Metro Inc
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Metro Inc
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Good ladies, morning and gentlemen. Thank you for standing by, and welcome to the METRO INC. 2020 Second Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I will now like to turn the conference over to your speaker today, Sharon Kadoche, Senior Adviser, Investor Relations and Risk. You may begin your conference.
Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our second quarter, which ended March 14, 2020. With me today is Mr. Eric La Flèche, President and Chief Executive Officer; and François Thibault, Executive VP and Chief Financial Officer. During the call, we will present our second quarter results and comment on its highlights. We'll 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 can 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 2019/'20 action plans. 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. The description of these risks, which could have an impact on these statements, could be found under the Risk Management section of our 2019 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 Eric La Flèche.
Thank you and good morning, everyone. I hope you and your families are all well. Today, I will be speaking first as I want to address the COVID-19 pandemic and how it is affecting everything we do. I will then give you the highlights of our second quarter and then François will discuss the results in more detail. I will come back at the end with more comments on our outlook. The COVID-19 pandemic was officially declared during the last week of our second quarter, which ended on March 14. Starting on February 28, we saw customers beginning to stockpile in the province of Ontario, followed by Quebec about a week later. The significant surge in sales, especially in the last week of the quarter, was unprecedented and required the mobilization of all our resources to ensure the safety of our employees and customers, the resiliency of our supply chain and the operations of our food stores and pharmacies. The sales have since leveled off, but we are still experiencing significant increases in revenues due to the pandemic, and I will give you more details in my closing remarks. Our teams on the frontline of this crisis are working very hard to provide the essential services of food and pharmacy to our customers. The company quickly implemented several initiatives to ensure the health and safety of our employees and customers as well as recognize the significant contribution and dedication of our employees. We increased the hourly wage for frontline food store and warehouse employees by $2, retroactive to March 8 and ending on May 2, now extended to May 30. We reduced store hours to allow teams more resting time and to help in replenishing the shelves. Our teams did a great job of rolling out the installation of plexiglass shields to all of our food stores and pharmacies in a matter of only 1 week. We are limiting the number of customers in our stores as well as imposing limits on certain items. We applied social distancing measures in all stores and warehouses. And lastly, hygiene measures were reinforced and cleaning frequency increased. We also increased our community investments to support our fellow citizens who are most at risk through the food banks and Centraide United Way. Our teams have responded above and beyond the call of duty under difficult circumstances. They are mobilized more than ever and focused on carrying out our mission of providing essential services in food and pharmacy across our retail network as well as online. I want to take this opportunity to recognize them and thank them for their exceptional engagement. I also want to thank our affiliated Metro retailers, the Jean Coutu and Brunet pharmacist owners as well as our suppliers for their outstanding support since the beginning of the crisis and of course, our customers for their loyalty and understanding. Turning now to the second quarter. Let me start by saying that we were experiencing a strong sales momentum right up to the pandemic. We were definitely on track to deliver a very solid financial performance. Our food same-store sales for the second quarter were up 9.7%. And excluding the impact of the pandemic, we estimate that they would have been up by 5.2%. That's on top of a strong performance in Q2 last year at plus 4.3%. The shift of Christmas sales accounted for 0.6% of our second quarter comp sales. Our internal food basket inflation was 2%, the same as in the first quarter. Average basket, traffic and tonnage were all up, and we were able to grow our market share. On the e-commerce front, demand surged following the outbreak of the pandemic as some customers were confined at home or chose to limit their trips to the store. We more than doubled our online volume overnight, and the current demand is hard to meet as time slots are filling up as soon as they become available. We added a second store in Québec City as already planned and added as much capacity as possible to our other stores in Montreal and Toronto. We just signed a new agreement with Cornershop, a grocery quick delivery service in Toronto and Montreal, that will add to our online capacity. Finally, we just recently launched the Metro Priority Service for seniors and customers in quarantine, which is a simple web form sent to the store for pickup or delivery. This service is now available in 130 Metro stores in Québec and 90 stores in Ontario. On the pharmacy side, same-store sales grew by 7.9%, with a 7.7% increase in prescription drugs and an 8.3% increase in front store sales, fueled by strong volume growth in Rx and OTC categories that drive overall