Metro Inc

TSX:MRU

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the METRO INC. 2020 Third Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would like to now hand the conference over to your speaker today, Sharon Kadoche, Manager of Investor Relations and Treasury. Please go ahead.

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

Good morning, everyone, and thanks for joining us today. Our comments will focus on the financial results of our third quarter, which ended July 4, 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 third 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, plan, 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 plan. These forward-looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks, known and unknown, as well as uncertainties that could cause the outcome to differ materially. A description of these risks which could have an impact on these statements can 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, performance of the company and the realization of the forward-looking statements used in today's discussion. 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.

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

Thank you, and good morning, everyone. I hope you and your family are in good health. I will start my opening remarks by addressing the pandemic, followed by our third quarter highlights. François will then provide comments on the financial results. So when we last spoke in April, we were a few weeks into the pandemic. It seems like ages ago, and while the peak of the crisis is behind us, we are still operating in what can only be described as challenging and unusual times. Our teams continue to do an excellent job to ensure that store operations and the supply chain run efficiently while never compromising on the safety of our employees and customers. As we disclosed this morning, we incurred $107 million of COVID-19-related expenses in the third quarter. About half of these expenses represent the temporary wage increase and special bonus for frontline employees, with the remainder related to cleaning and disinfecting store greeters, signage, personal protection equipment, et cetera. Our food business experienced high levels of sales as a large portion of restaurant and foodservice sales transferred to the grocery channel. We disclosed last April that our same-store sales for the first 4-week period of our third quarter were up 25%. And we realized same-store sales of 15.6% for the entire 16-week third quarter. We continue to see fewer visits, more than compensated by a larger basket size. Sales of our conventional banner in both provinces continue to perform very well as many customers opt to shop more locally and are still growing faster than our discount store sales, which are doing quite well also. The growth gap between conventional and discount has narrowed, and we expect that it will continue to do so. This strong performance is reflected in our growing market share in both Québec and Ontario. Our pharmacy business delivered a balanced performance of plus 1% total same-store sales growth in the third quarter. We are pleased with this result given the very challenging operating conditions of our pharmacies in the first half of the quarter. Our pharmacists' ability to maintain the quality of service through this period, notably through expanding home delivery services and leveraging our expanded online pharmacy capabilities, was key in delivering prescription same-store sales growth of 2.7%. We indicated in April that front-end sales were down 9% for the first 4 weeks of the third quarter because of the initial pantry loading of essential items that happened late in the second quarter, restricted physical access as well as the reduction in promotional activity as safety measures were initially rolled out. While we are still seeing lower in-store traffic, larger baskets driven by key categories, including OTC and beauty, have helped offset some of this impact in the latter part of the quarter. Overall, we ended the quarter with a 2.5% decline in front-end same-store sales. I would now like to turn to our online food business. Because of COVID, online food sales were up 280% in the third quarter, albeit from a very small base last year. Today, the size of that business is at a level we had forecasted to reach in 2 or 3 years. As a result, we are accelerating our plan to add capacity, and we are finalizing work to evolve our current hub store model to better meet the growing demand. We have learned a lot in the last 4 years, and we will be leveraging the investments we made in building teams and expertise in the delivery of full fresh basket to the homes of Québeckers and Ontarians, including robust technologies and competencies in customer web interface, picking and home delivery. In the short term, after adding a second hub store in Québec City earlier this year, we have just added a new hub store in Sherbrooke, Québec, bringing to 9 the total number of stores in Québec offering our online service. In Ontario, we will be adding a third hub store in Scarborough in October to serve the east end of the GTA. We will also be expanding our click-and-collect offer, with some 30 additional stores in Québec and Ontario offering this service in fiscal '21. These stores will not offer a delivery service. Finally, as previously announced, we have partnered with Cornershop for Québec and Ontario to serve customers wanting same-day, 2-hour delivery service, and we are pleased with the results so far.Loyalty will remain a cornerstone of our online strategy. Our best-in-class loyalty program and partnership with dunnhumby is allowing us to engage customers both online and in-store in a proven omnichannel strategy. Our disciplined approach allows us to gain share through increased customer loyalty and new customer acquisition. We are leveraging our expertise and brand strength focused on fresh to deliver a good experience in store and online. Turning now to our third quarter. We delivered strong results with same-store sales up 15.6% and adjusted EPS up 20%. Our internal food basket inflation was 3%, up from 2% in the previous quarter, with the meat category continuing to be the main driver. On the pharmacy side, as I mentioned earlier, same-store sales grew by 1%, with a 2.7% increase in prescription drugs and a decrease of 2.5% in front-end sales. We are encouraged by the overall performance of our pharma division through this challenging period and have now resumed the integration activities that were interrupted during the crisis, such as the rollout of the Jean Coutu lab and POS retail systems to our Brunet pharmacies in the coming weeks.Our Ontario supply chain modernization project is back on track after being delayed for a few weeks. Both projects are well underway, and the interior fit-up work is ongoing, including installation of automation systems. Some German nationals responsible for the automation part of the project have obtained clearance from the authorities to come to Canada and are now working on both sites. The start-up of our new fresh DC has been postponed from September of this year to January of 2021. Our retail CapEx program remains on track. So far this year, we opened 6 new stores, relocated another 2 and renovated 11 stores for a net square footage addition of 130,000 square feet or 0.6%. Investments in technology at the retail level are also ongoing. And by the end of this fiscal year, we expect to have about 100 stores equipped with electronic shelf labels, plus another 100 stores coming in F '21. Also, 200 stores will have self-checkouts at the end of the year, and another 120 stores are planned for 2021. Customer use of self-checkouts is increasing steadily, and we are meeting our ROI targets. Looking ahead, while it is impossible to predict how long this pandemic will continue and exactly what impact it will have on long-term customer shopping patterns, we do expect that in the short term, food revenues will continue to grow at higher-than-normal rates versus last year. After 4 weeks in the fourth quarter, food same-store sales are up by about 10%. On the pharmacy side, front-end sales growth is above 6%. In closing, let me thank all my colleagues for their outstanding work during this challenging period. I want to reiterate that the safety of our employees and our customers remains our top priority as we continue to invest in our stores, our supply chain and our merchandising programs to best meet the needs of our customers and ensure our long-term growth. That's it for me. I will now turn it over to François.

