on it is Quebec is pretty strong, but where would the most upside be for improvement? Just if you can give us some broad -- is it the west or is it Ontario?
Mike, do you want to handle that?
Sure. I'm having a little trouble figuring out maybe exactly how to answer because you got to look at relative weightings. One of our largest, if you want to call it, regions is, of course, in the west. Yes, you referred to Quebec, which is significant as well. So Quebec does very well. It's properly managed and a relatively decent improvement there. Clearly moves the needle because it's a big business. At the same time, our Western business is very large and is underperforming. So there we have the double impact, if you want to call, the large business that has lots of opportunity. And when we get that business back to its full earnings potential and the culmination of that significant improvement and the fact that it's a larger business, I think you would probably have to say that at least over the medium term that's where our most significant potential improvement will come from.
Okay. And just on that topic, given that Empire's challenges emerged when it acquired Canada Safeway coincident with the declining oil price and declining consumer confidence, is it too far of a jump to say that when the consumer confidence strengthens, one should anticipate the Western Canada business starting to get some benefit from that associated with more stably higher oil prices for the moment?
I mean, I'm not an economist, but I think that any improvement there would be most welcome by us and all of our competitors. And also, I think that there would be a slight shift probably away from discount, a little bit better for conventional, which for Safeway stores would be a good thing. But I can't pick the price of oil. And we're going to make all these changes. And if we get some wind in our sails, good for us.
Okay. And just the last one here, switching gears a little bit, inflation. Industry inflation seems pretty low, a bit surprising to me just given all the cost pressures that grocers have to face. Do you have any comment on that? And more particularly, is that reflective of irrational competition in the marketplace?
I'm not sure it's reflective of irrational market competition, but the markets are definitely very promotional. Nobody's willing to give up shares. There's a high level of promotion across the country. I'd say that's probably having an impact. So beyond that, I'm not sure I'd point to any particular theme or any other particular reasoning.
What we're seeing though is produce is a little less inflation than we might have thought, but that'll be the only area to point at.
Your next question comes from Mark Petrie from CIBC.
Wonder if you could just comment about sort of the operational improvements that you've seen in the business to this point. And I guess specifically, EBITDA dollars are up sort of a little bit over $200 million in fiscal '18. Sunrise is about half of that. Some of it's from sales improvements. But in your view, what are the big drivers of that other bucket? And as we look forward into 2019, what do you feel like are the incremental opportunities for margin expansion beyond the savings from Sunrise, net of the other headwinds that you flagged?
So I think we've done a reasonable job in 2018. Michael would probably did a very good job of stabilizing margins and being smarter about how we promote. It's had a stabilizing and a strong impact on many of the improvements that we've seen, both on the sales line and the margin line, particularly in the west. So that's been very helpful for us in 2018. As we move forward to next year, you outline the operational improvements. I really do have to just emphasize again that the work we're doing in our categories does result in improvements in costs and cost of goods sold. And clearly, we're going to be very sharp on that. And the fact that our suppliers will be participating in larger categories, they'll have bigger opportunities. We are, for sure, going to be looking for lower costs in our purchasing and in our procurement. But at the same time, the thing that we're very excited about as we reset and relook at all of our categories on a nationwide basis is our category management is going to be better. That doesn't entirely result to cost reductions. It's also going to drive margin enhancement and higher sales. And we're pretty excited about that. So I wouldn't underestimate that potential impact as we get our categories right and our merchandisers start to find their feet and have more miles in the saddle.
Okay. Is it fair to say that those opportunities are mostly material in the regions where your business maybe hasn't performed at higher levels, so Ontario as an example?
I'd say, I'd look at improvements right across the entire country. Quebec will benefit from the consolidated categories as much as the rest of the country. But yes, they would be areas where we haven't been as quite as sharp in our merchandising where we'll be better. And Quebec has been very good. Other regions, maybe not so much on the merchandising side, but I'd say the improvements will be across the country.
Okay. And I guess just one follow-up. With regards to the timing of the savings from Sunrise in fiscal 2019, what's the timing of the non-merchandise procurement savings? Is that pretty much spread throughout the year or is that also part of the second half weighting?
No, we'll annualize the organizational savings, of course. On the operational savings, which you're referring to, those are benefits that we've been accruing through '18. And we expect that number to keep increasing as our strategic sourcing group gets more traction and we add more addressable spend and we just become more entrenched in the business. So I see those increasing on a fairly consistent trend all the way through the period and would not be lumpy or skewed towards the back end.
Okay. And then just one clarification question. With regards to the same-store sales result in the quarter, when you called out sort of excluding related businesses, could you just talk about the performance of the pharmacy business and the impact that, that had on same-store sales?
