Metro Inc

TSX:MRU

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, and thank you for standing by. Welcome to the Metro Inc. 2021 Second Quarter Results Conference Call. [Operator Instructions]I would now like to hand the conference over to Sharon Kadoche, Manager, Investor Relations and Treasury. Thank you. Please go ahead.

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

Thank you. 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 13, 2021.With me today is Mr. Eric La Fleche, President and Chief Executive Officer; Francois Thibault, Executive VP and Chief Financial Officer. During the call, we will present our second 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 2020-2021 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 can 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 2020 annual report. As with the preceding risk, 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 morning, everyone. I hope everyone on the line is in good health. We started cycling the peak sales at the start of the pandemic last year in the latter part of our second quarter, especially in the last 2 weeks.Our second quarter sales totaled $4.2 billion versus $4 billion last year, an increase of 5.1%. Food same-store sales grew by 5.5% for the quarter on top of 9.7% for the same quarter last year. Pharma same-store sales were down 0.8%. Our gross margin stood at 20.2% of sales versus 19.7% for the same quarter last year. The increase in gross margin was mainly the result of a continued strong performance in our core food business. Operating expenses, including $29 million of COVID-19 expenses represented 10.7% of sales versus 10.3% last year, a ratio that was positively impacted by the fact that we experienced a strong surge in sales in the last 2 weeks of the quarter last year due to the pandemic but with no incremental COVID-19-related expenses. Our teams continue to do a great job at finding ways to mitigate part of the increase in operating expenses. The $29 million in quoted expenses include $8 million of gift cards that we're giving to frontline employees.EBITDA for the quarter totaled $396.1 million, that's an increase of 5.9% versus last year and represented 9.4% of sales, the same margin as last year. Adjusted net earnings were $194.7 million compared to $182.8 million last year, an increase of 6.5%. Our adjusted net earnings per share were $0.78, up 8.2% versus last year adjusted EPS of $0.72. And again, earnings in the second quarter last year were favorably impacted by a surge in sales due to the pandemic with no incremental COVID-19-related expenses. Our capital expenditures for the second quarter totaled $119.6 million versus $95.1 million last year. As expected, higher CapEx is mainly the result of some carryforward projects that got delayed last year due to the pandemic, namely our Ontario automated DC.At the retail level, for the first half of this fiscal year, we opened one store at Adonis in Québec City, relocated another one and carried out major renovation in 7 stores, representing a net increase of 56,000 square feet or 0.2% of our food retail network. Following the end of the quarter, we opened 2 new stores, 1 Metro Plus in Courville, Québec, and 1 food basics in Courtice, Ontario.Investments in technology at a store level are also ongoing. We now have about 260 stores with self checkouts, and we're planning on adding another 90 this fiscal year. Also, we now have about 120 stores equipped with electronic shelf labels and we're targeting another 90 by year-end.Under our current normal course issuer bid program, we have repurchased between November 25 of last year and April 2 of this year, 4.25 million shares for a total consideration of $238.9 million, representing an average share price of $56.21.I'd like to close my remarks by reaffirming that our financial position remains solid. 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 morning, everyone. We had very solid results in the second quarter delivering sales growth of 5.1%, EBITDA growth of 5.9% and adjusted EPS growth of 8.3% and what can only be described as a challenging operating environment. Our teams continue to demonstrate great dedication and resilience to serve our communities. I'm grateful for their work -- for their hard work. And following the most recent government measures, we announced last week that all our frontline employees would receive a third gift card bonus in May in recognition of their commitment, whether they are in a lockdown region or not. We continue to apply the most rigorous safety protocols for our employees and customers. Food same-store sales were up 5.5% in the quarter and 10.1%, excluding the last 2 weeks when we saw the initial surge in sales last year at the start of the pandemic. We continue to gain market share and the market environment is very competitive as always. Our internal food basket inflation was 2%, down from 2.5% in the first quarter. Transaction count remains significantly down versus last year, but is again more than offset by the larger basket size. Promotional ratios trended up quarter-over-quarter, but are still below pre-pandemic levels due mostly to the larger basket.Online grocery sales grew by 240% for the quarter versus 1 year ago. Volumes in our hub stores remain strong. We are on track to have 170 click-and-collect stores by the end of September. Our partnership with Cornershop continues to grow, and we recently added our Adonis banner to the same-day delivery service. The Montréal dark store will open this summer as planned and provide us additional capacity. Finally, we will be expanding our online hub delivery -- home delivery service to the Ottawa market this summer with the opening of 1 hub store and several click-and-collect stores.Turning to pharmacy. Comparable sales were down 0.8%, with prescription drugs up 4.2% and front-end sales down 10.5%. The core RX department remains very solid however, as we indicated on our last call in January, the restrictions on the sale of nonessential goods in Québec for about 6 weeks, combined with a much milder cold and flu season, negatively impacted commercial sales in the second quarter.At the end of March, our affiliated pharmacists in Québec started to administer COVID vaccines albeit in very small quantities due to limited supply. Some 450 of our pharmacies in Québec and most of our pharmacies in Ontario and New Brunswick will participate in the vaccination effort, and we are working closely with the authorities to accelerate the pace of vaccination as more supply becomes available in the coming weeks. The transfer of the Brunet pharmacies to the Coutu DC as well as the Metro and Super C stores for health and beauty products has started and will be completed in June. This is the last phase of our 3-year integration plan, and we anticipate savings of about $10 million next year in distribution and warehousing costs as we will operate in one facility. As you know, one of our strategic priorities is the modernization of our supply chain. In February, we started the operations in Phase 1 of our new semi-automated produce DC in Toronto. About 2/3 of our stores are now supplied from this facility and the transfer will be completed in the next few weeks. Post ramp up, this new facility will provide increased capacity and better quality for our stores. It is always challenging to start a new DC, even more so during a pandemic, but our team is doing a good job to manage the expected transition costs. The new fully automated frozen DC is in the final stage of construction and systems will be commissioned over the next months in time for a January 2022 opening.Looking ahead, the recent lockdown measures in Ontario and parts of Québec continue to favor food at home consumption. In Q3, we expect food sales to stay elevated compared to pre-pandemic levels. But as we cycle the peak sales of the start of the pandemic, we expect comp sales to be negative for the quarter. In our pharmacy division, we expect continued growth from prescription drugs. And subject to the evolution of the public health measures, we expect front-end sales in the short-term to compare favorably to last year, given the serious restrictions to access to pharmacies that were in place during the first wave of the pandemic. So our priority remains the safety of our employees and customers, and we believe we are well positioned to continue to deliver value to our customers and shareholders. And we'll now take your questions.