[François Thibault, Executive VP, CFO & Treasurer]

Thank you, Eric, and good morning, everyone. Our third quarter sales reached $5.8 billion versus $5.2 billion last year, an increase of 11.6%. Excluding the impact of IFRS 16, the sales increase stands at 11.9%. As Eric mentioned, food same-store sales grew 15.6% versus last year, and pharma grew 1%. Of note, we will no longer report the variation in script count for the time being as the changes in script delivery frequency, notably around compliance packaging scripts moving to a monthly versus weekly delivery, by having a significant impact on screw count variations versus the prior year. So we'll therefore focus on same-store dollar sale as a main comparison metric. Our gross margin stood at 20% of sales or 20.3% excluding IFRS 16, and that compares to 19.7% for the same period last year. A bigger basket size and higher sales in our conventional banner contributed to the gross margin improvement. Operating expenses as a percentage of sales came in at 10.7% or 12% without the impact of IFRS 16, and this compares to operating expenses of 11.6% of sales for the same period last year. The increase in operating expenses is primarily the result of COVID-19-related expenses totaling $107 million, of which about half represents the temporary hourly wage increase and bonus paid to our frontline employees. The increase was partially mitigated by a reduction in other operating expenses. Cost synergies related to the Jean Coutu acquisition amounted to $23 million in this quarter, and we have now secured an annual run rate of $70 million of cost synergies. Our EBITDA for the quarter stood at $542.9 million, representing a margin of 9.3% of sales versus 8.1% of sales for the same quarter last year. Again, excluding the IFRS 16 impact, EBITDA was up $60.4 million or 14.3% and represented 8.3% of sales. Adjusted net earnings were $272.3 million compared to $230.3 million last year. That's an increase of 18.2%. And our adjusted net earnings per share were $1.08, up 20% versus last year. Our cash flow from operating activities stood at $512 million. That's a solid increase of $107 million versus the level generated last year. Our total capital expenditures in the quarter totaled about $136 million. As mentioned during our last call, some projects have been delayed due to the pandemic, and we now expect our total CapEx for the fiscal year to total north of $475 million. Under our normal course issuer bid, we repurchased 3.16 million shares between November 25, 2019, and July 31 of this year at an average share price of $54.96 for a total consideration of $174 million. Our financial position remains very strong. That's it for me. We will now take your questions.

