Metro Inc

TSX:MRU

Earnings Call Analysis

Metro Inc. Reports Solid Q1 Growth Amid Challenges

In Q1, Metro Inc. saw total sales climb by 6.5% to $4.934 billion, with food same-store sales up by an adjusted 3.4% and pharma same-store sales increasing by 3.9%. Gross margin remained stable at 19.6%, however, operating expenses rose by 10.5%, mainly due to costs related to opening a new distribution center and higher e-commerce fees. EBITDA increased by 1.2%, reaching $468.1 million. Net financial costs grew, affected by higher interest rates and increased debt. Adjusted net earnings fell slightly by 1.1% to $235 million, while adjusted EPS rose 2% to $1.20. The company maintained its dividend growth streak with a 10.7% hike, amidst executing their plan in alignment with the November guidance for fiscal '24 of EBITDA growth under 2% and adjusted EPS to be flat to slightly down.

Metro Inc. Reports 6.5% Increase in Total Sales and Solid Q1 Performance

Metro Inc. kicked off the fiscal year with a promising start, exhibiting a 6.5% surge in total sales, reaching $4.934 billion. This performance is a direct reflection of both the food sector, with its 6.1% uplift in same-store sales, and the pharmaceutical segment, which also rose 3.9%. A noteworthy point for investors is the timing of Christmas sales, which positively influenced the food segment's growth. Adjusting for this seasonality, the same-store sales growth rate normalizes to 3.4%. Shareholders can find reassurance in the company's ability to maintain a consistent gross margin of 19.6%, identical to that of the previous year.

Challenges and Expansions Impact Operating Expenses and Earnings

The quarter also brought its set of challenges, most prominently the increased operating expenses, which grew by 10.5% to $506.4 million. This rise is largely attributed to the costs associated with launching the Terrebonne automated distribution center (DC) for fresh and frozen products, which resulted in temporary cost duplications and inefficiencies. The company's EBITDA saw a nominal year-over-year increase of 1.2%, and a somewhat stronger performance when excluding asset disposal gains, at 2%. Adjusted net earnings saw a slight dip of 1.1% from last year, settling at $235 million. However, earnings per share (EPS) demonstrated resilience, with a 2% bump to $1.20.

Investments in Technology and Shareholder Returns Showcase Strategic Growth

Metro Inc.'s commitment to growth and operational efficiency is reflected in its investments in self-checkout and electronic shelf label technologies across hundreds of food stores and pharmacies. Moreover, the company's assertive capital management strategy is evident through its share repurchase program, acquiring 1.675 million shares for roughly $113.7 million. The Board of Directors has also proclaimed a 10.7% increase in the quarterly dividend, marking the 30th consecutive year of dividend growth – a noteworthy milestone for long-term investors.

Future Outlook Remains Positive Despite Operational Adjustments

While the installation of the new Terrebonne DC has impacted expenses, the process aligns with Metro's overall strategic plan and previously shared guidance. The company's forward-looking statements indicate an EBITDA growth projection of less than 2% and a flat to marginal decline of $0.10 in adjusted EPS for fiscal '24, compared to the previous fiscal year. In addition, the expansion narrative continues with the opening of new discount food stores, indicating a growing market footprint.

Consumer Trends and Pharmacy Sector Adaptation

Consumer behaviors have shown a deceleration in food basket inflation to approximately 4%, below the general consumer price index (CPI) and a reduction from 5.5% in the preceding quarter. The pharmacy sector presented a mixed picture, with a robust 6.6% upswing in prescription sales but a 1.2% falloff in commercial sales, reflecting a post-COVID shift in over-the-counter medication demands.

Leveraging Technology and Personalization for Competitive Advantage

Investors may take interest in the company's emphasis on personalization and loyalty programs, such as metro&moi and AIR MILES, to bolster customer engagement and spending. Furthermore, the Terrebonne DC's integration continues to progress, with frozen and seafood products already transitioned and expectations to extend to meat and deli items. This progress is anticipated to enhance productivity in line with the company's business plan. As we move forward, Metro eyes balancing the approaching cost increases from consumer packaged goods (CPG) companies with retail price adjustments.

Enhanced Corporate Responsibility and Shareholder Confidence

Metro's recent publication of their annual corporate responsibility report with improved transparency and strategic targets underscores their commitment to sustainable business practices. For investors, this is an affirmation of Metro's long-term vision, ensuring that stakeholder interests are intertwined with broader social and environmental objectives.