[Operator]

[Operator Instructions] Your first question comes from Karen Short of Barclays.

[Karen Fiona Short, Research Analyst]

Wondering if you could talk a little bit about how your thinking about inflation as we go through the rest of the year? And then how you're just generally thinking about what the cadence of traffic versus basket may be as we get into the third and fourth quarter, given that there is so much volatility in both of those numbers for the remainder of the calendar year?

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

Well, inflation expectations are, again, uncertain, but we had pretty muted inflation in the second quarter, down a bit from the first quarter, like I said. We saw some inflation in produce. What's ahead of us will depend on a bunch of factors. On the grocery side, we understand that there are some cost increases being asked or coming due to production cost increases from our vendors. So there could be a bit of inflation on the grocery side. In the fresh department, again, there are many factors at play. FX, Canadian dollar is stronger this year versus last year that should help us a bit to offset some of the inflationary pressures. But net-net, we don't expect the inflation picture overall to change that much. The 1.5% to 2%, 2.5% number is something that we think is realistic. But again, no crystal ball, and it is volatile, and it is uncertain. As far as traffic is concerned in our stores, traffic trends, I said, are down year-over-year. As we cycle the pandemic, we're going to be improving traffic trends. We're going to see the basket be more normal versus last year because it's COVID against COVID. So I think we need to look at it going forward on a 2-year basis and see what our growth is. And we're confident that our sales will remain very strong versus 2019 on the food side.

