Metro Inc

TSX:MRU

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Metro Inc. 2022 First Quarter Results Conference Call. [Operator Instructions] Also note that the call is being recorded on Tuesday, January 25, 2022. And I would like to turn the conference over to Sharon Kadoche, Manager, Investor Relations and Treasury. Please go ahead.

[Sharon Kadoche, Senior Advisor of Investor Relations & Risks]

Thank you, Celine. Good afternoon, everyone, and thank you for joining us today. Our comments will focus on the financial results of our first quarter, which ended on December 18. With me today is Mr. Eric La Fleche, President and Chief Executive Officer; and Francois Thibault, Executive VP and Chief Financial Officer. During the call, we will present our first quarter results and comment on its highlights. We will then be happy to take your questions. Before we begin, I would like to remind you that we will use in today's discussion different statements that could be construed as forward-looking information. In general, any statement, which does not constitute a historical fact, may be deemed as a forward-looking statement. Expressions such as expect, intend, are confident that, will and other similar expressions are generally indicative of forward-looking statements. The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy and our annual budget as well as our 2021/2022 action plan. These forward-looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks, known and unknown, as well as uncertainties that could cause the outcome to differ materially. A description of these risks, which could have an impact on these statements, could be found under the Risk Management section of our 2021 annual report. As with the preceding risks, the COVID-19 pandemic constitutes a risk that could have an impact on the business, operations, projects, synergies and performance of the company. We believe these statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking information, except as required by applicable law. I will now turn the call over to Francois.

[Francois Thibault, Executive VP, CFO & Treasurer]

Thank you, Sharon, and good afternoon, everyone. For the quarter, total sales were $4.317 billion, an increase of 0.9% over last year and 7.1% when compared to the first quarter 2020. Food same-store sales declined by 1.4% for the quarter, but grew by 8.5% on a 2-year basis. Pharma same-store sales were up 7.7%. Our gross margin stood at 19.9% of sales versus 19.7% for the same quarter last year, led by strong performance in pharma. Operating expenses were down $7.4 million year-over-year and represented 10.1% of sales versus 10.4% last year. The lower level of operating expenses is mainly due to a reduction in pandemic-related expenses, which stood at $28 million last year. Operating expenses are up 4% when compared to fiscal 2020. EBITDA for the quarter totaled $424.1 million, up $24.9 million or 6.2% when compared to last year's EBITDA. And as a percent of sales, EBITDA was 9.8% versus 9.3% last year. Adjusted net earnings were $214.2 million compared to $197.7 million last year, an increase of 8.2%. And our adjusted net earnings per share were $0.88, up 11.4% versus last year's adjusted EPS of $0.79. The impact of the labor conflict at Jean Coutu impacted last year's EPS by $0.05. 12 weeks into fiscal 2022, capital expenditures amounted to $141.5 million. That's up $51.6 million versus last year. And this higher level of capital expenditures is a result of our ongoing investments and the modernization of our supply chain in both provinces and in our regional store network, including in-store technology as well as the increase in our online capacity. The amount also includes the purchase of the prime real estate property in Ottawa, where we operate a Metro store. At the end of the first quarter, we had 360 stores equipped with self-checkouts and 190 stores with electronic shelf labels. So far in fiscal 2022, we opened 3 new food basics. We also relocated another Metro store and carried out measured renovations in 3 stores, representing a net increase of 76,000 square feet or 0.4% of our food retail network. On November 19, we renewed our Normal Course Issuer Bid program, enabling us to repurchase 7 million shares between November 25, 2021, and November 24 of this year. And as of January 14, the company had repurchased 650,000 shares for a consideration of $41.2 million, representing an average share price of $0.63 and $0.38. In closing, the Board of Directors yesterday declared a quarterly dividend of $0.275 per share, an increase of 10% versus last year. This is the 28th consecutive year of dividend growth and represents a payout of about 31% of last year's adjusted net earnings. So that's it for me. I'll now turn it over to Eric.