[Operator]

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

[Karen Fiona Short, Research Analyst]

I wanted to just get a little color on traffic versus basket. Wondering if you could just give us a little more granularity on what traffic versus basket was kind of as we go from that 25% comp to the 15.6% for the quarter and then into the 10% for the quarter-to-date. And wondering also within that, if you could talk a little bit about the gap and how that's narrowed more granularly on discount versus conventional.

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

Okay. Well, like I said in my opening statement, we continue to see declines in traffic, more than compensated by a large basket. I would say that over the quarter, the traffic declines have improved in all of our banners. They're still down, but they have improved, both in food and pharmacy, and within food, conventional and discount. The big difference is the basket growth has been higher in conventional than it has been in discount. It's high in both, and we have -- we're very pleased with our comp sales in both formats. We're not going to disclose by format, but I can tell you that the gap is not that big. It's there, but it's not that big. We have healthy sales in both conventional and discount. We're growing share in both of our markets. And we're very happy with that performance.

[Karen Fiona Short, Research Analyst]

Okay. And then -- okay. And then in terms of the COVID cost, the $107 million, obviously, you gave us the split this quarter. Can you just give us a little more color on how we should think about that into 4Q and then beyond in terms of lingering costs? Should we assume kind of 50% lingers, but on a 12-week basis?

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

I'll let François answer that.

[François Thibault, Executive VP, CFO & Treasurer]

Yes. So if you assume about half is the temporary wage increase, you can assume that half is remaining. But some of these -- some of the COVID expenses are behind us, like the plexiglass shields and the donations that we made. So listen, if you just take the half of the $107 million, it would be about $13 million a period -- or a 4-week period. If you adjust for these -- some of the expenses that are behind us, it will be lower. I think $10 million to $12 million a period -- a 4-week period is probably as good a guess as you can have. Obviously, we will spend what we need to spend to make sure that we react to any measures that we have to take. But that's about a good run rate, I would say, going forward.

[Karen Fiona Short, Research Analyst]

Okay. And then just last question. Could you -- would you be willing to give us an e-com as a percent of sales, including pickup?

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

No. We chose not to disclose that in our MD&A. And for competitive reasons, we prefer not to disclose that number. I'd just like to add a little more color to the traffic basket question that you just asked. So conventional is growing faster than discount. But I can tell you that the traffic declines are smaller in discount than they were -- they are in conventional. Although the traffic declines are improving, we've seen the transaction count decline smaller in discount than conventional. So conventional is benefiting from a huge lift in the basket. Higher traffic declines, huge basket lift. Traffic declines in discount, although albeit smaller than discount, compensated by also a higher basket, which was already higher to start with. So that's the picture.

[Karen Fiona Short, Research Analyst]

And traffic continues to get better at both banners into the fourth quarter?

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

Yes.

[Operator]

Your next question comes from the line of Peter Sklar from BMO Capital Markets.

[Peter Sklar, Analyst]

Like in terms of the COVID-related costs, you also mentioned in the write-up that you did have a reduction in operating costs as you were able to successfully mitigate some of the COVID costs. So these costs that you've taken out, are they -- like are they permanent? Have you permanently taken costs out? Or are these things that will creep back in as you get back to the new normal?

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

No. I wouldn't say they were taken out permanently. There were changes in operating conditions. I'll give you an example. In Metro stores, hot food cases, cut fruit, some of these departments were negatively impacted and we reduced hours in those departments. The hours were allocated elsewhere in the store for COVID situations. But that's what we mean by mitigation of extra expenses generated by COVID were mitigated by -- as best we could, reductions in costs elsewhere in the business.