[Karen Fiona Short, Research Analyst]

And then just a follow-up on the promotional environment. I guess, what's your perspective in terms of how that environment will look as we're looking several, I guess, quarters down the road in terms of the competitive landscape, broadly? I mean, obviously, all retailers know that the negative comps are a function of, I mean, obviously, very, very unusual comparisons, but how do you frame that with respect to how the competitive environment may look in the next several quarters?

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

Well, again, I can't speak for others. I just said, we are looking at our week-to-week sales, our market share every week, and our sales versus 2 years ago, that's really the bottom line for us. The promotional environment, I said, increased quarter-over-quarter. We expect that to continue and normalize. I think it's a very competitive market out there. It always has been, and we expect that will continue.If the basket stays larger versus 2 years ago, I think that's helpful for the promo ratio in the sense that fuller basket will have perhaps a smaller share of promotional items in it. So we're confident that we -- in a very competitive market with promotions increasing, we're confident that we can manage through that and deliver good value.

[Operator]

Your next question comes from Kenric Tyghe of ATB Capital Markets.

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

Eric, I wonder if you could provide any insight on the makeup of your basket. I understand it's a larger basket, but if you could provide any insight on full services to how consumers are shopping and perhaps whether they are filling their baskets by buying up or whether there's any material change in the basket composition? And second to that, have you seen any differences emerging between the basket in full-service versus Québec -- in Ontario versus Québec as the -- as we sort of rolled through the pandemic?

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

Well, the makeup of the basket, again, it's a larger basket and there's a higher food at home consumption. So clearly, protein, meat, fish remain up pretty substantially versus pre-pandemic levels. So that continues in both of our conventional and discount banners, perhaps more so on the conventional side. In terms of promotional mix, I've spoken about that already. It's below pre-pandemic, but inching up every quarter. It's a full basket. People are shopping around less and concentrating their purchases in fewer stores, one store or a couple of stores. So that makes up for a fuller basket that's representative of all the departments with the protein sector benefiting a little more.

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

And then just quickly switching to pharmacy. Obviously, loss in -- beauty and cosmetic sales are a loss for the market. But as we look -- again, look forward what levers do you believe you're able to pull in the Québec market to either try and drive increased share or otherwise in that beauty and cosmetics space on any sort of normalization of behavior through the summer here? How do we think about the evolution of beauty and cosmetics? It's certainly a business that has been under marked pressure over the last year and trying to tease out how that could evolve and what levers you could pull to try and drive any sort of real recovery or acceleration through the back half year?

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

Well, I think we're very well positioned. With Jean Coutu and Brunet, we cover all of the Québec market extremely well. Our market share in prescription drugs is strong and as well in HABA. Coutu has a strong promotional strategy. I think as more and more people get vaccinated, I think traffic to our pharmacies will improve. And I think with the strong merchandising and promotional program, we will be able gain more sales than we have over the past 12 months where it's been challenging for pharmacy for sure. So as I said in my opening remarks, depending on how the sanitary measures and restrictions evolve, we expect that, over time, they will gradually be eased and removed eventually that will benefit our pharmacy network on the beauty and cosmetic side. So another lever is e-com. We're growing the e-com business on the pharmacy side gradually. We expect that to continue to grow. But the biggest strength, the competitive advantage, is our retail network and our reach -- and our strong merchandising promotional program at Jean Coutu.

[Operator]

Our next question comes from Michael Van Aelst of TD Securities.

[Michael Van Aelst, Research Analyst]

Can you help us with understanding the compensation that pharmacists are getting for the vaccine administration?