[Eric Richer La Fleche, President, CEO & Non]

Thank you, Francois, and good afternoon, everyone. We are pleased with our strong first quarter results driven by continued sales growth on top of record sales last year and good expense control. On a 3-year basis, we delivered sales growth of 7.1%, adjusted EBIT of 15.3% and adjusted EPS growth of 23.9%, all of which exceed our long-term annual financial targets. Food same-store sales were down 1.4% in the quarter, but up 8.5% when compared to fiscal 2020. Transactions were up in Q1, but are still below 2020. Average basket size was down versus last year, but remains significantly higher than 2 years ago. For the quarter, our internal food inflation was 3.5%, up from 2% in the prior quarter, driven by the meat and grocery categories. Promotional penetration has increased as consumers manage their budgets in this inflationary environment, and I assure you that our merchandisers are working hard to continue to provide great value to customers in all of our banners. Since the end of the quarter, the spread of the Omicron variant has impacted our operations and those of our suppliers, putting pressure on our supply chain. Our team has worked in collaboration with suppliers to mitigate the impacts. And as more people return to work at our suppliers and in our operations, overall, supply chain pressure has started to ease. Turning to pharmacy. Comparable sales were up 7.7%, with continued solid growth in prescription sales and front-of-store sales up a strong 8.9% driven by over-the-counter medications resulting from the stronger cold and flu season, good seasonal merchandise sales as well as lower sales last year due to the labor conflict. Our online grocery sales were flat versus the same quarter last year, but up 167% over 2 years ago. We continue to deliver against our plan with 185 natural stores now offering click-and-collect across the provinces of Quebec and Ontario, 14 hub stores offering delivery service and 1 dedicated facility in the high-density Montreal market. We have recently launched a 2-hour express delivery service on Metro.ca in the Greater Montreal and Toronto areas, and we'll roll out the service to more stores in Quebec and Ontario over the coming months. We also started offering the click-and-collect service in addition to our existing delivery service in pharmacy in mid-November, and now more than 270 pharmacies offer this service across Quebec, Ontario and New Brunswick. We believe our flexible e-com model positions us well to meet consumer demand as it evolves. Our supply chain projects are progressing well. Productivity in our new produce facility continues to improve, and I'm pleased to announce that we have reached another milestone with the completion of our new fully automated frozen food distribution center in Toronto earlier this month. The transition to the facility is underway and will gradually ramp up over the next few months. In Quebec, construction of the new fresh and frozen automated facility in Terrebonne is on track and scheduled for 2023 opening. Looking ahead, while we can't predict exactly how the pandemic will evolve, we expect, in the short term, our food sales to remain relatively flat versus last year, but they compare favorably to pre-pandemic levels. In our Pharmacy division, we expect strong comparable sales in the second quarter as we are cycling 6 weeks of government restrictions on the sale of nonessential goods in Q2 last year. In closing, I invite you to take a look at our 2022/'26 corporate responsibility plan unveiled today, which builds on the progress we achieved over the last decade and sets ambitious goals for the company in terms of sustainable development. That's it for me. We'll take your questions. Thank you.

[Operator]

[Operator Instructions] And your first question will be from Kenric Tyghe at ATB Capital Markets.

[Kenric Saen Tyghe, MD of Consumer and Retail & Analyst]

Eric, I wanted you to provide some insight on how consumer response to inflationary pressures in this cycle has perhaps differed to in past cycles, just given the backdrop we're dealing with and some of the complexity we're dealing with? Have you seen less product substitution in the sort of the early stages of inflation ramp? You've spoken to promotional penetration, but any additional insight you can provide would be really useful.

[Eric Richer La Fleche, President, CEO & Non]

Thank you. Yes, Like I said in the opening remarks, inflation is higher than normal. It has increased quickly. So consumers are adjusting their behavior, for sure. They are buying more on promotion. They're buying more private label. So there's a bit of a trading down. There's a shift, I would say, back to pre-pandemic levels and the discount penetration versus conventional penetration in the general market. So we've seen that shift. And consumers are adjusting to the inflationary realities. So as I pointed out earlier at the AGM, we're working really hard to contain those inflationary pressures by offering the best value we can. The merchandisers, I think, are doing a great job to minimize the impact on our consumers in all of our banners. So watching it closely, clearly an important issue.

[Kenric Saen Tyghe, MD of Consumer and Retail & Analyst]

And just one quick follow-up for me. Francois, you called out the impact on gross margins as sort of the recovery in pharma. Can you provide any more color on the drivers there in terms of the gross margin lift that the pharmacy business provided in quarter?