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Metro Inc. 2024 First Quarter Results Conference Call. [Operator Instructions] I now would like to turn the conference over to Sharon Kadoche, Manager, Investor Relations and Treasury. Please go ahead.

[Sharon Kadoche, executive]

Good afternoon, everyone, and thanks for joining us today. Our comments will focus on the financial results of our first quarter, which ended on December 23. With me today is Mr. Eric La fleche, President and CEO; and Francois Thibault, Executive VP and CFO. 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 a forward-looking statement. Words or expressions such as expect, intend, are confident that, will and other similar words or 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 and our 2024-2025 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. Risk factors that could cause actual results or events to differ materially from our expectations as expressed in or implied by our forward-looking statements are described under the Risk Management section in our 2023 annual report. We believe these forward-looking statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking statements, except as required by applicable law. I will now turn the call over to Francois.

[François Thibault, executive]

Thank you, Sharon, and good afternoon, everyone. For the quarter, total sales reached $4.934 billion, an increase of 6.5% versus the same period last year. Food same-store sales were up 6.1% and sales were positively impacted as the week preceding Christmas fell in the first quarter, whereas last year, it fell in the second quarter. When we adjust for the Christmas shift, that is when we compare same-store sales for the 12-week period ending December 23, 2023, with the one ending December 24, 2022, food same-store sales increased by 3.4%. We will have the reverse effect in the second quarter. Pharma same-store sales were up 3.9% when comparing the 12-week period ending December 23, 2023, with the one ending December 24, 2022. Our gross margin stood at 19.6% of sales, same as in the first quarter last year. Operating expenses amounted to $506.4 million, up 10.5% versus last year. Operating expenses as a percent of sales was 10.2% versus 9.8% in the same quarter last year. As expected, the higher ratio is mainly due to the commissioning of our new automated DC for fresh and frozen products in Terrebonne as we incur temporary duplication of costs and learning curve inefficiencies. We also have higher third-party e-com fees than last year. EBITDA for the quarter totaled $468.1 million, up 1.2% year-over-year and up 2% when removing the gains on disposal of assets. Total depreciation and amortization expense for the quarter was $131.1 million, up $11 million versus last year. A significant portion of the increase is due to our new Terrebonne DC. Net financial costs for the first quarter were $32.4 million compared with $27.1 million for the corresponding quarter of '23, and the increase is mainly due to an increase in debt, higher interest rates and lower capitalized interest related to our distribution center automation projects. Our effective tax rate stood at 25% versus 26.5% last year, reflecting a favorable tax adjustment in respect of prior years. Adjusted net earnings were $235 million compared to $237.6 million last year, a 1.1% decrease and our adjusted net earnings per share amounted to $1.2, up 2% versus last year adjusted EPS of $1. After 12 weeks in fiscal '24, capital expenditures amounted to $117.3 million versus $129.3 million last year. On the retail side, during the first quarter, we opened 3 Super C stores and carried out major expansions and renovations of 4 stores for a net increase of 88,400 square feet or 0.4% of our food retail network.Turning to in-store technology, we ended the quarter with 502 food stores and 63 pharmacies equipped with self-checkout technology. As for electronic shelf labels, at the end of Q1, we had 345 food stores and 46 pharmacies equipped with that technology. Under our normal course [ issue ] program as of January 19 of this year, we have repurchased 1.675 million shares for a total consideration of $113.7 million, representing an average share price of $68.89. The Board of Directors yesterday declared a quarterly dividend of $0.335 a share or $1.34 on an annual basis, an increase of 10.7% versus last year. This is the 30th consecutive year of dividend growth and represents a payout of about 30% of last year's adjusted net earnings in line with our policy. In closing, our first quarter results are tracking well to the guidance we provided in November for fiscal '24, that is EBITDA to grow by less than 2% versus the level reported in fiscal '23 and adjusted net earnings per share to be flat to down $0.10 versus the level reported in fiscal '23. That's it for me. I'll now turn it over to Eric.