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

I don't have the specific dollar amount by heart. We could get back to you, but there is a negotiated fee that the Association of Pharmacists negotiated with the government. I think it's $17 or $20 in that range that the pharmacist will earn for vaccine administration. On the distribution side, because we are supplying the vaccines from our Jean Coutu warehouse in Varennes, so we will also make a small distribution fee that was negotiated with the government, the Ministry of Health. So this is not a huge moneymaker. It's a community drive to accelerate vaccination, but there is some compensation.

[Michael Van Aelst, Research Analyst]

Okay. And that $17 to $20 kind of negotiated fee, is that over and above the cost or is that to cover some of the costs as well?

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

The cost of the vaccine? There's no cost for the vaccine.

[Michael Van Aelst, Research Analyst]

No, sorry, like your PPE and things like that, the materials?

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

Well, it is to cover that their time and their expenses related to the vaccination efforts.

[Francois Thibault, Executive VP, CFO & Treasurer]

Not the cost of vaccine.

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

But not the cost of the vaccine.

[Michael Van Aelst, Research Analyst]

Okay. Great. And then as you see -- we've been lapping COVID now for, I guess, several weeks or a month or so from a year ago. And I know that the traffic is still below pre-pandemic levels, but are you seeing consumers getting more comfortable with coming back into the store versus where they were 3, 4 quarters ago at the start of the pandemic? And are they -- does that mean -- if that's the case, does that mean that they would be doing a little bit more of the cherrypicking and willing to go to more than one store, similar to what they were pre-pandemic or are we not there yet?

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

I don't think we're there yet. People -- I think we saw over the first part of the second quarter traffic trends versus the previous year, somewhat better than in the first quarter and then more restrictions came down, lockdown measures. So it's very volatile and uncertain. So I would say that the level of comfort has not materially changed. And certainly, in the last couple of weeks, level of comfort is more challenging as more measures are adopted and cases climbed.So it's -- I wouldn't call it more comfortable and then shopping around. So I think we're still in a world where people are concentrating their purchases with their main store. I think the key is establishing trust. I think we have done a great job over the last 14 months to secure the trust of our customers with rigorous controls, protocols, greeters in every store, extra sanitation. So I think that served us well. We're getting good customer feedback from that in our surveys. So I think we're in a good position to continue to serve our communities and keep them comfortable in our stores as much as we can.

[Michael Van Aelst, Research Analyst]

Okay. And then finally, just a question on your operating expenses. For the first 3 quarters or so of the pandemic, it seemed like you were -- excluding COVID costs, you're kind of flat to down a little bit year-over-year. And then now we've seen our return to growth in operating expenses in this quarter. Are there certain main categories of spending that is coming back at a quicker pace now?

[Francois Thibault, Executive VP, CFO & Treasurer]

Michael, I think it's -- we're back in -- excluding the COVID expenses, you're back to a more normal ratio. We're at 10.7% this quarter versus 10.3% last year. But last year, as we said, there's a lot of extra sales due to the beginning of pandemic with no related COVID expenses. So that 10.3% compared -- obviously was affected favorably. So if you remove those COVID expenses, the increase year-over-year is under 2%. So I think that's a normal trend year-over-year, given the environment we are in.

[Michael Van Aelst, Research Analyst]

Okay. So none of the -- like, the advertising expenses or other, like SG&A, or I guess, travel is not back yet, but none of the other expenses are coming back yet at any particular timing.

[Francois Thibault, Executive VP, CFO & Treasurer]

No, there's nothing unusual. It's pretty. When you remove the specific -- I mean, obviously, the bulk of the increases in wages and then you have some in maintenance, you have some in supplies for the mask or gloves, et cetera. You remove that, the lines of operating expenses are pretty much in line except, of course, travel is not as high as it was, but it was never a big expense to begin with in our company.

[Operator]

Your next question comes from Irene Nattel of RBC Capital Markets.