[Francois Thibault, Executive VP, CFO & Treasurer]

Well, as you remember, we were comping a labor conflict last year in pharmacy. So obviously, that affected sales. And so combined with a great seasonal -- season OTC program this year, this explains the improvement in gross margin in pharmacy.

[Eric Richer La Fleche, President, CEO & Non]

Just to pick up on that, last year, during the conflict in Q1, we secured deliveries of Rx over commercial merchandise from the warehouse. So that was a priority was medications, obviously. So the sale of front end, our commercial merchandise, out of our warehouse last year was impacted by those -- by the contingency plan. So this year, we cycled that. So that clearly benefited gross margin from our Pharma division.

[Operator]

Next question will be from Peter Sklar at BMO Capital Markets.

[Peter Sklar, Analyst]

Eric and Francois, can you talk a little more in depth about the labor situation? You indicated that supply chain is getting a little better. I'm just wondering if you expect it like to -- like if things are going to get tighter again given the vaccination requirements that Canada recently introduced for truckers? And as well, can you talk about the labor situation in your stores, just anecdotally. I've been in some stores and it seems there's some big hauls in the shelves. And seems to be fewer cashiers. So are you having trouble getting labor in your stores? And how is that impacting your ability to stock the shelves? Do you think you're going to have to curtail store hours? And how is all that going to play out?

[Eric Richer La Fleche, President, CEO & Non]

Okay. There a lot to cover there. Clearly, the pandemic has had since the beginning, an impact on the supply chain, mostly labor shortages across the chain, from our suppliers, to logistics providers, to ourselves. So I would say that there are labor pressures. They have been there pre-pandemic. They amplified somewhat in the pandemic, and they clearly amplified when the Omicron variant started to spread in late December. So I would say the last 4 or 5 weeks were really tough with the big spike in the virus. We felt it in our operations. Our suppliers felt it. So we have been challenged for sure, and you have seen some holes. There's no panic in the stores. I think consumers understand what's happening after 2 years of pandemic. There's no real hoarding. But clearly, there are more holes than we would like to offer to our customers. Working hard on that. So the good news is the 5-day isolation rule for people in close contact or with the virus is helping to bring people back to work. So more recently, we've seen more people come back in our shop and at our suppliers. So we're trying to get to a better position, which has started to happen. So I think the worst is behind us. But with this virus, you never know. So we keep a close eye on it. So getting merchandise, stocking ourselves clearly a big priority and working in that direction. As far as labor in our stores, the pandemic affected an increased absenteeism, for sure. But we have labor challenges as an industry, and we're addressing them. We're recruiting as best we can. We're installing technology in our stores with self-checkout to mitigate the impact of not finding cashiers for certain shifts. But overall, I think we're managing it pretty well. It's not perfect. Clearly, it's been tough, like I said, the last few weeks, but we think it's going to get better. On the vaccination of truckers, it's having and will have mostly an inflationary impact on the cost of merchandise coming in from the U.S., produce especially. We saw an uptick in the transportation costs right away, but we're getting the merchandise. So our transportation providers are able to service us, for the most part, there's always exceptions. But for the most part, we're getting the merchandise, but there's an inflationary issue that comes with that requirement. So it's a challenge, but I think we're working really hard. I think our teams are doing, under the circumstances, a pretty good job to provide our customers the best experience that we can. And we look forward to improving our in-stock position.

[Operator]

Your next question will be from Irene Nattel at RBC.

[Irene Ora Nattel]

I don't think we've quite beat this horse from every angle yet. So I was wondering about sort of merchandising and promotional strategies. And I'm thinking here, Eric, about the flyer and the challenges in putting together the flyer when you don't know what you're going to get necessarily and you don't know how much you're going to get. So can you just talk a little bit about sort of the key skill sets that you guys have that really make a difference in this kind of an environment? Or whether we should just expect to see kind of thinner flyers?