traffic to our stores. Excluding the impact of COVID, we estimate that the pharmacy same-store sales would have been up 6.4%. Prescription count grew by 3.9%. And I would say that the extended cough and cold season also contributed to this strong performance. The integration of our pharmacy distribution activities was progressing as planned before the pandemic crisis. The deployment of the POS retail and lab management systems to our Brunet pharmacies was also on track, with a quarter of the Brunet pharmacies now using the new software. Obviously, in light of the current crisis, you can understand that the deployment of the retail systems and the negotiation of our Varennes collective bargaining agreement are all on pause. There will therefore be a delay in securing the remaining Jean Coutu synergies. At this point in time, it is impossible to provide a precise revised time line. Last month, we announced a major investment in our future, a 5-year $420 million investment to modernize our Québec supply chain with a new automated distribution center for fresh and frozen products in Terrebonne, just north of Montreal, and the expansion of our produce and dairy products distribution center in Laval. The technology will be provided by Witron, the same supplier we are working with for the new Toronto automated DCs. This investment added to the ongoing investment in our Ontario supply chain, will improve service to our stores with increased accuracy, reduced handling time, resulting in more variety and freshness for our customers as well as efficiency gains for the company. Given the pandemic related travel restrictions, we will experience some delays for the completion of the 2 Ontario distribution center projects as we require the assistance of foreign nationals working for Witron. Again, it is difficult to provide a precise revised time line, but I'm certain that all parties involved will do their best to mitigate the delay. As for the retail network, in the first half of the fiscal year, we opened 5 new stores, including 2 relocations and expanded, converted or remodeled 11 stores for a net square footage addition of 115,000 square feet or 0.6%. At the moment, all retail CapEx projects are on hold in Québec because of government restrictions, but our Ontario projects for this year will be completed. I will now turn it over to François, who will cover the quarterly results in more detail, and I will come back after to provide color on our current situation and outlook. François?
Thank you, Eric, and good morning. I also wish to express my best wishes of health to everyone on the line. In our second quarter, our total sales reached $3.99 billion versus $3.7 billion last year, that's an increase of 7.8%. Excluding the impact of IFRS 16, sales reached $4 billion or an 8.1% increase. The main driver of this strong performance in sales was organic growth, including a small positive impact due to the Christmas shift. As Eric stated earlier, we experienced a surge in sales in the last 2 weeks of the quarter due to the COVID-19 crisis. We estimate the increase in sales due to the pandemic at $125 million. And excluding this figure, total sales for the second quarter would have increased by 4.4% year-over-year. Our gross margin stood at 19.7% of sales or 20% when adjusting for the impact of IFRS 16, and that's compared to 20.1% for the same period last year. Operating expenses as a percentage of sales came in at 10.3% versus 13.2% last year or 12.2% when we exclude the retail network restructuring expense and the loss on divestiture of pharmacies incurred in the second quarter last year. And adjusting for the impact of IFRS 16, the ratio of operating expenses on sales for this quarter stands at 11.7% of sales. That reduction of 50 basis points versus last year is mainly the result of strong operational leverage, given the significant increase in sales as well as the fact that we have cycled the sharp increase in transportation costs that occurred early in the second quarter of last year. The adjusted EBITDA stood at $374.1 million, that's up $80.5 million and represented 9.4% of sales versus 7.9% of sales for the corresponding quarter last year. Excluding the IFRS 16 impact, adjusted EBITDA was up $36.1 million or 12.2% and represented 8.2% of sales. During the quarter, we captured $15 million in cost synergies related to the Jean Coutu acquisition, the same level as in the previous quarter. And on an annualized basis, our realized synergies remain unchanged at $65 million. Adjusted net earnings were $182.8 million compared to $155.1 million last year, that's an increase of 17.9%. And our adjusted net earnings per share were $0.72 versus $0.60 last year, an increase of 20%. The increase in sales resulting from the pandemic positively impacted our earnings per share by about $0.03. Our total capital expenditures in the quarter stood at $95.1 million versus $69 million last year. And as Eric indicated, we will be facing delays in some investment projects. And therefore, the indication that we gave of $550 million of CapEx for the year will need to be revised onward. We will do so at the time we release our third quarter results. I would like to end my address by saying that we are fortunate in this time of unprecedented crisis to maintain a strong financial position. On February 10, effective February 26, we issued 30-year notes for an amount of $400 million at an all-in rate of 3.41%. The proceeds were used to reimburse our floating rate notes of $400 million that were maturing on February 27. We have no debt coming due until December 2021, and we also have an unused $600 million revolving facility at our disposal. That's it for me. I will now turn it back to Eric.