[Irene Ora Nattel]

Just want to continue the discussion a little bit about e-commerce. We saw a not surprising uptake in e-commerce, sequentially, in Q2. Wondering what you were seeing just in terms of timing and how it might have related to lockdowns? And sort of what types of behavior you saw in Québec during the early lockdowns that you may or may not be seeing now in Ontario, sorry?

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

There's no change in behavior of customers in the quarter versus previous quarters. I think the big difference in the uptick in our e-com volume is our added capacity. So there's effectively 2 hub stores extra this quarter versus the same quarter last year. We added 1 in Toronto and we had just started 1 in Québec City a year ago. So effectively, there were 2 more hub stores selling in Q2 versus Q2 last year.The COVID -- not COVID, but the Cornershop partnership continues to grow nicely. So we're getting good growth there in both of our markets. So those are the large contributors to the increase in our e-com volume. Click-and-collect stores are being deployed. We're about -- we have about 45 done as of today. We are on track. We hope to get to 170 by the end of our fiscal year. So that, again, will add more capacity. So it's more a question of capacity. In terms of bookings and trying to get a -- get your order delivered in the next day or so, I think it's a lot better than it was a year ago. Our systems are better. Our capacity to serve is a lot better. So we're not at full capacity. There are some windows, delivery windows, that are open midweek. At the peak of the pandemic, it was completely full, as you remember. So we're not there, but we're seeing very strong or good solid sales from our hub stores, that remains. But the growth is what I just explained.

[Irene Ora Nattel]

That's great. And what has been the early consumer response to the click-and-collect?

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

It's not overwhelming. It's ramping up. It's -- I think there is a demand for that, certainly in some more, I should say, lesser density, smaller markets. We expect that there will be some demand for that service. So we're managing through that store-by-store. Some of our affiliates in Québec are participating. The volume is not high, but again, it's work in progress and ramping up nicely, contributing to the overall online sales number that we report, but the majority of our sales remain in our hubs and delivery service and Cornershop.

[Irene Ora Nattel]

That's great. And I know you don't give channel performance, but from your overall commentary, with consumers still consolidating their shopping, is it fair to say that conventional remains robust as a channel?

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

For sure. Yes, conventional is strong in both of our markets. We're pleased with our discount performance also, but yes, conventional is still growing ahead of discount.

[Irene Ora Nattel]

That's great. And one final question, if I may. I just want to come back to the promotional intensity. You noticed that there was an uptick sequentially, I guess, the penetration of promotional items in a basket. But what about sort of, I guess, how hot, like, the promotions are? Are you seeing other players in the market step it up a little bit or consistent?

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

It's -- I said in my opening remarks, it's very competitive. It always has been. There are weeks where we see some aggressive promotional items. It's happened before. We saw some of that in Q2. We are competitive ourselves. So yes, some weeks are hot. But overall, I would think it's pretty consistent.

[Operator]

Your next question comes from Mark Petrie of CIBC.

[Mark Robert Petrie]

Just a follow-up on a couple of the topics you have already discussed. I wanted to ask about sales mix versus the pandemic impacted period last year. Obviously, you've adjusted your stores in the offering, given the changes in restrictions and customer preferences. But I'm wondering what you're seeing in categories like prepared food versus last year as well as something like private label penetration?

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

So thank you. Preferred food has been in decline ever since the start of the pandemic in our conventional stores. The good news is it's improving. It has improved over the last couple of quarters. We're not back to pre-pandemic levels. A lot of our prepared food is sold through urban stores, and urban stores are under pressure for the obvious reasons of no office workers, new students, university students. So we have several of those stores that are affected. In our more suburban stores, prepared foods are selling pretty well. The chicken pizza programs, those are still always very strong. But the overall prepared food sales are still down versus pre-pandemic, although improving.Private label continues to penetrate really well. I think it's been really strong throughout the pandemic and continues to be strong. So our penetration of private label continues to grow in both dry grocery as well as in the perishables. So it's -- that's very good performance. So there's less pantry loading going on right now versus a year ago. You all remember the first few weeks of the pandemic last year. There was a lot of loading stockpiling grocery, especially. So we're not seeing that as we cycle the pandemic, but we're pleased with our sales.