[François Thibault, Executive VP, CFO & Treasurer]

Most Sundays, some stores were closed Sunday in Québec as well. So...

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

Yes. So that reduced costs for a while when stores were closed in Québec on Sundays. That's ended, and we're fully open, as you know. So...

[François Thibault, Executive VP, CFO & Treasurer]

But also there's -- as we do always, there's always cost-containment measures on other areas like advertising, supplies. So we always look to cost-contain these expenses, and that's -- so a combination of both.

[Peter Sklar, Analyst]

Right. Okay. I get that. Eric, in your commentary, you talked -- you touched on the technologies that you're introducing into the store, things like electronic shelf labels. I'm just wondering, how does that work in Québec, where I believe you have, I don't know if you call them franchise stores and associate stores and stores where Metro may have a minority part of the equity and the owner has a larger portion of equity? So how do you implement those technologies where they're not corporate stores in Québec?

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

So in the noncorporate stores, i.e. affiliates.

[Operator]

Pardon the interruption. We'll just be a moment. [Technical Difficulty]

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

Sorry about that. I don't know what happened. The line cut on out.

[Peter Sklar, Analyst]

Yes. So I don't know if everyone cut out or just me, but we were talking about how you handle technology with the affiliates. And then...

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

So the answer is the affiliates are independently owned stores, and they decide their level of investment. They tend to follow our programs that we do on the corporate and franchise side. So we're working with them. Some of them have already started to implement self-checkouts and electronic shelf labels. And we expect them to invest along -- the same way that we do. So we're starting with our corporate and franchise stores, and affiliates will tag along.

[Peter Sklar, Analyst]

And do you subsidize the affiliates at all or they pay the cost?

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

They pay those costs.

[Peter Sklar, Analyst]

Yes. And then lastly, if I could just ask François. Given COVID, has there been any change in your attitude towards the normal course issuer bid? Or is it business as usual on that front?

[François Thibault, Executive VP, CFO & Treasurer]

No. We've resumed -- we've been active in the buyback this quarter. At the beginning of the pandemic, Peter, we did take a bit of a pause because it was very unclear as to where this thing was heading. And I think we wanted to be prudent. But I think we feel comfortable about how our operation has stabilized. And we've been active on the buyback, and no change in our capital allocation policy.

[Operator]

Your next question comes from the line of Mark Petrie, CIBC Markets.

[Mark Robert Petrie]

So when it comes to e-commerce and the incredible acceleration and adoption there, I'm just interested to hear how you would rate your execution in meeting that demand? And also, what impact it had on your results in Q3? And then, Eric, you mentioned some of the steps you're taking to broaden the offering, but could you just expand on your comments as it relates to how you are investing in technology in order to scale that?

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

So how would I rate the execution? Clearly, it's been a challenge with the surge -- immense surge in demand early -- during the quarter. And it has leveled off since, but it's still much higher than it used to be. So that has put a lot of stress on our teams, where we pick in a few stores and deliver. I think they did a fantastic job managing that surge to deliver a decent experience. It's been a challenge. It's far from perfect. And we need to improve, and we will improve it. So I'm not going to give you a rating other than to say that under the circumstances, I think we did well. But clearly, it's something that will need to be refined and improved. So the evolution that I talked about, we have invested in technologies and training for our people. We will be leveraging that. We will continue to leverage that as we evolve the hub store model to serve the growing demand. For competitive reasons, I am not going to say more. And when we're ready to announce anything more, we will. But right now, this is it.

[Mark Robert Petrie]

Okay. Okay. And then I'm wondering if you could just also give a bit more color with regards to the higher gross margin. I know you mentioned basket size and channel mix as key factors. And I know you don't give commentary specific to the food and pharmacy segment, but just wondering if you could give us any sense of the relative performance for each of those in terms of materiality to the consolidated results. And then specific to the food business. Obviously, lots of other moving parts beyond the basket size and channel mix. You touched on the shutting down of prepared foods or at least the lower demand there. But also presumably, there's lower promotional penetration. So just wondering if you could talk through some of those dynamics and how you've seen that sort of evolve through the course of the quarter.