[Eric Richer La Fleche, President, CEO & Non]

Our flyers are not thinner than they were, and we're working hard to provide as many promotions as we did before. I said penetration is increasing of the flyer in recent weeks. With more inflation, we're seeing an increased penetration. So no, we have no intention of cutting promotions. We're working with our suppliers to see what product can be featured and when. So there's a lot of work behind the scenes. Again, there are some hits and misses in there, and sometimes we don't get the product we're supposed to get. We get it late so that we're not in stock as much as we'd like to be in our stores. But again, it's unusual, extraordinary circumstances. The peak in Omicron clearly had an impact. But I think the worst is behind us. And I think our merchandisers have enough experience to work with the suppliers to provide a good commercial offer with great value to our customers.

[Irene Ora Nattel]

That's great. That's really helpful. And then I was really interested in your commentary around the return of traffic to discount. So if you think back to previous inflationary cycles like this, do you think we're kind of at in balance now or close to imbalances in terms of what we should be expecting discount versus conventional?

[Eric Richer La Fleche, President, CEO & Non]

Yes. So the shift back to discount, I think, was expected and was normal, and I think a little higher inflation has perhaps accelerated it a little bit. But as we all know, during the first phase or the most part of the pandemic, conventional supermarkets, community supermarkets benefited with the one-stop shop and did well. So we all expected that to revert back to discount at some point, and I think we're there.

[Operator]

Next question will be from Mark Petrie at CIBC.

[Mark Robert Petrie]

With the trade down that you're seeing, Eric, I'm just wondering if there are certain categories that do better or worse, or if it's just sort of trading around within categories? And I guess maybe I'm thinking specifically about Prepared Foods and HMR. It's obviously more expensive than consumers preparing themselves, but cheaper option than restaurants. Just curious what you're seeing in that part of the store?

[Eric Richer La Fleche, President, CEO & Non]

Yes. Well, there's ups and downs everywhere. But I would say, Prepared Foods in general are up versus last year. So I don't consider that necessarily a trading down. We're trading up. It's just reverting back to more normal levels. In the fresh meat category, because of certain really high cost increases, our promotional strategy, our merchandising strategy was adjusted with different cuts of meat, lower price cuts of meats sometimes. So some trading down just with our promotional mix is happening. So things like that happened. And private label and grocery, frozen and dairy does well in times like this. So that's all contributing to what's happening at the till and in line with the inflation that we're seeing.

[Mark Robert Petrie]

Okay. Great. And I'm just wondering how the sort of challenges of accelerated inflation are different in your pharmacy business, front store, if at all, than in the food business? I know there's obviously a structural difference just with regards to the business model. But commentary about inflation in pharmacy versus grocery, please?

[Eric Richer La Fleche, President, CEO & Non]

We're not seeing as high inflation in health and beauty products that we sell mostly in our pharmacies. There is inflation, but at more normal levels in the 2% range or so. So clearly, the spike is more on the food side. So I would call the inflation levels or trends in pharma pretty normal.

[Mark Robert Petrie]

Okay. And then just one follow-up. Francois, sorry, I know you don't normally comment on the segmented results specifically. But -- and apologies if I missed this in the comments. You were talking about the benefit from the growth in pharmacy on gross margins. But could you just comment about the gross margin performance in the food business specifically? Was it stable or up or down? Could you give us any indication?

[Francois Thibault, Executive VP, CFO & Treasurer]

Well, it was slightly down. I leave it at that. But it was slightly down. The inflationary pressure that we're facing, we did not pass all of it.

[Operator]

Next question will be from Michael Van Aelst at TD Securities.

[Michael Van Aelst, Research Analyst]

I wanted to ask about e-commerce. And when we look at the trend a year ago, we saw the volume ramping up as we got into the winter months. And so the growth rate was much higher in the winter months last year. So you just said that it was flat essentially in the first quarter. Are you seeing it ramping up again in the second quarter? Or because if not, I assume that would mean it would be trending lower year-over-year?

[Eric Richer La Fleche, President, CEO & Non]

So yes, we're seeing an uptick in e-com demand and e-com sales basically since Christmas or after Christmas. I think a lot has to do with the government measures announced and the closures of restaurants and the stay at home restrictions. I won't call it a full lockdown, but it feels like it. So with this rapid spread of Omicron, I think a lot of people stayed home and went back online or went online. So yes, we're seeing -- we have seen the uptick, for sure, in online. We -- that sort of coincided with the rollout of our click and collect offer in food at Metro Quebec and Metro Ontario. So we worked hard over the last -- the summer and fall to roll it out, and volume has clearly picked up since Christmas in click-and-collect. So that was timely. Same thing in pharmacy. We rolled it out, the click-and-collect, and that's also ramping up.