[Eric La Flèche, executive]

Thank you Francois, and good afternoon, everyone. We recorded solid results in the first quarter as our teams continued to deliver good value to customers in all our food and pharmacy banners. Total sales grew by 6.5%, EBITDA by 1.3% and adjusted EPS by 2%. As expected, our results were impacted by the commissioning of our new automated DC for fresh and frozen products in Terrebonne. The transition from our other facilities is causing some duplication of expenses and loss of efficiency but the good news is, as Francois said, we are on track with our plan and with the guidance we gave you in November. As Francois also mentioned, food same-store sales were up 6.5%, and when adjusted for the Christmas shift, same-store sales were up 3.4%. Our internal food basket inflation decelerated to about 4%, lower than the reported CPI and down from 5.5% in the previous quarter.For the quarter, our tonnage -- our food tonnage was up with higher transaction counts, while the average basket remained stable overall. Promotional penetration remained high and private label sales continue to outpace national brands. We are very pleased with the performance of our discount food stores. We opened 3 new Super Cs during the quarter with very encouraging early results. This brings the total to 106 Super C stores. Over the last 15 months we opened 9 new discount stores in Quebec and Ontario and another 4 are scheduled to open this fiscal year. Our online food sales grew by 105% versus last year while the market was stable. Growth continued to be fueled by third-party partnerships and the expansion of click and collect to our discount banners. As we begin to lap the start of these initiatives, we expect the year-over-year growth of online sales to moderate over the coming quarters.Total pharmacy comp sales were up 3.9% on top of 7.7% in the first quarter last year. Prescription sales were up a strong 6.6% driven by professional services and specialty medications. Commercial sales were down 1.2% in the quarter as OTC sales declined compared to exceptionally high demand for cough and cold products last year. This was partly offset by continued growth in cosmetics and HABA. We continue to be pleased with our MOI loyalty program. We have now reached over 2.5 million active members, more than double the size of metro&moi. Members swipe rates, loyalty sales penetration and member engagement rates continue to grow across all banners and have surpassed all past program metrics for metro&moi, at Metro and AIR MILES at [Indiscernible]. We see cross-shop spending and visits increasing with potential for more as we leverage our personalization capabilities.Coming back to our Terrebonne automated DC, during the quarter, we completed the transfer of all frozen products as well as fresh seafood. We are currently transitioning fresh meat and deli products. And as I said, productivity in the facility is tracking the business plan as our teams are leveraging our experience from the commissioning of our DCs in Toronto. Going forward, the cost increases received from the big CPG companies will start to be reflected in retail prices in February. The number of increases will be more normal than the peak we saw during the last two years. On the pharmacy side, we will be going up against tough comps again in our second quarter as we continue to lap extraordinary demand in OTC medication due to post-COVID cough and cold symptoms last year. To conclude, last month, we published our annual corporate responsibility report with improved disclosure and additional targets. We believe that our approach to corporate responsibility is an asset in realizing our purpose to nourish the health and well-being of our communities and in creating long-term value for our shareholders. That's it for me. Thank you, and we'll be happy to take your questions.

[Operator]

[Operator Instructions] And your first question will be from Irene Nattel at RBC.

[Irene Nattel, analyst]

Thanks, and good afternoon, everyone. Eric, from your commentary, it sounds as though we're really seeing a continuation, both of competitive intensity and of consumer behavior for calendar Q4, your fiscal Q1, I guess, is that a fair statement? And have you seen any changes Q1 to date?

[Eric La Flèche, executive]

I think that's a fair assessment. That's what we're seeing. It's pretty consistent, like I tried to describe, but it's highly promotional as it was. There's some trading down going on, private label sales are continuing to grow at a much faster rate than the national brands. And discount -- the shift to discount continues to happen. So very similar to the previous quarter, yes.

[Irene Nattel, analyst]

That's great. And you also mentioned price increases. We've heard from some of your peers that domestic suppliers, the price increase requests have been more modest but the big multinationals still being kind of aggressive. Can you talk about what we should be thinking around pricing in 2024?

[Eric La Flèche, executive]

So like I said in my opening statement, post cost [Indiscernible], which starts next week, some prices at retail will start to increase. The good news is the number of increases is going back to more normal levels compared to what we saw in the last two years. So there's a substantial reduction in the number of requests. The size of the request varies but the general average is certainly lower than what we saw last year. So I don't have a precise number, but I think we're returning to more normal inflation levels gradually. So mid-single digit, for some categories a little less than that, for some categories higher than that. Some other commodity-driven categories can be even more than that, but those are more exceptions. So in general, it's trending better, trending towards normal, but still higher than normal.

[Operator]

Next question will be from Tamy Chen at BMO Capital Markets.