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

Well, there's not -- the essential takeaway is basket size and channel mix that favors -- or that increased our gross margin a bit. The environment remains very promotional. It's very competitive out there. Our promotional ratios were down quite a bit early in the quarter, have resumed to more normal levels. So it's not quite as promotional as a year ago because of the larger basket size. The bigger the baskets, proportionately, there's a bit less items on promotion in there as people do the full, full shop. But that's the main story: basket size, channel mix. Yes, those departments -- the high-margin departments that you described like cut fruit and hot foods did affect gross margin. But that was -- we were able to compensate that. It wouldn't be appropriate to discuss more between food and pharmacy margin mix. That's my answer.

[Operator]

Your next question comes from the line of Chris Li from Desjardins.

[Christopher Li, Research Analyst]

My first question -- and thanks for the colors on the COVID impact on cost. And so based on that and what you're seeing so far in the first 4 weeks of the quarter, is it fair to assume that you still expect COVID to have a positive impact on earnings for fiscal Q4?

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

Well, we disclosed our same-store sales for the first period of the fourth quarter. Those are healthy numbers. We have lower COVID costs because of the premiums. So that's public fact. So we'll see where we end up. We don't give guidance, but I'll let you do your forecast.

[Christopher Li, Research Analyst]

Okay. That's great. And second question, just the 6% front store, same-store sales growth again for the first 4 weeks of the quarter, I mean, that's very strong. And you mentioned the OTC and beauty as sort of driving that. I'm just wondering, how much of that growth is sort of catch-up sales versus a structural change as the demand for convenience channel remains elevated because of the virus? Just trying to get a sense of how sustainable that 6% is. Because, as you know, historically, sort of 2% to 3% has been the long-term average. I'm wondering if there's going to be a step-up longer-term because of the virus.

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

Some of those sales are helped by COVID-related products like masks and sanitizers. Clearly, that's giving a lift at this time. How long that will last, again, we don't know how long this pandemic will last and what exactly the patterns will be. But that has given it a bit of a lift. It's offset by declines in cosmetics and some other categories that are not doing as well because of COVID. So it's a mix at the front end there. How much is catch-up? How much is COVID? How much is regular? All I can say is that we're back to our normal promotional activities in the pharmacy segment. We issue a flyer every week. We have our seasonal programs. We have our merchandising programs, which are good and effective. So I think it's good merchandising, good execution overall, combined with the COVID environment. That's how I would describe it.

[Christopher Li, Research Analyst]

Okay. That's helpful. And are you able to provide the same number for prescription? I know you won't talk about script count, but what about on a same-store dollar basis the first 4 weeks? How is the prescription business performing so far?

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

Well, our prescription drug sales are holding steady. And we didn't feel required any more disclosure because there was no real difference -- a material difference; whereas on the front end, it was a bit of a rollercoaster. That's why we decided to give the number for the first 4 weeks. But we're not going to give you the number at this time. So when we issue Q4 in November, we'll give it to you.

[Christopher Li, Research Analyst]

Okay. And my last question and maybe this is a bit of a sensitive one. Just it's been reported by the media that the United Grocers have informed their suppliers that they would expect a similar cost reduction that Walmart Canada will presumably be receiving at some point. I'm just wondering if there's anything you can say on that. And what's been your negotiation with suppliers so far?

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

Well, the UGI letter is standard fare, I would say, as when we hear about our competitors asking or getting for different conditions, we try to make sure we're treated equitably. So that's the only purpose of that letter. It's no threat. It's no official demand, other than to say we need to be treated fairly and equitably versus other retailers. That's all I have to say.

[Operator]

Your next question comes from the line of Vishal Shreedhar from National Bank.

[Vishal Shreedhar, Analyst]

On PJC, Metro was able to capture synergies in the quarter despite some challenges related to COVID. And now you're $70 million annualized. Just given that you're close to the target number there, wondering if management sees opportunity for further synergies? And if so, maybe you can tell us which buckets you may see synergies in and if it's a meaningful number?