[Michael Van Aelst, Research Analyst]

Okay. So when you say that it's ramping up to be -- to show growth year-over-year? Or is it still kind of flat?

[Eric Richer La Fleche, President, CEO & Non]

Well, the quarter is not finished. And I don't want to give you a guidance, but it feels like it should go up.

[Michael Van Aelst, Research Analyst]

Okay. And so you talked about the COVID costs as well. I'd assume they are relatively stable in Q1. But in Q2, you announced another gift card. So is it the same amount, that $8 million or so that we saw the last time it was provided to employees?

[Eric Richer La Fleche, President, CEO & Non]

Yes, it is. Yes. We announced it last week. We did it 3x last year. We felt that last week, it was the right time -- right thing to do this year after the last few weeks that I just described in enough detail has been very challenging for our people, and they've done a great job. So we felt it was the right thing to do. So it's $8 million, yes.

[Michael Van Aelst, Research Analyst]

Okay. And apart from that, has the surge in Omicron required you to spend more in other types of COVID costs? Or is that stable right now?

[Eric Richer La Fleche, President, CEO & Non]

Stable.

[Operator]

Next question will be from Vishal Shreedhar at National Bank.

[Vishal Shreedhar, Analyst]

Just related to the in-stock positions that you have in your different banner types, conventional and discount, are they impacting one banner more than another?

[Eric Richer La Fleche, President, CEO & Non]

No. We service our stores from the same warehouses in Quebec and in Ontario. The general in-stock position is similar between all of our food banners.

[Vishal Shreedhar, Analyst]

Okay. And would the same comment applies for labor shortages given the smaller labor number at discount stores? Are you finding you're more understaffed there?

[Eric Richer La Fleche, President, CEO & Non]

Well, it's all a question of proportion. As a percentage of employees, the staff missing is pretty similar. There's, like you say, less services in a discount store. So you can absorb absenteeism a little better in a discount format, but it's also a challenge there. So as I said earlier, as people return back to work following the peak of Omicron, we will be in a position to fill our shelves better and offer a better experience to our customers.

[Vishal Shreedhar, Analyst]

Okay. And with respect to your conventional banners, have labor shortages placed pressure on some of your service counters? And if so, did that impact margins in the quarter?

[Eric Richer La Fleche, President, CEO & Non]

I wouldn't say it impacted our margin. But at a granular level and store XYZ, they may have cut hours in the deli or prepared foods. So in general terms, there could be some reduction of hours in certain departments, which could have impacted margin in that store. But overall for the company and the numbers we're reporting to you, I wouldn't call that one out.

[Vishal Shreedhar, Analyst]

Okay. And with respect to the variety of investments that Metro is making, either through supply chain investments or it's store investments like the shelf tags or the self-checkouts, is the inflation and the labor pressure that Metro's seeing curtailing the rate at which Metro can make investments and delaying projects?

[Eric Richer La Fleche, President, CEO & Non]

No. Our capital program is staying constant. And you're familiar with our supply chain projects. We -- our CapEx for retail renovations in new stores is pretty similar year-to-year and the technology budgets are part of that for stores. So no, the inflationary situation is not impacting our CapEx, although some of these construction costs are very high these days. And we're looking at every project before we invest on the renovation, especially sizable renovations. We make sure the numbers work out because construction costs are a much bigger factor.

[Vishal Shreedhar, Analyst]

Okay. And lastly, maybe you can just provide some extra color on the Toronto Fresh DC and the level of performance it's at and the automated frozen DC?