Okay. So as I said earlier, we saw a huge spike in sales during the last week of the second quarter. The surge continued in the first week of the third quarter for both food and pharmacy. Stockpiling then started to ease off, but we continue to experience significantly higher food revenues due to the COVID-19 pandemic as people are eating more at home. In the first 4-week period of our third quarter, starting on March 15, ending on April 11, food same-store sales were up 25% versus last year. In all formats, we are seeing a significant reduction in customer visits, but a significant increase in basket size, that is customers are doing a much bigger and fuller shop. The largest increases are in the grocery and meats departments. The larger basket size translates into a higher average price per item and a lower percentage of items sold on promotion, a situation that is also amplified by the request of certain suppliers to stop or reduce promotional activities to avoid putting further strains on the production line and supply chain. However, we are also incurring higher operating expenses, namely in terms of labor, safety measures, maintenance, cleaning, in addition to volume-driven increases in labor, distribution and other costs. On the pharmacy side, prescription sales are holding versus last year, but we are experiencing a decline in front-store sales, reflecting the emphasis on providing medication first and foremost, and the safety measures currently in place that reduce physical access to pharmacies. Pharmacy front-end sales in the first period of our third quarter are down 9% versus last year, and that metric has been trending down over the period. We expect front-store sales to improve from current levels as commercial activities will be gradually expanded in the coming weeks. In closing, at this time, it is impossible to determine how long the situation will persist, how gradual the return to normalcy will be and what this new normalcy will even look like. We will continue to serve our customers as best we can while providing a safe environment for them and all our employees. We will run our stores and warehouse operations as efficiently as possible, mitigating the increase in expenses without compromising on health and safety measures. So that concludes my remarks, and we'll be happy to take your questions.
[Operator Instructions] Your first question comes from the line of Karen Short with Barclays.
First question I just wanted to ask. I mean even prior to COVID, your food comps were extremely strong, and I know you said they were running ahead of plan. But wondering if you could just give a little color on what you think was driving that? And then I had, obviously, some COVID-related questions.
Well, first, I would say that, as I said in our Q1 report in January, Q1 was affected negatively and Q2 a little favorably because of a bit of a Christmas shift. So I pointed that out. That was about 0.6%. But I think in -- turning after Christmas, our momentum was strong. January, February, a very effective merchandising across the business, really drove our food sales. We saw good tonnage, good traffic, very happy with that performance. The teams did a great job. On the pharmacy side, we saw very positive comps, too, for those periods pre-pandemic, driven mostly by Rx, OTC categories, very strong cough and cold season this year, extended cough and cold season. So clearly, that drove part of it. But it's all part of an effective merchandising program, good flyers, good digital programs, good execution at the store level. So it's a bunch of things, but we're very happy with that performance.
Okay. And then as we look at what you're seeing now, many retailers in the U.S. have obviously, like -- explained that they're seeing the same pattern that you've just explained with respect to traffic being down, but basket being up meaningfully. I guess I'm wondering what you think, if you had to kind of guess the behavioral shift beyond this. Do you envision a scenario where kind of basket peters down, but traffic remains negative? Or do you think you're going to be in a structurally higher basket situation for a while? And then I guess the other question I would have with respect to the operating expenses. You obviously announced the $2 wage increase. Wondering if you could just actually quantify that impact on the operating expense. But then, when things become a little more normal, the question is, how much flexibility do you have on bringing operating expenses back in line? Or is there going to be an embedded higher structural level of operating expenses kind of in a new normal world, I guess?