[François Thibault, Executive VP, CFO & Treasurer]

Well, Vishal, we said at -- the last remaining bucket for us to generate the cost synergies was the combination of our warehousing and distribution activities into that end. So that has yet to happen. So we still have that bucket to fill, if you will. So yes, without that, we are very close to our target of $75 million. So listen, I think it means that we're in very good shape to meet that $75 million target. And can we do a little more? We always try to do. But obviously, we are very confident that we will at least meet that $75 million target once we've combined the warehousing and distribution activities into the facility embedded.

[Vishal Shreedhar, Analyst]

Okay. And do you have a time line for that when you see the completion done?

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

So the time line is, we'd like to do it as soon as possible. The roadblock is the collective bargaining agreement at Varennes, which needs to be renegotiated. We are in negotiation, as we speak. And hopefully, we will find a common ground and sign a long-term deal with the union in the next few weeks. I don't have exact timing. There were negotiations in July. There's a hiatus right now. It will resume sometime in August. And hopefully, we'll get to a good outcome. And then, we can move on and integrate or combine the McMahon operations into the Varennes center. So the plan is ready. We look forward to doing it. But we need that condition to be met before we start the plan.

[Vishal Shreedhar, Analyst]

Okay. And have you noticed, since you've acquired PJC, any meaningful revenue synergies dropping down? And if so, can you just give us some buckets on where they -- you actually saw them?

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

We never really talked about revenue synergies. So we talked earlier about private label being sold, the Personnelle being sold in the food stores. That's been doing well for us. I think it's -- in Ontario, especially, it's doing quite well for us. Selection Irresistibles is available at Jean Coutu. I wouldn't say it's been a dramatic increase in revenue. So we decided not to talk about revenue synergies. There are some programs and synergies, but it's not that material. And especially now with the COVID situation, it's even less material. So the short answer is not material.

[Vishal Shreedhar, Analyst]

Changing now topics here. Metro uses AIR MILES for a portion of its loyalty program, but airline demand and travel isn't what it used to be, at least for the near to medium term. So wondering if -- how committed management is to AIR MILES and if you're subject to long-term agreements for that loyalty program.

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

Well, as you know, we have AIR MILES for Metro Ontario and for Jean Coutu in Québec. So I won't give you the exact terms of those contracts. But we have normal duration contracts with both. Clearly, with the traveling situation, those rewards may not have as much appeal. But I think AIR MILES is evolving in their rewards programs and are offering different programs. They offered cashback for a while, and we are a channel that accepts -- or redeems quite a bit of a cashback point. So watching closely, working with them, but nothing really more specific.

[Vishal Shreedhar, Analyst]

Okay. And just maybe one last one here. In terms of your thoughts for e-commerce to capture that market, which is growing quicker than you would have anticipated, call it, several months ago. Are your new thoughts on the technologies that you wish to implement or you aim to implement, will they improve the profitability of e-commerce? And can you see that business becoming profitable, call it, in the next couple of years?

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

Well, we'll see. We're looking at all those numbers. With the huge surge in demand with our current model, I can tell you that it has turned the corner and is a profitable business. So that's good news for us right now. As we evolve that model, they may require some investment, and we'll see how that goes to the bottom line. But we approach this e-com growth prudently, and we want to manage our investments with discipline as part of our regular CapEx. And we hope to capture our share of our sales that want to migrate to online. So I think we're in a good position to do that. So -- and so far, we have. And we will continue along that strategy.

[Operator]

[Operator Instructions] Our next question comes from the line of Irene Nattel from RBC Capital Markets.

[Irene Ora Nattel]

I wanted to -- I was really intrigued by your commentary, Eric, around the growth in basket size at conventional and discount. And so I wanted to a little bit more color, if you can, on sort of which -- presumably, it's the fresh categories in conventional but less so in discount. If you could just talk a little bit about what you're seeing there and maybe if there's anything you can do to help address that disparity.