[Tamy Chen, analyst]

I wanted to ask about the ramp of the DC. So as I recall, for Toronto Phase I, I believe that was completed over a span of, I think, about two years or so. And what you're launching in this fiscal year is a lot larger in scope. So can you help us understand or just remind us, I guess, what gives you the confidence that you can stand up all of this in this one year? Is it because the technologies and the equipment in Terrebonne are the same as what was in Toronto Phase 1 so you're viewing this year's ramp as a bit of a rinse and repeat, even though it is larger in scope?

[Eric La Flèche, executive]

So yes, for sure, there's a lot of learnings from what happened in Toronto. Toronto Fresh Phase 1 was the first project. We then followed up with the freezer, which went better. And now the third one is a big one in Quebec, which is fresh and frozen. So this fall, it was very focused on frozen. So it was a comparable ramp-up start-up in what we did with our frozen project in Toronto. And we started fresh seafood towards the end of the quarter, took a pause for the holidays and now in general, we're back with fresh meat and deli that's going to take place over the next several weeks. So for sure, it's a big project. That's why we talked about headwinds and the extra expenses that we incur to start up a big building like that. But a lot of learnings from the Toronto projects, a lot of our teams here in Quebec went to Toronto to work in the start-up over there, so everything is going faster and better. So -- and we planned for it. So the budgets we made, the plans we made and the guidance we gave you were based on better, quicker ramp-ups here in Montreal and we're tracking on plan. So we're very pleased with that. It's a huge effort by a lot of people here but so far it's going well.

[Tamy Chen, analyst]

Okay, that's good to hear. And my follow-up is on pharmacy. When I look at Jean Coutu over the years, I don't see much unit growth. I recall at your Investor Day last year, you alluded to wanting to invest more in I believe it was the HABA aspect for front of store. But can you just remind us right now, how are you thinking about your overall strategy for pharmacy over the medium to long term?

[Eric La Flèche, executive]

So we are the lead player in pharmacy in Quebec with Jean Coutu, the clear leader and [Indiscernible]. So we have a 2-banner strategy. We have close to 670 pharmacies, so we're not adding units as much as growing organically with our current network. So we've optimized the network. There were a few conversions to Jean Coutu. So our focus is very much on growing organically, growing sales front store and HABA in the existing fleet. That's more than growing the store count. So professional services are certainly growing, first line of the health care system is a big part of our strategy. All the digital work that we can do to increase customer engagement is going to be happening at Jean Coutu. So there's a big digital component of the lab that's already in place, and we're going to build on that to increase our digital connections for commercial sales in the front end with our MOI program. So we like our position, we like the structural demand, the demographics for pharmacy, especially in Quebec, and as a clear leader, we're well positioned to do well.

[Operator]

Next question will be from George Doumet at Scotiabank.

[George Doumet, analyst]

Good afternoon Eric and Francois, I just wanted to follow up on the pricing discussion. So food CPI in the U.S. and Canada seems to be a pretty significant difference. I just wanted to get your take on that. Do you see that as a kind of a 5- to 6-month lag and we're back to the U.S. levels or do you think there's something more structural in Canada that keeps the Canadian inflation running kind of well above the 2% to 3% range this year?

[Eric La Flèche, executive]

Well, there are some structural differences between the two countries, some regulated markets in Canada that you don't necessarily see in the U.S., so that's contributing to a higher structural rate of inflation but it's not that material. I think the good news is here, the year-over-year inflation rate is coming down, month-over-month prices have stabilized over the last few months and the year-over-year number keeps coming down early quarter -- every quarter. So pleased with that. The increases we're getting, like I said, they're still coming in lower quantities and for lower prices but it's still going to cause some inflation we expect in the next year, albeit at more normal levels. We always say more normal is 2% to 3%. We're not quite there yet but we're getting there.

[George Doumet, analyst]

Okay. And I just want to talk about the front store, the negative comp there. First off, was there an impact at all from the Christmas week in there? And can you talk a little bit about how the cosmetics and how the volumes trended? And how soon can we maybe get back to those kind of low single digits, mid-single-digit cadence there?