[Mark Robert Petrie]

Yes. Okay. Great. And then on online, I understand you have more capacity. So that's a key driver of the growth. But maybe versus Q3 of last year, when you put up a similar growth rate, I guess, is it fair to say that more of the growth right now is sort of in the number of transactions, whereas last year, maybe it was more basket size or transaction size?

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

Somewhat, yes. We have more customers because we have more up stores, more capacity. The basket size remains very healthy in online. It might be down somewhat from the peak of the pandemic, but it's still a strong basket, a full basket. So it's mostly a number of transactions, no number of customers.

[Mark Robert Petrie]

Okay. And so then in the -- with the acceleration in the online sales versus Q1 or Q4, do you have a sense of how many of these sales are sort of new to the Metro network or if this is more people sort of substituting from the stores?

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

So consistent to what we've said before, we're attracting mostly new incremental business. There is, for sure, some cannibalization from existing Metro customers. But what we see from the loyalty data that we have is we're getting a higher share of the wallet of existing customers who are shopping both in-store and online, so I think that's number one. We're attracting some new customers to the Metro banner with our online offer and our service, so that's new business. And yes, there is some transfer from brick-and-mortar to online. But overall, it's an incremental contribution to sales.

[Mark Robert Petrie]

Okay. Appreciate that. And then just last one, I guess, probably for Francois. Could you just -- with regards to the investment in the distribution network, you guys have said that you expect to generate your targeted rate of return on that investment. Could you just give us a clearer sense of the timing of that? And is that return generated entirely in labor savings? Or what else are you including in that analysis on those assumptions?

[Francois Thibault, Executive VP, CFO & Treasurer]

Well, it's a long-term project. Obviously, the return is on several years. This is built for capacity for the foreseeable future. So it's not a -- you don't achieve it day 1, but you achieve it over a period of time. The bulk of the saving is, as you pointed out, it's mostly labor, a reduction in labor, operating expense. But there is also some benefits in terms of in-store servicing and optimizing of transportation costs and so forth. But the bulk is in lower operating expenses labor.

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

And down the road, we expect, with those new DCs that are automated, semi-automated, that we will be able to reduce cost at store level, receiving in the stores, planned labor around those receptions, I think it's going to be...

[Francois Thibault, Executive VP, CFO & Treasurer]

It will be an improvement versus today.

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

An improvement versus today. So we're not quantifying that, but it's going to be part of the picture to get the return that we are hoping to get.

[Operator]

Our next question comes from Vishal Shreedhar of National Bank.

[Vishal Shreedhar, Analyst]

Just on real estate, wondering what your perspective is as you chat with landlords? Do you perceive better availability of real estate, more favorable terms as you renew? And what should we expect for real estate growth going forward? Is that kind of like a 0.5% growth number, kind of a good target?

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

So we're always looking to develop and open stores where it makes sense for us to grow our presence, grow our share, really market-by-market, banner-by-banner with full financial analysis to see -- it makes sense for us. So no change to our strategy. There are perhaps some opportunities, but not that many, where we see a ton of real estate available for our supermarket format. In pharmacy, we cover the market pretty well. We're mostly focused on relocations, expansions on the pharmacy side. So I wouldn't call it a changed market for real estate because of the difficulties you read about commercial real estate in general. I think the grocery, pharmacy, real estate is healthy, and there are not that many new opportunities out there. So we are working hard to find good locations in markets where there's growth. So we opened Adonis in Québec city in the quarter. It's off to a very good start, pleased with that. We just opened a food basics in Courtice, outside of Oshawa. So -- and one affiliate of Metro just north of Montreal opened another store for them. So there are a few stores planned every year. In terms of square footage expansion, 0.5% to 1% is our regular number and that's what you should plan for.