[Eric Richer La Fleche, President, CEO & Non]

So the automated frozen DC just started. We turned basically the operation on this past week. So we're piloting some stores out of that DC last week, just started. So we're going to do more and more stores every week. So we see a process of 4 to 5 months. The shorter the better, but we'll do what we have to do to do it properly to transition from the old freezer to the new freezer, it takes some time. But I think we're in a good position since it's the second one we're doing. And I'm confident that the transition will go well. It's a lot of work, especially in the midst of a pandemic. So not easy work, but it's going to get done. So produce, I said in my remarks, productivity is improving. So we're adjusting systems and processes and schedules and everything. So we're working with our unionized employees and with WITRON, our technology partner, to optimize. So again, big project, a lot of change management, but going in the right direction. And I'm pleased with the improvement certainly over the last few months. We have room to grow. We're never happy. We want it to be better, and I'm confident that it will continue to improve.

[Operator]

[Operator Instructions] And your next question will be from Patricia Baker at Scotiabank.

[Patricia A. Baker, Analyst]

Most of my major questions have been asked, but I obviously have minor ones. So firstly, with respect to the supply chain disruptions and where you've seen the hold, are they primarily in the grocery category? Or are they also in the fresh category? Are they -- is there a focus on where those holes are where you're seeing the shortages?

[Eric Richer La Fleche, President, CEO & Non]

Yes. Grocery is an issue because there's more variety basically in center store, and that's the biggest issue. We're getting product. People can fill out their order. But clearly, there's our SKUs missing, there's variety of missing. There could be sizes missing. As our suppliers are adjusting their production, given their constraints, we don't offer necessarily the full variety in our center store. So that's grocery, dairy, frozen. Those categories, you tend to see a little more holes that you would see in our fresh departments.

[Patricia A. Baker, Analyst]

Okay. And then I have 2 questions that are specific to Quebec. Now in your outlook, when you discussed your outlook for pharmacy sales, you did mention that you expect that the rapid -- the distribution of the rapid test could be a nice tailwind for pharmacy in the near term. And on the outset in Quebec, it was pretty chaotic that distribution, not necessarily from you guys, but from the government getting them to where they were going to be distributed. Has that kind of calmed down and become more orderly?

[Eric Richer La Fleche, President, CEO & Non]

Getting better as we get more quantities and more supply. So the government, for those who are not in Quebec, put the distribution -- free distribution of rapid test in the hands of the community pharmacies. And every community pharmacies was basically having 108 kits a day. So that's not many kits for many pharmacies, especially Jean Coutu, which have large volumes. So that caused a lot of frustration early on. People lining up and trying to get online. So it was hectic. It was chaotic, like you said. It's getting better as supply has increased. We would like to have more, and I think the government will be in a position to supply more. So it's getting -- it's better every week, but it wasn't easy.

[Patricia A. Baker, Analyst]

Okay. So another thing exclusive to Quebec, Eric, is the fact, for the last 3 Sundays, the grocery stores have not been allowed to open. It was only 3 Sundays. But I'm still curious what you might have seen there in terms of consumer behavior? Did you see people reverting more to online because of that on most days? Did you see a bigger uptick in the Saturday? Or was there just not any discernible difference?

[Eric Richer La Fleche, President, CEO & Non]

No, it was another element that made life more complicated, for sure. So 3 Sundays are now behind us. We were opened this past Sunday. But the 3 previous Sundays we were closed in Food, not in Pharmacy but in Food. So yes, most of the volume transfers for the Saturday or the Monday, it puts pressure on other days. In an environment where we had supply chain issues that we've talked about at length today, it made it more complicated. So it was a challenge. It's behind us and move on.

[Patricia A. Baker, Analyst]

Yes. Let's hope it stays behind you. And then just lastly, a slight clarification. So you talked about discount reverting back or getting more shoppers in the discount box. So when you say revert back, so what you're referring to there is that we're back more or less to the normal levels that we saw pre-pandemic as opposed to heightened or elevated levels?

[Eric Richer La Fleche, President, CEO & Non]

Yes. That's what I'm referring to. And again, at Metro, we have a good portfolio of banners with discounts and significant discount presence in both Quebec and Ontario. We have Adonis also. And Metro provides great value. So I think we're well positioned to sort of all customers. And yes, so the discount we're reverting back is a market, I think, phenomenon, and we're well positioned to capture it.

[Operator]

Next question will be from Chris Li at Desjardins.