[Eric La Flèche, executive]

So the front store number we gave you for pharmacy is perfectly comparable, so there's no Christmas effect on that. So a couple of things, last year as I tried to explain, front store sales were high at 10%, very strong OTC demand. This was post-COVID symptoms' trifecta, respiratory COVID, influenza, name it. There was a lot of cough and cold symptoms last fall, and we were [ comping ] that. And the cough and cold season started later this year. So there's less OTC demand this year that is the biggest contributor to the decline is a decline in OTC, which, as you know, generates traffic into pharmacy and may have an impact on the rest of the front store. So that's the biggest one. If I look at Q2 with the cough and cold season now permanently in place, even if we comp good high numbers in front end in Q2, we're seeing better trends because of the cough and cold. One other factor I might add for Q1, for those of you who don't live in Quebec, there was a significant public sector strike for several weeks, teachers and then for several days, general strikes. So disposable income in November, December in this province was not where it used to be. So that had an impact a bit on seasonal sales. So hopefully, that's all behind us.

[George Doumet, analyst]

Yes. That's helpful. Maybe if I could just ask one quick one. Without really getting into specific numbers, but just order of magnitude, perhaps maybe in terms of timing, I think you mentioned in your Investor Day that you expect Terrebonne to be fully ramped up in kind of Q2, Q3 this fiscal year and I think [ fresh 2 ] by Q1 next fiscal year. Should we expect, I guess, the full margin contribution from everything to play out by kind of Q1 fiscal '25. Is that fair?

[Eric La Flèche, executive]

Well, Terrebonne started in Q1. We're transitioning and we're in Q2, and we're still transitioning. So we're not going to be all done and perfectly productive by the end of Q3. We said that it's going to take all of this fiscal year to get this thing started up. And so Q1 next year is more the number where we should be in good shape. Phase 2 Toronto Fresh, we start in June or thereabout. So it's going to be a ramp up there all summer. We expect it to go well, but ramping up is ramping up. Francois can get back to you on the exact timing there but that too is going to take [ two ]months. So is it before Christmas or most likely around that, Francois can get back to you.

[Operator]

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

[Michael Van Aelst, analyst]

When did the Terrebonne D.C. actually open in Quebec?

[Eric La Flèche, executive]

Was in October, I don't have the exact date for you. Last October.

[Michael Van Aelst, analyst]

Yes, there was a break but I remember you said it was early in October, so. Okay. So then when should we expect to see peak duplicate overhead costs and peak inefficiencies?

[François Thibault, executive]

Well, Michael, we're seeing it now as in Q1, we are basically at the peak in terms of duplication, learning curve and efficiencies and so forth. It's going to continue throughout the year, but I believe everything else according to plan, you should start to see some improvement on that front as the year progresses. But then we have this fresh Phase 2 that's going to start. So we're going to have that overlap. And as Eric said, by the first quarter of next year, we expect that most of those duplicate headwinds and deficiencies will be behind us. Some expenses will remain like depreciation, that's not going away. But the increase next year will be much more manageable year-over-year than what we're seeing today. So we're living it now in terms of the peak.

[Michael Van Aelst, analyst]

Because I was just trying to understand if you started it -- if you opened in late October and you only had say two versus three months in Q2, is it possible that the duplicate overhead costs are actually – and inefficiencies for that matter, are actually higher in Q2?

[François Thibault, executive]

Well, it will be a similar picture, to be honest, it's still a very compressed time frame in Q1, Q2. That's where the bulk of it will be. And then we're going to see some improvements as the year progresses.

[Michael Van Aelst, analyst]

Okay. Perfect. Your CapEx was quite low in the first quarter despite your guidance for CapEx to be over $800 million for the year. So why is -- I would have thought CapEx would have been high to start the year, given everything is opening, but what should we expect? Or are we still expecting over $800 million for the full year?

[François Thibault, executive]

Yes. So I'm not changing it is right now. We'll see where we are in Q2. It's -- some of it is very choppy in terms of where it falls, quarters or second quarter. So no change for now, but I will update you as we go forward.

[Michael Van Aelst, analyst]

And then just finally, I know you mentioned the discount is still growing faster than conventional, but are you seeing growth in conventional as inflation slows? Are we seeing any change in the pace of growth in conventional?

[Eric La Flèche, executive]

No, I don't think you can -- we could we could say that. Clearly, there's a lot more growth on the discount side. We're pleased with the growth or the levels that we're seeing in conventional. We have some growth but it hasn't changed, that's the question. So I'm trying to answer on a relative basis. That said, we're pleased with our relative performance in conventional in both of our markets. So we look at the news and numbers every week, and we're trending okay. But the growth is more on the discount side.

[Operator]

Next question will be from Mark Petrie at CIBC.