You're covering a lot of stuff here, but -- so the current pattern of lower traffic, higher basket, we expect that to stay for a while. As long as we're in confinement, as long as many sectors of the economy are not reopened, as long as restaurants are for the most part closed, we expect that pattern to be sustained. I don't have a crystal ball, how long, how much, it's really hard to know. Clearly, the food at home share is much, much bigger than it was 2 months ago. How much of that will stick going forward, your bet is as good as mine. I would expect that more people eating at home today, some of that will stick. Exactly how much is very hard to say or to say. So we don't expect the basket to peter off. We expect to see a continued strong basket in this current environment. Then there will be a transition period as the economy reopens. And then I guess we'll see a return or a bit of a return to the former pattern of more trips and smaller basket. But I think we have some time ahead of us. The operating expenses, yes, we extended the $2 an hour, the well-deserved $2 an hour to May 30 because we saw the operating conditions being pretty much the same until then. And we'll have to review that in the days or weeks prior to the end of May to see exactly where we are. So time will tell. There are additional expenses, as I pointed out in my opening remarks, just for cleaning and for safety measures and masks and shields and a bunch of items like that, that are here for a while, and we expect to continue to incur lots of those expenses in the next months. But my response would be that we expect that our sales will be strong enough to justify supporting those expenses going forward. So we will manage it carefully. We will not compromise the safety of employees and customers. And we expect that those expenses will be absorbed by the additional volume.
Your next question comes from the line of Irene Nattel with RBC Capital Markets.
Thank you for the incremental color. Just picking up on the prior question around the impact of the wage increase, I guess Empire quantified it last week as a rate, that kind of points to 150 to 200 basis points. Would you see it being consistent for you guys?
I'll let François answer that.
Irene, it's François here. We're at the beginning of our quarter. So throwing out an SG&A number without sales volume is -- doesn't really tell you much. I think the best way to look at it is what's that potential contribution we get from the extra sales given the extra expenses. I think we gave you a good starting point with our Q2 results, $0.03 per share for $125 million in revenue. That's roughly equates to a pretax contribution in sales of between 9.5% and 10%. So let's say, 10% for argument purposes. So that's the first point, I think, we can look at. Obviously, there were not a lot of specific COVID-19-related expenses. We had the wage increase, yes, for 1 week. And I'm sure that -- there were a lot of expenses that -- because the stores, as you know, it was pretty -- it's a tsunami that fell on us in terms of replenishing the shelves and the customer traffic and so forth. So there are a lot of higher expenses that we weren't -- we didn't really quantify per se, related to the COVID. And at the same time, a lot of the purchases were done for items, there was a lot of stockpiling items that were lower margin, some on promotion. So I think that's the context you have to look at that roughly 10% pretax contribution. As we move forward in Q3, yes, we're going to be incurring a lot more expenses, as Eric pointed out, signage for the social distancing, labor. Not just the labor increase per se, but also there's more people, like the greeters and the people that disinfect the car handles, cleaning, maintenance, even credit card. A lot more transactions on credit card, which comes at a higher fee. So all this is taken into account. And I think we gave you a point -- we gave you a fact of where we are in our same-store sales after P7. How long those -- that's going to remain, it's -- as Eric said, your guess is as good as mine. But I think, obviously, with those levels, you can expect that we will beat that contribution, 1, 2 basis -- 1, 2 percentage higher than the 10%. Yes, that's a realistic assumption. But again, it's -- -- these expenses vary. We're getting a lot of directives from the health authorities that change, and we have to adapt. So very difficult to say where that's going to end. But I think you have a good starting point to estimate the potential contribution that these extra sales will do.
Okay. That's really helpful. And again, apologies for focusing so specifically on the current situation, but obviously, that's what everyone's trying to understand. If we think about the cadence of sales for the 4-week period that you discussed, presumably, for example, that first week was part of the biggest week in history in terms of revenues. Did you see sort of a normalization? Or is that mid-20% range kind of indicative of where we continue to run on a weekly basis?
So the record week was the last week of the second quarter. The first week of the third quarter was a strong week. It was the second strongest week. So that was above 25%. We're not going to give you specifics. So it was a very strong number that first week, leveled off in the teens and you end up at 25% for the first 4 weeks. That's the picture. So the go-forward increase in food sales, it can be anywhere from 10% to 20%. We don't know where it's going to be week to week. So we gave you a number for the first 4 weeks, and we expect the strong sales to continue, as I said earlier, as long as the economy or the confinement is where it is and food at home is where it is.