[Vishal Shreedhar, Analyst]

Okay. And as a result of this pandemic, are you noticing a changed approach from the various governments with regards to how they view community pharmacy? I know in the past, there were reforms implemented without much input from pharmacy. Do you perceive governments viewing pharmacy in a different light now or is it too early to say?

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

Well, I think the Québec government adopted a law last year to allow more medical procedures to be performed by pharmacists. So I think the government has been on a track or a journey to have pharma and community pharmacies participate in the delivery of health services to unload the public system. So I think that's a positive feature or it's a positive event for our pharmacy business and our pharmacists, and that was started before the pandemic. I think the influenza vaccination was one example. Now we're participating in the vaccination for COVID. So I think it's just reinforcing, I think, the government's view that the pharmacies can play more of a role in the delivery of health services on the frontlines. And I think they have proven that and we will prove it during the vaccination for COVID. So I think the shift has started, and it should just go forward a little more with the pandemic.

[Vishal Shreedhar, Analyst]

Okay. And regarding your digital offer and your loyalty data, does metro -- has metro examined the opportunity to sell advertising on your websites or provide your supplier partners with more advanced data analytics for a fee? Is that something that's on the radar that you're examining or is -- or you're pleased with your offer as it stands?

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

So we've been providing data analytics services through our dunnhumby partnership for over 10 years to our suppliers. So we've been at that, been doing that for quite a while. So we work with our vendors using the services of the data analysis that is provided by dunnhumby. So our merchandisers, the vendors, both use this data to work on our promotional programs and be more efficient. So that's -- we've been at that. And we have monetized that data in our relations with our suppliers. As far as advertising, not there yet. We're -- it's something we're going to be -- we are looking at. And we'll see and we'll announce -- if and when we get there, we'll announce it. But it's something we're aware that very large retailers are doing in the U.S., especially. What's the opportunity for us to do it? It's something we're looking at.

[Operator]

Our next question comes from Peter Sklar of BMO Capital Markets.

[Peter Sklar, Analyst]

Just a question first on your gross margin, which was up 50 basis points year-over-year. Do you think that improvement is largely mixed because you're kind of comping against the -- that 2-week pantry loading last year, where there would have been a lot of lower-margin things, like toilet paper and other supplies? Or do you think there's structural improvement that's ongoing in the gross margin? How would you think about that 50 basis points?

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

Well, mix is a part of it. Conventional is strong. Fresh departments, meat and produce are strong. So that's healthy for the gross margin. Prepared foods are down, which is a negative. But overall, the large basket size in all of our banners on the food side is contributing to a healthier margin. I think discipline in our merchandising is also a contributing factor. High sales performance produces shrink in stores, which is also a contributing factor.So it's a mix, very much related to a mix -- a mix of contributing factors very much related to our strong sales volume and good operations, good merchandising that's delivering this. So call it structural, and I think that may be a little pushing it. I think we're doing what we've always been doing with a higher sales number.

[Peter Sklar, Analyst]

Okay. My next question is, just on the COVID costs, you had kind of this quarter, the $21 million of core cost plus the $8 million of gift cards that I think you -- the total COVID costs were $29 million in the quarter. Is that kind of what it's going to look like in -- like, through Q3, assuming that the gift card cost is about the same? And then when we do get back to the new normal, that $21 million core run rate that you have, does that -- how much do you think that comes down by and how much carries on?

[Francois Thibault, Executive VP, CFO & Treasurer]

So to your first question, Peter, we've announced a gift card. So you can assume it's going to be a similar amount, although the third quarter is for 4 periods instead of 3. So we have to factor that in, but the gift card itself will be the same amount. And then going forward, you are right, it's tough to say because it's unclear how many restrictions or where that's going to develop. Restrictions, there will be some easing. But there will be some cost that will stick, for sure. I don't think readers are going away anytime soon. Disinfecting and cleaning, that's going to remain. So it's very hard to say how much of that expense will come down, but it maybe come down a little bit, but it's going to be -- in a short term, it's going to be similar to what we posted today.