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

Well, going back with -- there's a lot of moving parts. But essentially, our Metro banners are your local supermarket, community supermarket; high frequency, people go a couple of times, 3 times, 4 times a week, and do a shop; sometimes a full shop, sometimes not -- just a convenience top-up. With the COVID, people are going to stores less frequently. That's obvious. You all know that. So the average basket size in a conventional store is lower than a discount store, in our case. So the customer that used to go twice a week or used to go to different stores and now shops in one conventional store is doing a full shop. And that's what we saw during the COVID so -- in all departments, fresh, grocery, dairy, frozen, all of them up. Grocery, dry grocery, especially, had huge surge in sales in our conventional stores because people were shopping less frequently and doing a much bigger shop. So that's the explanation for the significant increase in the basket in our conventional stores. Maybe these people have more money in their pockets. Maybe -- not maybe, but they're going less to restaurants. They're reading at home 3 times a day. They're working from home. So they are spending more money in our Metro stores. On the discount side, I think we've -- we're seeing some of the same behavior where traffic is down, although less so than in the Metro stores. Basket is up, although less so than in the Metro stores. But we're happy with the growth there, too. I think we're seeing healthy comp sales growth in our discount stores. We're seeing market share gains in our -- also in our discount stores. So happy with that and good execution for our teams. I hope that answers the question.

[Irene Ora Nattel]

Yes. That does, Eric. And then in terms of these market share gains, presumably, they're coming at the expense of some of the independents or other players where -- that don't quite offer that full basket?

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

Well, we measure market share -- Nielsen provides 2 numbers: all channels, which includes Costco and other channels; and grocery banners. So in both of those market sizes or market analysis, we're doing well. And we're happy with our performance. We're -- with multi-format, conventional discount, Adonis, Première Moisson, I think we're well positioned to serve our customers for all their food shopping needs. And those that will be looking for value going forward, if the recession and economic challenges, I think having a strong discount presence is a big plus. And we're well positioned with our Metro stores. So pleased with our performance and we're working hard to continue.

[Irene Ora Nattel]

Yes. Absolutely. Clearly, great performance in the quarter. And then just finally, if I might. On the e-commerce side, on the last call, you mentioned that you were looking at dark stores versus fulfilling in stores. Is there anything that you could say -- have your thoughts evolved on that at all? Or still kind of wait and see based on how everything else evolves?

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

No. We're past the wait and see, but we're not ready to disclose the next plan. As I said in the opening remarks, we are looking to both store model that we have that works well. Technology, good people, practice, so we've learned a lot. We're going to leverage what we did and evolve it to better meet the growing demand. So exactly what form that will take, stay tuned. And when we're ready to announce, we will.

[Operator]

Your next question comes from the line of Patricia Baker from Scotiabank.

[Patricia A. Baker, Analyst]

Most of my questions have been asked, but I have one. I want to talk a little bit more, if you don't mind, about the online and what you're seeing there in terms of basket and whether you're able to discern that you're getting customers that were previously not customers of Metro. So you're getting incrementality there in terms of shoppers that you didn't have previously.

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

Yes. So the basket -- just in terms of basket size at e-com, that's up also during the COVID. Similar to what we're seeing in our physical stores, the e-com basket has gone up. So not a big surprise. In terms of customer acquisition and customer loyalty, we find that the e-com customer, especially in COVID, we've attracted new customers. Clearly, people are trying it or have tried it for the first time. Hopefully, they will stick around. So yes, there were new customers acquired to generate the sales lift that we saw during this quarter. And we're getting, we think, more loyalty from existing Metro customers who shop both online and in store. We track that with our program, metro&moi, and we can see that we get a higher spend. So it's positive, and we will continue to maximize and leverage our loyalty program to increase loyalty and to increase the spend with our banner.

[Patricia A. Baker, Analyst]

And Eric, just to follow on that. Then your capability and what you're doing on online obviously also contribute to the market share gains as well as in conventional and discount. Is that fair?

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

Well, it contributed to our growth, total growth. So we measure our total growth versus market, versus competitors, and we are seeing some market share gains. So it has contributed to that just as much as our stores have contributed to that.