That's really helpful. And as you kind of looked at basket composition and traffic to both discount and conventional, has there been anything -- I mean other than just the sheer volume, has there been anything surprising to you about mix or trends or any behavioral aspects that you didn't anticipate?
Not greatly, but I would just say that the big basket boost has had more of an effect on the conventional stores, which have a lower average basket than the discount stores. I'll give you those reference points. So the percentage boost in basket in conventional is even higher than in discount because they're starting from a lower base and people are limiting their trips and buying a fuller shop. And so we saw an even larger basket increase in our conventional stores. Is it proximity? I think that's the main reason. But other than that, the buying behavior -- private label is up everywhere. I think people in those first few weeks were buying anything they could get their hands on in several categories. So private label profited from that. But there is no shift to discount because of the recession. We might see that down the road, as we all expect a recession in this country. How will that impact customer behavior down the road, it could very well mean more of a shift to value, and we'll be well positioned for that, but that's not what we've seen so far.
Your next question comes from the line of Patricia Baker with Scotiabank.
Two questions. Eric, in your discussion of the front-end pharmacy, you said that -- you expect that there should be a return -- commercial activity will come back, will gradually return. Are you referencing anything that you'll be doing to get that commercial activity to return? Are you referencing, as you would expect, the government to lighten up on some of the restrictions?
Well, I think we will follow directives of the government, obviously; the public health, obviously. The College of Pharmacists, which is the governing body of the pharmacists, has an influence and is issuing directives on how to operate labs in this current environment. So it's a different world, pharmacy, than food right now. So there are restrictions to access the stores, severe triage and very few people at the same time in the stores. Most, if not all, of the focus is on the lab and Rx and providing medication to the patients, first and foremost. So that's what they're focused on. Flyers in pharmacy in Québec over the last few weeks have been basically suspended. Very, very little commercial program activity, just to alleviate pressure on the stores and limit the draw to the stores. So that was an industry or professional directive from the College of Pharmacists. So we abided by that. We are returning to limited commercial program starting tomorrow. There will be a printed flyer for Jean Coutu and Brunet starting tomorrow again. So again, some sense of return -- gradual return to front-end activities without putting undue pressure on the pharmacies because their main responsibility is taking care of their patients who are looking for medication and to renew their prescriptions. So that's what I would say on the front end.
Okay. Can you talk about the commercial programs that you're going to launch tomorrow? Is there an emphasis on any particular category?
I can't answer that in specific detail, Patricia. I don't know what's on the flyer.
That's okay. I'll just look for the flyer tomorrow. Don't worry about it.
I usually -- I look at them, but I don't know today was a little bit busy.
Listen, it's really hard for us to determine what the new normal is going to look like, but I'm wondering if you'd be probably giving this some kind of thought. Do you anticipate that any of the safety and cleaning protocols that are in place currently might become permanent part of the operating structure?
Yes, that could happen. To what degree exactly remains to be seen. But for sure, customers are going to be expecting more from us. I think we're getting great customer reviews, sometimes not so great. We're not perfect. But overall, I think people have been appreciative of what we've done in our stores for them and for our employees. And I think that's part of the new normal, is what customers are going to expect in terms of cleanliness and sanitation, and wipes and disinfectants and shields. Some of that, I think, is going to be with us for a while. So that's why I say some of those expenses will stay down the road. So it will be our job to find ways to offset them. Maybe not to the same extent as we have them at the outset of the crisis. But yes, we expect that some of that will have to stay.
Your next question comes from the line of Mark Petrie with CIBC.
Eric, I guess I just want to follow up in terms of the promotional programs. And you sort of -- you've talked about it a little bit. But just in terms of specifically the food business, obviously, there's no reason to try and drive traffic. You commented, or perhaps it was François, that some of the suppliers sort of pulling back on some of their programs in order to better manage demand and service levels. So just in terms of your promotional strategies, how do you sort of balance all those puts and takes? And what does that end up meaning in terms of promo mix and then gross margin?