[Mark Petrie, analyst]

Just to follow up on that last topic. Eric, would you say that the sales performance gap between discount and conventional is stable? Is it growing or is it narrowing?

[Eric La Flèche, executive]

It's stable. It varies by region. There's a change in the market. There's some conversion happening at a pretty rapid clip so the size of the discount pie is growing. So that creates a mathematical growth on the discount side in Quebec. In Ontario, I would say that the discount market growth is a lot more stable but it's -- again, it's higher than conventional.

[Mark Petrie, analyst]

Yes. Understood. Okay. And then I know you don't give gross margin obviously by segment. But any commentary you could provide just anecdotally about the relative performance would be helpful. And I'm guessing the timing shift didn't really affect the consolidated rate much at all, but maybe a slight tailwind. I don't know if you have any comment there.

[François Thibault, executive]

Yes. So Mark, it's Francois here. It's pretty flat across banners and divisions, so nothing really stands out from one versus the other. And you're right, this doesn't have an impact on that.

[Mark Petrie, analyst]

Yes. Okay. And then just last one. Obviously, now there's some public reports about assets for sale in the pharmacy sector, hoping just at a high level, you could address your priorities when you're evaluating M&A and specifically the relative strategic importance of having a national presence.

[Eric La Flèche, executive]

Well, like we always say, our M&A engine always one, and we're looking at opportunities in food and pharmacy in Canada. I can't comment on any specific file. We look for a strategic fit, we look for value creation for our shareholders long term. So those parameters have not changed.

[François Thibault, executive]

And we have a balance sheet that they can take on a significant acquisition if it presents itself.

[Operator]

[Operator Instructions]. Your next question will be from Vishal Shreedhar at National Bank.

[Vishal Shreedhar, analyst]

Thanks for the questions. I just want to get some perspective on gross margin and the year-over-year change. And can you give me a sense of the puts and takes. For instance, discount was growing, the e-commerce business growing quickly, pressure in front store OTC and seasonal, which are presumably high-margin discount categories. So it seems to me that all else equal and gross you're growing quicker than pharmacy. It seems like all else equal, there should be pressure on gross margins, but you were able to hold it flat. What were the big drivers on the other side? And did I get my big factors right in the way I characterized it?

[François Thibault, executive]

Yes. But there's also efficiencies that we have that we highlighted that last year with the Ontario freezer that we're able to generate some good efficiencies as well that helps the margins. So it's not just mix, it's also our operational efforts at reducing costs and reducing efficiency. So all this blended, we were able to keep gross margin stable year-over-year, both food and pharmacy.

[Vishal Shreedhar, analyst]

Okay. So it's largely the initiatives that you've been working on, those are -- that was the offsetting factor?

[François Thibault, executive]

Several initiatives. And nothing moves the needle by itself, but all considered it adds up. But your points about the mix are valid as well. That's obviously that goes into the equation.

[Vishal Shreedhar, analyst]

And just wanted to get your sense on some of the growth in the pharmacy business on the professional services side and maybe even on the specialty side, wondering if the specific pharmacy formats that you have are tailored sufficiently to address the growth in these segments in terms of consultation rooms and the like. And if not, is there ability to retrofit your existing locations quickly given the franchise structure, a little bit different than a corporate structure? So how do we think about your ability to capture that growing market?

[Eric La Flèche, executive]

That's a good question. So we're encouraging our franchisees to expand some space for professional services and call it clinic and nurses and those services. So in general, there's good space and we're well equipped to provide those services. And you see it in our Rx sales growth, which, as I said, was fueled by specialty and services. So we're doing it. Will there be more opportunities in the future to do it? Yes, we think so. So as we renovate some of the pharmacies, that space will be examined for sure and will be optimized for us -- for the pharmacists to capture that demand growth.

[Vishal Shreedhar, analyst]

Okay. And in terms of the ability -- your ability to incent the franchisees to renovate their stores, is that a relatively direct process or is it more on their volition or whether they want to proceed or not?

[Eric La Flèche, executive]

Well, they are franchisees. It's their store and their business so the decision has to be theirs. But we encourage and we help financially, and we provide planning services and procurement for all sorts of equipment and real estate and everything. So, but at the end of the day, the franchisee is independent, is an owner, and it's his balance sheet and his decision. Again, we work closely with them, and we provide all the necessary incentives to keep our network modern.

[Operator]

Next question will be from Chris Li at Desjardins.