[Peter Sklar, Analyst]

Okay. And then just lastly, I just have a question on the dark store you're developing on the island. Is the business case around that for same-day delivery or next-day delivery or it's going to be a combination of both depending on when you receive the order?

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

It's going to be both, but I would say the majority is going to be next day, but there will be some capacity for same day. So it's built for both and it's built mostly to add capacity and improve efficiencies by picking in one location, only for online, as opposed to have customers pick in the same store for their orders. So yes, it's built for both, and it's going to be more efficient and add capacity.

[Peter Sklar, Analyst]

And under the current model, where you're fulfilling delivery from stores, are most of those deliveries next day as well or do the stores have more capability to deliver same day?

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

We have some capability to do same day. We're optimizing deliveries and fine tuning our systems and cutoff times to be able to give same day. But the majority, as I said, of the sales are for the next day, but there is some capacity to do same day from our stores today.

[Operator]

Your next question comes from Patricia Baker of Scotiabank.

[Patricia A. Baker, Analyst]

I just want to return to the topic of the automated DCs, Eric, and maybe share with us a little bit about the plans that you have for that changeover? How long you think it will take to fully transition or ramp the DC? And will you be running the old DC in parallel? And if so, for how long?

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

So as I said in my opening statement, Phase 1 fresh is our DC facility in Toronto. It's the first phase of 2 phases for fresh, and it starts with produce. We're transferring stores as we speak from the old facility, which is next -- literally next door to the new facility. That will be done over the next month or so. We're in the ramp-up change management phase right now, not easy, but getting through it as expected. So that's going to take a few more months. We're not going to be at peak productivity tomorrow, but we'll get there over the next few months, confident about that.Once we have transferred all the stores from the old facility to the new, we will demolish the old facility and make room for the Phase 2 of our fresh, which will be fully automated. And that's when eventually, in a couple of years, we will transfer meat and dairy from the facility that's not too far away from it at Dundas. But -- it's a multiyear plan, and we're going to do it gradually in phases. And we have the team, I think, in our logistics and distribution to manage through that. It's some heavy lifting, for sure. We're going to manage through it, as we always have. So it started in produce. And then, next January, we will do the frozen facility, which is fully automated. That's finished basically -- construction is finished, but the systems are being commissioned and it takes a while with WITRON. And again, that will be a fully automated DC. So again, there will be some ramping up there. We expect that to be manageable. And we're going to absorb those costs as part of our results going forward. And if there are periods that are tougher, we will tell you, but I think we have a good plan to manage through this.

[Patricia A. Baker, Analyst]

Okay. And then just in your remarks, you talked about or I think it was Francois who talked about investment, and one area of investment was self-serve checkouts. I think you said you have 260 now, 95 more to come in the remainder of the year. Can you share with us sort of the distribution of those levels, primarily in the conventional banners or are we also seeing them in the discount?

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

Well, we're doing it in both. So again, it's a store-by-store analysis where we think it pays off and where it accelerates service for customers, reduces ours for us, and generates a good return by increasing service with the self checkouts. On the electronic shelf labels, we have focused a lot on discount to start to be more efficient on that side, but we are rolling them out to some conventional stores also. But it's been mostly on the discount side for shelf labels, and it's on both sides.

[Patricia A. Baker, Analyst]

Okay. Then just one final question. I'm just curious about the gift card for employees and your experience there in terms of redemption. Is it pretty immediate and almost full redemption that you're seeing with those cards?

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

Yes. Employees appreciate the gesture. They appreciate the recognition. And for sure, they are redeemed. It's not 100%. It's very close, and it doesn't take much time.

[Operator]

There are no further questions at this time. I'll turn the call over to Mr. Kadoche for closing remarks.

[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 third quarter results on August 11. Thank you.

[Operator]

And this concludes today's conference call. Thank you for participating. You may now disconnect.