[Christopher Li, Research Analyst]

Eric, I know there are many moving parts, and you don't have a crystal ball. But just wondering, can you share with us some of the major puts and takes that you see impacting gross margin for the year? Do you believe stable margin is a reasonable expectation? Or do you see some downside risk because of the inability to fully pass on all the cost increases at the retail level?

[Eric Richer La Fleche, President, CEO & Non]

Yes. Well, that's a hard one. And you're right. I don't have a crystal ball. I do know that we're getting cost increases. We're getting more increases this time of year than we usually do. It's usual in our industry in food to get cost increases late January or early February. So in the next days and weeks, there's a significant amount of products that will have cost increases. So how much of that will be reflected at retail? We will be very competitive, we monitor prices everywhere, and we intend to remain competitive. So I think there's -- there could be some risk short term to gross margin rate as those cost increases come in, and if we can pass them on at retail. So typically, it takes a bit of time. So we've been there before, and we managed through it before. But it's something -- it's a watch out, for sure, on the gross margin. Other than those cost increases, which is a key element, I think we're confident in our strategy, our merchandisers on the fresh side, I think, are going to do a good job. And I think we can deliver a margin. And the diversification with pharmacy, I think, is another helpful element. We saw it in this quarter. So overall, I think we're confident that we can deliver good gross margin numbers, but it's competitive.

[Christopher Li, Research Analyst]

Okay. That's helpful. And maybe specifically, how big of a contributor has the increase in private label sales to the gross margin in the quarter or in the last couple of quarters? Has it been a notable contributor or not really?

[Eric Richer La Fleche, President, CEO & Non]

Well, it's a key contributor overall always with the uptick. Private label penetration is doing well. We're seeing the same in our gross margin. I wouldn't call it out as a big difference in the gross margin that we're reporting, but clearly, it's a contributor. But the supply chain issues that we talked about affect private label, too. Some suppliers are in difficult positions there, too. And we're not getting all the merchandises we need sometimes in private level. So it plays out everywhere, even in private label.

[Christopher Li, Research Analyst]

Okay. And maybe just one for Francois. I apologize if you disclosed this already, but what's the COVID expenses that were incurred during the quarter?

[Francois Thibault, Executive VP, CFO & Treasurer]

Yes, Chris, as we said on the last call, we're no longer reporting on COVID expenses. One, they're coming down versus the peak, obviously. And two, it's the line between COVID and non-COVID expense is blurring quite a bit. It's just part of our normal operating expenses now. So we're no longer specifically tracking that number and reporting as such because it's not as clear cut as it was before. So that's what we indicated on the last call.

[Christopher Li, Research Analyst]

Okay. That's fair. But I guess, suffice to say, given that you guys did call out, I think, over $100 million of expenses last year, based on your early comment that it's been sort of stabilizing, we should expect that to be a fairly good tailwind in terms of reduction in expenses throughout the year?

[Francois Thibault, Executive VP, CFO & Treasurer]

Yes, some -- but some departments that were open post-pandemic or when restrictions were easing have more labor and services. So it was not a dollar for dollar, but yes, the peak of COVID expense of last year, that's -- we don't expect that to be repeated.

[Operator]

[Operator Instructions] And your next question will be from Mark Petrie at CIBC.

[Mark Robert Petrie]

Just a quick follow-up. Eric, you already spoke about the relative demand and traffic you're seeing in e-commerce with the Omicron wave. I'm just curious, though, with the pickup in inflation, does that affect how people shop online at all, either in terms of basket size? Or are you seeing the same sort of increase in promo penetration in the online business as well?

[Eric Richer La Fleche, President, CEO & Non]

It's similar. Yes, I would not call out notable differences of buying behavior online versus in-store with the Omicron variant. Sizable basket. Margins are -- it's a good basket, it's a good customer, and we want to service them however they want to shop. But I wouldn't call out a big difference there.

[Mark Robert Petrie]

Okay. So the same variances, as sort of before inflation kind of accelerated, remained in place?

[Eric Richer La Fleche, President, CEO & Non]

Right.

[Operator]

And at this time, we have no further questions. Please proceed.

[Sharon Kadoche, Senior Advisor of Investor Relations & Risks]

Thank you all for your interest in Metro, and we will speak again soon to discuss our second quarter results on April 20. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this does, indeed, conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.