Our pharmacy business was impacted by some of the challenges we had in the west, of course, because our pharmacies are all in-store in the west. There was certainly an effect, a deflationary effect on our scripts as a result of no longer being able to incentivize customers with AIR MILES in Alberta. And of course, we've had the early beginnings of the drug reform. So the combination of all of those had a market deflationary effect on our pharmacy sales to the extent that we felt we needed to call it out and provide a little more visibility on our food grocery sales.
Your next question comes from Chris Li from Macquarie.
Just a few questions from me. First, you called out food tonnage as being stable in the quarter. I was wondering if you can tell us what the tonnage was like the previous quarter. Just want to get a sense if there was any sequential improvement in food tonnage during the quarter.
It was a little better this quarter than the last quarter.
Got you. Okay. That's good. And then just on the savings for Sunrise, can you give a sense of what is the split between the cost of goods sold and SG&A expenses for this year?
When you say this year, Chris?
So I meant for fiscal '19 as you guided for, I guess, up to $150 million of incremental cost reduction from Project Sunrise, more from a modeling perspective, how much of that would be seen in cost of goods sold and how much of that would be seen in SG&A expenses?
I'm not sure I can give you a great split right now. If I was going to give you a directional number and it is absolutely directional, I'd probably say maybe 40% in cost of goods sold, but that would be very directional. That reflects the fact that towards the end of the year is where, as I mentioned, the category improvements, which should mostly show up in cost of goods sold or skewed towards the back end. And so that's my basis for giving you that percentage split.
Okay. No, that's helpful. And on your capital expenditure, I think in your opening remarks, you called out $40 million will be spent on expanding FreshCo to the west. I guess based on your previous guidance that it will cost about $4 million per store, I guess that would imply there's roughly 10 expansion that we can look forward to in the fiscal '19?
Yes. That wouldn't imply that we're opening all of the stores in '19 because the spending and the investment begins before that. But yes, that would be a pretty good estimate.
Okay. Great. And Michael, can you give us maybe a sense of the labor negotiation out west, any update that you're able to provide?
The ones out west you're referring to?
Yes, yes.
Sure. Well, let me first say that, we are currently at various stages of negotiations with the unions in the west. And we need to make sure -- what's our bottom line, to make sure that the stores in the west are viable, profitable and that we're playing on a level playing field. So I don't think we're asking too much to be playing on a level playing field. We have reached that level with mutually beneficial agreements in Manitoba and Saskatchewan. And we're still working out the deal in BC. And I'm confident we'll come to a good accommodation out there. And these things take a little time, but they're worth it because that's a key component, as you know, of our business. And so we take this very seriously. But I like where we ended up in 2 provinces. And I think we'll like where we are in BC as well.
And how about Alberta? Is that also on the table as well or no?
No. Right now, we're just in conversations with BC.
BC. Okay. And my last question is just with respect to the tariffs that are coming on July 1. I know there are some that are food product-related. Any impact, material impact you expect from a, I guess, consumer perspective? Will we see prices go up because of that? Or just any comment on that would be helpful.
That's very hard to call because it's a fluid situation. Our position at the outset is, we'd rather not see our consumers and our customers pay more. So our first response as manufacturers attempt to push tariff cost increases to us will be to resist them and not accept them. Or alternatively, and better still, ask them to manufacture in their Canadian locations. If they're unable to do that and for some reason we have to continue to list their products because our consumers want them, any cost increases ultimately would have to be reflected at the price at retail. But our view is, is we need to find alternatives. And we're not going to easily pass the tariff price increases on to our customers.
Your next question comes from Peter Sklar from BMO Capital Markets.
First, I just wanted to clarify what you're saying about the grocery comp. So I think you're saying, if you look at the comp, you carve out the pharmacy and you carve out wholesale, that tonnage is flat and you had some inflation. Is that what you're saying?
Yes. That's right.
And Michael, can you quantify the level of inflation you're seeing or saw?
Yes. We saw 0.8% inflation in the past quarter that we're reporting on.
Okay. I understand that number now. Lyne, a question for you. So Michael and Michael have been talking at a very high level about the changes that are going on. But you as the chief merchant, could you maybe describe how the merchandising strategies have changed, the promotional and flyer strategies have changed since the new management came on and since you've become the chief merchant of the company?