That's a good question. So I say, our guiding principle has been to act as a responsible corporate citizen and to provide food as much as possible to our customers. So we did reduce the page count. We did reduce the number of items on ad every week because we're not in a normal period, especially at the start of the crisis. There were supply issues, shortages. You all saw the pictures, you all visited stores, you saw what we were going through. So we had to address that by taking some items off, sometimes at the request of our vendors and suppliers, sometimes at the request of our stores just to be able to navigate and operate. So I would say from mid-March to mid-April, that's been the situation. We're back to more normal levels. There are still some shortages in dry grocery and some frozen categories that are supply related, not because of our logistical issues, which was sometimes the case at first during the crisis. But my comment on the general promotional program is that fewer items on our flyers, just to be able to provide as much as possible to our customer base. So if you combine that to the fuller shop, the big basket, which is, all else equal, always a better mix in terms of -- between regular and special. I said the penetration of specials is lower with the big basket. So that's what we're seeing. So I think it's largely based on the size of the basket and the full shop behavior of the customer than what's in the actual flyer. I think people are looking less at the flyer these days. But I can say that we have not taken prices up. Our front page lead items are just as aggressive as they have ever been. And the page count, as we come back to more normal levels of supply, I expect the page count to get back to normal in the next weeks.
Yes. That's helpful. And I guess just sort of related to that last point, just sort of thinking about how this whole dynamic may evolve given changes in flyer distribution and altered dynamics around marketing and advertising, how have you sort of adapted your tactics for communicating with customers separate from the flyer and some of your advertising? I mean, obviously, very difficult to talk about the new normal, but any initial comments you might have on that would be helpful as well.
Well, we have been active on our digital platforms to contact our customers directly, the metro&moi, AIR MILES. I've -- we've sent general e-mails to all of our customers and all of our banners to inform them of what we were doing in terms of measures for their safety and the safety of our employees. So we did that at the outset in the first few weeks of the crisis, as did most companies. I think it's a responsible thing to do. In terms of marketing and media advertising, we've not been that active, to be honest, up to this point. Our focus, as you said, customers are in the store, we want to make sure we serve them as best we can. But we've been relying on the flyer basically for the -- since the crisis basically began. Our marketing plans going forward, for obvious competitive reasons, I'm not going to disclose on this call, but it's an important part of our mix, marketing, both traditional and digital. And merchandising -- effective merchandising is a key successful -- success factor in our business. So we're going to be doing that week in, week out, like we always do.
Yes. Understood. And just last one, François, if I might. Could you just give us a bit more color in terms of how you calculated the impact of the sort of COVID-19 pandemic-related spending? Like, was the 5.2% food same-store sales growth, like was that the run rate before you started to see altered behavior at the end of February? Or how did you actually go about quantifying that? And then also the $0.03 EPS impact?
That's exactly that, Mark. It's -- we looked at the trend up to that pandemic, and that's what we were tracking. So as we were -- at the end of the quarter, it was relatively straightforward to quantify the impact given where we had only 2 weeks left. That's how we did it. And we looked at, obviously, the contribution from a margin and from an SG&A related to that. And that's how we came -- that's how we estimated that profit impact.
Your next question comes from the line of Michael Van Aelst with TD Securities.
Just to follow up on that last point, quickly though. Did you see any increase in your same-store sales activity in February relative to January?
Well, we don't give out the week-by-week, month-by-month increases. But as I said, when we said we had strong momentum in January and February, I think I'll leave it at that. It was a strong stretch for the business -- for the food business and the pharma business across the board.
Okay. I was just trying to figure out whether maybe people started to shop a little bit more in February, but it was less noticeable.
No, it wasn't noticeable for us until February 28 in Ontario. That day -- something happened on that day, there was an announcement of some sort, and we saw the rush for mostly cleaning supplies, hand sanitizers, the toilet paper. You saw the beginning of the crisis, it was all about toilet paper. But in Ontario, it started that week -- that date effectively.
Okay. All right. And François, I think your earlier comments implied that the sales benefit you expect from COVID over the remainder of the year should more than offset the increased cost that you expect to linger. Is that an accurate summary?
Yes.