[Operator]

Your next question comes from the line of Michael Van Aelst from TD Securities.

[Michael Van Aelst, Research Analyst]

A couple of follow-up questions actually. To start, on the Varennes DC integration, I saw that the union has a strike mandate as of June. I'm just wondering if there's any real risk of disruption there? And to what level would your contingency plans allow you to continue to service your stores?

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

So in any negotiation, Michael, there is a risk. So we're taking that very seriously. They have a strong mandate. The negotiations are not easy, to say the least. So we have appropriate and strong contingency planning. That's all I can say for now, for obvious reasons. But we're at the table. We want to make a deal. We want to find a solution. I think we're good employers, and we should get there. But there's always a risk.

[Michael Van Aelst, Research Analyst]

Okay. And then, François, you mentioned COVID cost of $10 million to $12 million per period at this point. Would you say that these costs are permanent long term given the way the world has changed? Or do you see any reason why these costs may be able to go away over time?

[François Thibault, Executive VP, CFO & Treasurer]

I think it's very hard to predict how long this pandemic will last. This is what we're seeing today. So with everything else being equal, if things get better, obviously -- or they get worse, we will have to adapt. That's why I meant about, we will spend what we need to spend to make sure that our -- that we don't compromise on the safety of customers and employees. So for now, this is what we're seeing as a run rate. But obviously, this is all subject to how this pandemic develops.

[Michael Van Aelst, Research Analyst]

Yes. I was just wondering whether you felt that, from a company standpoint, it would be prudent to continue the extra sanitization and PP&E to a degree even post-pandemic, maybe not all the PP&E but at least the sanitation.

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

Well, it's Eric here. I think that's fair to say that standards have gone up, and customer expectations have gone up. So I think some of those costs will be part of the permanent picture. I think we've always had clean stores. But we will continue to do it at a level, at a higher level going forward. So there will be, I think, some long-term cost increases on cleaning. Exactly to what level? Is it the current pandemic level or something in between? Hard to say right now on this call. Greeters at the store, I think for now, it's the right thing to do. People expect it. Our customers appreciate it, and we have them in every store. Will that be permanent? Maybe not. But we're not there yet.

[Michael Van Aelst, Research Analyst]

Okay. And then excluding COVID and the IFRS 16 adjustments, your operating expenses were down, I think, just over 2%. Can you give us an idea as to how much of this was tied to the lower cost required because of COVID, whether it's travel or advertising or store closures, like you mentioned on Sundays? In other words, can you give us an idea of what maybe a normal underlying growth rate was? Because it's been growing at a higher pace than -- at a positive pace, for sure, the last number of quarters. I'm wondering if there's anything else that's changed?

[François Thibault, Executive VP, CFO & Treasurer]

Well, I think you're right. If you look at the delta between the operating expenses this quarter versus last quarter, you're looking at about a $94 million delta, and we have $107 million of COVID expenses. So yes, there's a reduction of about $13 million. A good chunk of that reduction is due, as we explained, because of the reduced hours elsewhere in terms of the departments that were affected by pandemic, like hot foods, cut fruit, deli, et cetera, others. So some of that, obviously, that's part of the explanation. But there's also regular cost-containment measures that we always do. And we were able to reduce some costs in other area than pandemic-related. So -- but you're right, the bulk of the explanation is some of the reduction in expenses due to the pandemic as well.

[Michael Van Aelst, Research Analyst]

Okay. And just finally, can you provide us with a CapEx outlook for fiscal '21, assuming a more normal environment?

[François Thibault, Executive VP, CFO & Treasurer]

Not today, but we will do so most likely on our next call. But obviously, it will be a higher-than-normal level because of the delays in the CapEx that we talked about last quarter and today. So we're finalizing that. I don't have a figure yet to share, but we will do so on the next call.

[Operator]

There are no further questions at this time. I will turn the call back over to Sharon Kadoche.

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

Thank you, all, for your interest in METRO, and we will speak again to discuss our fourth quarter results on November 18. Thank you.

[Operator]

This concludes -- ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.