Wow, it's night and day. Thank you for your question. It has been. Look, the fact that the team is now a national organization working as a functionally led business is obviously very different than where we were before. And we have also looked at how we can consolidate our go-to-market strategies in 2 ways. First is around product portfolio and portfolio strategy. And ensuring that we're all aligned on the categories that we want to win in, and we want to focus in and then those that we really actually want to create traffic in our stores, et cetera. So we took the last year to focus on that for all of our formats. And then we're also working obviously, as we've talked about, on our marketing and our flyers. From a marketing perspective, we tend to really focus on traditional approaches from a marketing perspective or traditional challenges or channels, should I say, which is really, we're very flyer-driven. And we're trying to actually do much more from a digital perspective and balance that portfolio of how we go to market to our customers, utilizing the data we have from our loyalty program to cater and customize offers to them, to our customers. So it has been a year of transformation on that end. And now that we have our category merchants in seats since March 5, we're actually working really, really well together end-to-end to focus on starting with the category strategy, all the way to the store strategy and how we want to present product to our customers. And you'll feel that even more in our resets. Very, very proud of the team. And we're looking as well from a marketing perspective to consolidate flyers. And we had a lot of different formats, different drop dates. We've actually changed our flyer start date to be on Thursday in all the lines. And so just little things like that has been very transformational to our business and to alignment and to our results. But there's so much, I mean, I think I could talk for the next hour, which I won't. But the team has done a phenomenal job so thanks for that.
And aren't a number of your merchants located or relocated in Stellarton, is that correct?
No. Actually, what we did was, we wanted to make sure that we had a cross-functional team in various locations. So the grocery team actually is in Stellarton. Our fresh team is in Tahoe. And we also -- I'm sorry, yes, Mississauga. And we do have some teammates in Quebec as well. And then we actually placed our field merchandising team for all of our local sourcing in Calgary. So the merchandising team is really, really spread across the country.
Okay. And I guess what I'm questioning is Stellarton. Isn't that a little awkward for suppliers to travel to Stellarton or they just don't travel there?
We're a $24 billion -- one of the biggest retailers in the country. We are the second-biggest grocer. We are proud to be in Pictou County. And they will make that trip. And I got to tell you, it's a great place to go. You should actually holiday there, Peter. But we have had no negative to our face problems with having people get on a plane and go visit a portion of the country which is our home, so no. And if they don't like it, that's the way it is anyway so no problems.
Okay. And then just lastly, I have a question on Safeway. As I recall, one of the issues related to the difficulties at Safeway is the strong club card that their customer base really liked. So the club card is gone so I assume you still -- your AIR MILES there. And like how have you done with respect to loyalty and in terms of securing data versus the club card and consumer acceptance of the new loyalty program? And what are your intentions there?
So this is Lyne. Our AIR MILES program transition has gone well in the west. We do measure our penetration by province and by format. And we also measure on-card and off-card programs and transactions. And we have been doing, honestly, really well. And it's great data that we're also utilizing. If you have our mobile app, for our customers, we actually do customized offers for them on the app, which is a load-to-card model through AIR MILES. So not only do we offer them promotion -- we cater promotions to their buying habits based on what we see their card transactions to be. So they get that on our load to card or our mobile app in Safeway in the west specifically and they get extra miles as well through promotional activity in the store. And we know for a fact that they like it based on penetration of swipes. We know for a fact that they like it in the west. So I think it's been good.
Your next question comes from Michael Van Aelst from TD Securities.
It's Evan in for Mike. Just wondering, can you talk a bit about what you're doing or what you plan to do to mitigate the $40 million impact from health care reform?
Well, we'd do anything we can within the confines of the business, which frankly the business -- probably we're doing anyway. Making sure that the mix of pharmacists and technicians is correct, being more efficient in our systems, finding ways to take cost out of the business. But that's what a well-run company would do anyway. Beyond that, this is a direct impact on pharmacy business' profit. So there's very little over and above normal good management that we can do to change or materially impact that number.
Okay. Great. And I guess my last question, with modest inflation and the headwinds you're facing on health care reform and minimum wage hikes, do you think you'd be able to grow earnings this year if you didn't have the incremental benefits from Project Sunrise? That's for fiscal '19 I'm talking about.
Well, I don't think I'm going to speculate on that. We're paid to improve the earnings of the business. So I guess, hypothetically, if we didn't have the opportunity of Sunrise, we'd find a different way.
Your next question comes from Patricia Baker from Scotiabank.
Michael, in your opening remarks, you interestingly referred to now that you're on more firm footing, it's time to go after the big prize which you described as sales, share, tonnage. And if I recall back a year ago when you first launched Project Sunrise and you were very careful to caution us all that -- that everybody was very worried about market share and sales, but that eventually you would get there, but there's a lot of stuff that they had to do, foundational work first, before you attack sales. It sounds a little bit today like maybe I'm recalling things differently, but sounds like you might be enthusiastic about having plans in place to get at the sales a little quicker than the original plan. So I'm just curious if that is the case? And then secondly, we've been pointing to and Lyne in one of her answers sort of got at this a little bit, but you're pointing to -- there's going to be changes to flyers, changes to private label. There's going to be store renovations and category resets. Does that all come together at one time or do we phase these in? Is there a phasing of when the flyer will be done, when private label will be done? What's the order of those things?