All right. Great. And now on the e-commerce side, you said your volume was up -- was doubled overnight. And I'd assume it's at least stayed at that level. And you talked about adding 1 more store to pick from in Québec City. But if we assume that some of this traffic and some of this e-commerce activity stays at elevated levels, because if capacity was higher, you'd have to think your demand would be a lot higher, too. So what are you doing to try and increase your capacity so that number can go to 3% or 4% or 5%?
So -- yes, so on the e-commerce front, we are -- we have been adding capacity as demand justified or demand drove it. So what is going to be the new level of demand? We expect it will be higher than it was before. There's an acceleration. That's pretty safe to say there's an acceleration that will stay. We don't expect short term to -- e-com sales levels to stay where they are. But clearly, they have made a step change. So we will need to add some capacity. So we're looking at our different options. We have started to look at that pre-crisis anyways. The Québec City store was something planned a long time ago. It takes a few weeks and months to open a store with our model. So that was in the pipeline. It opened at the right time for us. We focused on executing and adding orders to our existing stores in Toronto and Montreal, especially. So added staff to pick, added trucks, added delivery windows, so we were able to do that. Once that's all said and done, to grow it more, we will have to add stores or add capacity in some other fashion. So the Cornershop deal that I just announced, I think, for the quick order, the 1- to 2-hour window, some people are interested in that, they can shop our stores through Cornershop. And the seniors priority order form on the web, it's not an e-com transaction. It's like a modern version of the phone order, but it's allowing us to do more web orders and alleviate some pressure on the e-com business. So we're doing what we can to meet that demand as best we can. And as demand grows, we will do what we do to augment our capacity and grow our share of the e-com business. So stay tuned to new announcements on the future plans, but we will be looking at ways to add some more capacity.
Okay. But based on your structure, are you able to give us any kind of insight as to whether it makes more sense for you to add more -- pick from more stores or whether you go to a dark store or...
Again, those are all different options that we're looking at. We'll consider carefully, and we will keep you informed of our plans as they get confirmed. So I'll leave it at that.
Your next question comes from the line of Vishal Shreedhar.
Just a quick few follow-ups here. When you stated that the extra sales will more offset the extra costs looking forward, was that a comment for just food or was that an entire company comment?
Well, clearly, we're talking about food. Most of it -- well, there are costs in pharmacies for sure, too. But as we report our numbers, we report general company expenses and contribution and net earnings. So the answer is, it's for the whole company, driven by food where we're seeing sales increases. Sales on the pharmacy side, as I described earlier, are tougher right now. So we expect that for the whole company, if the food sales stay at a healthy level like that, that we'll be in a good shape to absorb all those expenses.
Okay. And given that the pharmacy sales a little bit tougher on the front shop, like, do the franchisees -- do they get any assistance from METRO? And how should investors think about that?
Well, it's too early to say. It's -- we have a franchise model, and we support our franchisees when the need arises and when the circumstance is justified case by case. So we'll have to review with them how some are affected more than others. And if they need support, yes, there could be some additional support expenses. But again, too early to tell. We'll give you more color on that when we report our third quarter.
Okay. So -- and just to kind of cover the Rx view, is it fair to say that the actual prescription drug category, that's fairly not impacted by COVID-19. Is that -- I mean in terms of the trends, the sales trends, that's generally business as it was. Is that a fair comment?
Well, we've seen a bit of a softening in prescription count. We had a healthy prescription count lift in Q2. If you look at our number at 3.9%, it was a strong number versus Q1. So the prescription count has come down a bit from that so far in Q3, but we're still seeing decent Rx sales. You have to understand there was loading in that last week of the quarter of Q2 of Rx and front shop. That's having an impact so far in the third quarter. But we expect Rx sales to maintain. The delivery -- home delivery of Rx is significantly higher than it was prior to the pandemic. There's less traffic in the stores, which I've already described. But the Rx medications are getting to the patients by delivery or a pickup in store.
Okay. Okay. So I guess looking forward, a reasonable way to think about it is Rx -- looking forward, Rx relatively stable-ish business, the front shop impacted by the commercial activities, and that will continue, although maybe improved from recent levels. And then you just really got it fair when things normalize.
I feel that's a fair summary, yes.
Your next question comes from the line of Peter Sklar with BMO Capital.