[Christopher Li, analyst]

Maybe Francois, just start off with a few modeling type questions. First one is, is it fair to assume that if we exclude those DC ramp-up costs or inefficiency related to the ramp-up, the SG&A expense rate for the quarter would have been at least stable given that you had some pretty solid top line growth?

[François Thibault, executive]

Yes. So I won't give you a precise breakdown, but if you remove those extra costs and these inefficiencies and so forth, when you also factor in the higher e-com third-party fees that we have, in terms of percentage of sales, it would have been roughly similar to last year. So you're right.

[Christopher Li, analyst]

Okay. That's very helpful. And then second modeling question just on -- maybe on the depreciation and interest expense level for Q1. Do you think there is roughly a good run rate for the rest of the year?

[François Thibault, executive]

Well, I -- last quarter, I gave you -- I gave some guidance to say, to expect that the total variance and depreciation would be $50 million, including, obviously, the new site. So we're about $11 million more this quarter. That's three periods of the $13 million, that's a run rate of about 47.5%, 48%. So we're on that run rate now. There will be some CapEx coming a little later, but it's not -- I think we're exactly at the run rate we gave last November.

[Christopher Li, analyst]

Got you. Okay. And then what was roughly the EPS benefit from the Christmas week shift in the quarter?

[François Thibault, executive]

Well, we don't really segregate that week. It's -- I mean, there's no surprise the calendar being what it is because of the way last year fell, it's part of our results. We want to be transparent so we have to be transparent to say, look, that included a full week before Christmas, whereas last year, it was in the second quarter. So we shifted that comparison to be apples-to-apples and you'll see the reverse in Q2. And when you look at the cumulative results after Q2, this will all be neutralized, obviously. So it's more sales, more cost and it's a normal contribution, but we don't really segregate that. But you can do the math, I'm sure you'll get something there.

[Christopher Li, analyst]

Okay. That's fair. And I know you guys get asked this question almost every quarter, but when we again look at your food [Indiscernible] sales and just look at the street math and take away your 4% inflation, the implied math would suggest that there was a bit of negative tonnage, but per Eric's remarks in the opening is that there is positive tonnage -- so I'm just figured out what is the disconnect and just help us understand?

[François Thibault, executive]

Yes. Well, again, the real quarter increase is 6.1% same-store. That's the -- those are the sales for the quarter. But that's the fact and the inflation was above 4%. So I can tell you, we did increase tonnage. Now when you shift the calendar for Christmas, it gets a little closer, but the reality is we are seeing some positive tonnage in our numbers.

[Eric La Flèche, executive]

I would add to that, the private label sales growth [Technical Difficulty] deflationary and increases tonnage. So net-net, even with the Christmas shift, we think we had good tonnage growth. And the [ Nielsen ]numbers tend to back that. And [Indiscernible] warehouse.

[Christopher Li, analyst]

Okay. Well, that's fair. And this is the rising discount square footage that you've been seeing in Quebec, is it fair to say it's manageable overall for you guys?

[François Thibault, executive]

So the square footage, we're adding square footage. One of our competitors is converting conventional to discount. So in the same square footage, they've added a couple of stores also. But -- so yes, on the square footage growth, it's manageable. There is an impact. It varies by region. I've said this before, in certain areas, we don't feel it much in other areas, we feel it more. But it's pretty much what we expected.

[Christopher Li, analyst]

That's great. And maybe last question, just on pharmacy. There's been a lot of more talks about these high-cost specialty drugs having a structural growth tailwind for them. I think Jean Coutu obviously participates in that segment as well. But I was just curious to see from where you sit today, how meaningful of this tailwind do you think are the specialty drugs that are growing -- seem to be quite fast? And from a profitability perspective, given your franchise structure, do you benefit as much from those growth versus if you were a corporate store?

[Eric La Flèche, executive]

Well, it's a growing category. It's a growing sector for sure. There are limits on distribution fees in Quebec because of -- for high-cost medicines, they are capped. So we don't make our full distribution margin on them on a rate basis. That said, there is some growth; these are generated by the pharmacist. Again, those are capped also, and we make a royalty. So net-net, it's a growth area, but it's not linear with other scripts, lower margin than the normal scripts.

[Operator]

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

[Sharon Kadoche, executive]

Thank you all for your interest in Metro, and please mark your calendars for our second quarter results on April 24th. Thank you.

[Operator]

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