Yes. I'm going to let Lyne answer that, but it is in waves, obviously. We got to make sure we do it in the proper way. To answer the first question before I turn over to Lyne, yes, I think we're feeling more confident. That doesn't mean every day isn't a trial or that we're anywhere close to where we should be. But I'm glad you were listening. I appreciate that. But this was a process. And the first process was to stabilize margins. I don't want to be with a company that can't control its margins and can't control its business. Part of that was to put in place process disciplines and systems that were superior to what we had, had before. I feel that we are on a good trajectory on that. And then it was to see how we could take cost out and restructure our organization from a regional to a functional structure, which is incredibly difficult. And I am very pleased at the progress we're making. The next was to assess all of our team, from the top down as to whether we had the team that could not only stabilize margin, take out cost and restructure and lead, but could be innovative and grow sales and understand how to balance sales and margin and costs and capital. And I think we're getting there. I'll just say, and I just want to -- you know me, I'm going to temper expectations a little bit. This is not a, you suddenly go off and your sales are great. And I don't want to say that. I said that in Q1, which we're currently in, we're still in the midst of a lot of this heavy lifting. But my confidence level, Mike's confidence level, all of our levels of confidence are higher today than they've been in some time, not because I'm trying to tell you that I'm seeing things that you wouldn't be seeing, but because we get to see on a daily basis the improvements we're making and the changing culture and the more accountable culture we're putting in, results-oriented, and the fact that not doing well is not appropriate. And that winning is the only thing -- winning within the rules and winning in the right way with our values is the way to go. So yes, we're confident, but we're still now in the middle of a quarter where we are still transitioning. And as we get into fiscal '19, then to '20, I think we're putting ourselves in a place where we have the most room to improve and we will take advantage of that.
Okay. That's very helpful, Michael. And I'm glad you brought up the point about culture because that's one of the critical underpinnings of being able to execute and get stuff done. So I'm certainly getting the impression that you feel that the cultural journey is very well underway. And that's probably what's permitting you to be, I know, cautious, but also more confident that you're going to be able to get to where you need to get to.
Yes. I mean, we know how the movie is going to end. We're going to do real well. It's just we got to get to that. And then sorry, Lyne, over to you.
No, it's okay. If you still want me to answer the timing?
I do. I do. I do.
Okay. So let me take it and give you 3 quick answers. First, resets. Resets are being done in 3 ways. And you will start seeing reset impact to our stores more towards our Q3, Q4 time frame for the first wave of product. And then the second wave of product, we will see it right after Christmas. The third wave of product, we will actually have negotiated everything with our suppliers. And we'll start seeing it, the transition into our stores, around Q1. So that's specific to resets. Around flyers and flyer improvements, I would say 2 things. First one is current flyer format. As I talked about, we aligned on just when the flyer drop dates were going to be. Michael and Mike touched on the improvement in our offering, but also what we are doing. And you've seen a glimpse of that this past weekend and the upcoming weekend for Canada Day is, we've actually done a better job at aligning offering and store excitement to create theater in the store, as Michael talked about. So I think we're excited about that. And that's given the same format of our flyers, changed a little bit. And then the third part is around the harmonization of the flyers and the reduction in format or the reduction in number of formats, not reduction in format, no, in number of formats. We have a road map. And that you're going to start seeing that in the fall. And so we've actually tried to make sure that we were looking at workload management and transition and what we could handle to do it accurately and then not impact the stores too much as well from a workload project management perspective.
Keith Howlett is now with Desjardins.
Just had a question on square footage growth. You talked about 0% to 1%. You've got 10 stores closing in BC. And I guess of the 11 you sold to Crombie, 2 of those, I presume, are closing and that you're not leasing them back, if I'm right there. So we have 12 closures. So I'm just wondering how we get to positive square footage growth.
So just 2 things, firstly, the stores in Quebec, you're correct, are closing, but we hope to -- sorry, did I say Quebec?
Yes.
Sorry, just about to start a rumor there. So no, the stores in the west, of course, are closing. We do have a few new stores coming on. And as Michael mentioned, we also plan to be in market with some new FreshCo stores this year. But on the Crombie sales, that's a financing structure where we sell the stores to the Crombie REIT, but then we're leasing them back from the Crombie REIT on a long-term lease basis. So those stores remain in our sales and in our same-store sales.
But you're only leasing back 9 of them, I thought?
Are you talking about the 2 that we won't be? Yes, those are 2 other properties that we sold off to them. They have a minimal impact on our square footage.
Thank you. I'll now turn the call back over to Katie Brine.
Thank you, Brittney. Ladies and gentlemen, we appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by phone or e-mail. We look forward to having you join us for our first quarter fiscal 2019 conference call on September 13. Goodbye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.