On the gross margin percentage, I would have thought that given the very high volumes you're pushing through the systems, you might have improved your gross margin percentage given that there is some fixed costs associated with that. But the actual gross margin percentage for the quarter was slightly down. So can you talk about the puts and takes that are affecting the gross margin percentage?
Well, the big lift in sales was basically the last week of the quarter. A lot of that was dry grocery. We actually had toilet paper on special and butter on special that week. So those are not good margin items for us. So that was a bit of a factor. But the gist of the quarter was non-COVID and our margins, we thought, were fine. We got good sales and the mix, we were happy with our mix. So I -- for me, there was no issue with our gross margin in the quarter. We were comfortable where the -- with the levels that we were at pre-COVID and post-COVID for the quarter.
Okay. And the fact that there's less reduced promotional intensity, how does that impact margin? Because to some extent, the promotions are funded by your CPG suppliers. So I'm just wondering if that might have less of an effect on margin than we might initially think.
Well, I think the main driver of the gross margin on the food side is the promotional mix between regular shelf and promo. So that's a good driver of -- that's good for margins. We're not taking prices up. But if you're selling proportionately less on promo, your gross margin should be in good shape. You have to think that you have to offset that with some departments that are not doing so well, even in the food stores like HMR, which is a high gross margin area. Those sales are pretty quiet. These days people are cooking from scratch more and more and not buying the HMR offer so much. So that's a negative effect on gross margin. Floral department. Some areas are not doing so well. But overall, the gross margin with the volume we have, the big basket we have, these days is in good shape.
Okay. And then just lastly, when -- in your disclosure for Q3, you talked about pharmacy commercial same-store sales. What do you mean by commercial?
Front-end. Sorry, pharmacy front sales, front store.
Your next question comes from the line of Chris Li with Desjardins.
Eric, just maybe if I can ask you to take out your crystal ball for a moment and wanted to get your thoughts on. In a post-COVID world, what does the industry margin look like? Because, if I'm thinking all out, obviously, if more peoples eat at home or cook at home, there's going to be a positive mix shift to your fresh sales, which is good for margins. But the offset is, as you alluded to earlier, you'll be investing more in increasing your online capacity and there's probably more structural costs from cleaning and wages. So would love to get your thoughts on just on a high level basis, where do you think margins will be like in a post-COVID world?
Again, we don't give guidance or crystal ball. That's not something we do. But you're pointing out some of the expenses that are likely to occur, either for the employees and safety and all that stuff and e-com, which is an investment at this point. So yes, clearly, we will need to offset that with some effective merchandising and control of our other investments. And with the supply chain investments we're making, it'll provide us with more efficiencies on distribution and supply chain. So it's a moving target, but we are focused on delivering growth to our shareholders, and we will find ways to grow our top line and grow our bottom line. So there are a lot of moving parts to get there. But I think we have the program, the formats and the team, especially, to continue to deliver as we've done before. So we will strive to continue to do that.
Okay. That's helpful. And I know a couple of your peers have started to sort of terminate their paper flyers and going all digital. From your comments, it seems to me that the flyers are still highly effective for you guys. I just want to see sort of what your thoughts on paper flyers going forward as -- going forward?
Well, we're watching that closely. We're looking at what our competitors are doing, which is pretty normal. So we'll see. We'll do our own strategy. And for now, we're staying with the paper.
And then on capital allocation, is it fair to assume your buyback will continue? I didn't see anything in the press release.
François?
No, no change. We've kept pace with buybacks. We didn't accelerate it or decelerate it. We're just regular paced. So no -- there's no reason to change our capital allocation today.
Okay. And lastly, just a more modeling question, François. Just on your $0.03 of contribution from COVID, if I did my math right, it would imply incur roughly about $15 million, 1-5, increase in SG&A expenses in the last 2 weeks of March. First of all, is my math right? And second of all, is the way to think about is that at least for the next few weeks, that run rate will likely be higher because as you mentioned, there are a lot of costs that probably were not incurred during your quarter?
There are more costs coming. But there's also, as Eric said, we -- it's a different purchasing, different basket. So that's why we say that given where sales are, we will be able to absorb all the expenses.
And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Thank you all for your interest in METRO, and we will speak again soon to discuss our third quarter results on August 12. Thank you.
This concludes today's conference call. You may now disconnect.