Metro Inc

TSX:MRU

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Metro 2021 Third Quarter Results. [Operator Instructions] The call is being recorded on Wednesday, August 11, 2021. I would now like to turn the conference over to Mr. Sharon Kadoche. Please go ahead.

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

Thank you, Andres. Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our third quarter, which ended on July 3. With me today is Mr. Eric La Fleche, President and Chief Executive Officer; and Francois Thibault, Executive VP and Chief Financial Officer. During the call, we will present our 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, 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 could cause the outcome to differ materially. A description of these risks, which could have an impact on these statements, could be found under the risk management section of our 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. This quarter we cycled very strong sales and earnings last year at the height of the pandemic. And in order to provide a better indication of performance, we're also highlighting sales and earnings growth over the third quarter of 2019. So, for the quarter, total sales were at $5.7 billion versus $5.8 billion last year, a decrease of 2%, but up 9.4% when compared to the third quarter of 2019. Food same-store sales declined by 3.6% for the quarter, but grew 11.4% on a 2-year basis for an annual compounded growth rate of 5.6%. Pharma same-store sales were up 7.6% versus last year.Our gross margin stood at 19.8% of sales versus 20% for the same quarter last year. Operating expenses represented 10.5% of sales versus 10.7% last year, and COVID-19-related expenses amounted to $38 million for the quarter, and that includes an $8 million amount in gift cards that were given to front line employees versus $107 million of COVID expenses in the last quarter last year -- in the third quarter last year, sorry. The decrease of $69 million in COVID costs was partly offset by an increase in other operating expenses mainly related to activities and services that have been reinstated after initially being paused at the start of the pandemic such as MHR, hot foods, advertising, marketing, et cetera.Operating expenses also include non-recurring costs of approximately $8 million incurred in a transition to our new fresh DC in Toronto due to early inefficiencies and a duplication of certain tasks as both DCs were operating at the same time for a few weeks. EBITDA for the quarter totaled $533.6 million, a decrease of 1.7% versus last year and represented 9.2% of sales, that's the same margin as last year. On a 2-year basis, EBITDA was up 26.1%, which represents a solid annual compounded growth rate of 12.3%.Adjusted net earnings were $261.2 million compared to $272.3 million last year, a decrease of 4.1%. Our adjusted net earnings per share were $1.06, down 1.9% versus last year's adjusted EPS of $1.08. And again, when we compare this to fiscal 2019, adjusted EPS grew by 17.8% for an annual growth rate of 8.5%. Our capital expenditures for the third quarter totaled $174.2 million, up $38.4 million versus last year. As expected, higher CapEx is mainly the result of our ongoing investments in the modernization of our supply chain as well as in store technology.At the retail level, since the beginning of the fiscal year, we opened 2 Metro Plus stores, one Adonis in province of Quebec, one Food Basics in Ontario. We also relocated another Food Basics and carried out major renovations in 8 stores, representing a net increase of 236,800 square feet or 1.1% of our food retail network. As I mentioned earlier, investments in technology at store level are also ongoing. At the end of the third quarter, we had about 300 stores equipped with self-checkouts and 140 stores with electronic shelf labels. Under our current normal course issuer bid program, we have repurchased between November 25 last year and July 30 of this year, 5.875 million shares for a total consideration of $333.6 million, representing an average share price of $56.78.That's it from me. I'll now turn it over to Eric.

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

Thank you, Francois, and good morning, everyone. We are pleased with our solid third quarter results as we cycled an exceptionally strong performance last year at the height of the pandemic. Sales and earnings declined slightly versus Q3 2020, but on a 2-year basis, we delivered sales growth of 9.4%, EBITDA growth of 26.1% and adjusted earnings per share growth of 17.8%, which we believe is more indicative of our underlying performance.For the quarter, as Francois said, food same-store sales were down 3.6%, but up 11.4% when compared to fiscal 2019. Our internal food basket inflation was 1%, half of what we experienced in Q2. With the roll out of the vaccine and the gradual lifting of restrictions, we saw traffic improved year-over-year for the first time since the beginning of the pandemic. Basket size, however, was down as customers increase their store visits. Promotional penetration continues to increase quarter-over-quarter and we are getting close to pre-pandemic levels.Online grocery sales increased by 19% versus last year and more than 5x over 2019 as we added capacity by expanding the service to new regions, deploying click-and-collect and with our partnership with Cornershop. In June, we opened our first dedicated online store to serve customers in Montreal, replacing 3 of our hub stores. This centralized facility will offer more delivery windows to customers and improved operating efficiencies, while delivering the same quality, assortment and freshness that customers expect when shopping in store. We are on track with our deployment plan for the click-and-collect service with 119 Metro stores now offering the service out of the 170 planned by the end of this fiscal year.This, along with the recent expansion of home delivery and click-and-collect in the Ottawa region will expand our reach to more than 75% of Quebec and half of the Ontario population. We remain confident in our strategy, which allows us to add capacity with reasonable investments to meet the pace of demand growth.Turning to pharmacy. Comparable sales were up 7.6% in the quarter and 8.6% versus 2019, with prescription drugs up a strong 9.3%, driven by higher prescription counts as medical consultations resume. Commercial sales were up 3.8% with most pharmacies gradually returning to regular opening hours. Our farmer performance was also positively impacted by the administration of vaccines and the new medical services now offered by pharmacy. We proudly contributed to the vaccination effort through our network of pharmacies and 4 central vaccination sites we sponsored with other corporate partners, which altogether administered over 500,000 doses.The month of June marked the completion of 2 other important milestones with the integration of our pharmacy distribution activities and the deployment of Jean Coutu retail systems to our Brunet pharmacies. As mentioned on our last call in April, we anticipate annual recurring savings of about $10 million starting next year in distribution and warehousing costs as we will service our pharma network as well as the Metro and Super C stores in Quebec for health and beauty products from 1 facility.Turning to the modernization of our supply chain. Our new semi-automated Produce DC in Toronto is now fully operational as we completed the transfer of all of our stores from the old Produce warehouse. The transition and ramp-up of the new facility generated additional costs in the quarter, which we expect will partially remain in Q4 and hopefully be behind us by the end of the fiscal year. The new fully automated frozen DC is almost complete and we will soon start the commissioning of the new automation systems in time for a January 2022 opening.Looking ahead, while we can't predict exactly how the pandemic will evolve, we expect our food sales to decline in Q4 versus last year's high levels, but to compare favorably to fiscal 2019. In our pharmacy division, we expect continued growth from prescriptions and the easing of restrictions will have a positive impact on certain categories that were negatively affected by the pandemic, such as beauty, cosmetics and cold and flu products.We'll now take your questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Irene Nattel with RBC.

[Irene Ora Nattel]

If we could just start very quickly with sort of the last thing you said, Eric, on pharmacy. We're hearing from others that acute Rx is still down about 10% to 15%. Is that the case at PJC or are we starting to see a better recovery there?

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

Acute Rx, I'm sorry?

[Irene Ora Nattel]

Well, just -- so the prescription count for sort of as opposed to the chronic conditions. But basically, overall, Rx volumes per pharmacy are still below pre-pandemic levels but recovering. Is that what you guys are seeing? In other words, should we see an acceleration performance of PJC as we move through the next couple of quarters?

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

Well, we're very happy with the performance of PJC, Irene, in the quarter. A nice comeback, especially in prescription drugs versus last year. You have to remember last year, pharmacy, doctors’ offices, there was a lot of closures and restricted opening hours, restricted access. So, prescription counts were -- except for the loading upfront in the quarter prescriptions counts were softer. I think we're back to pretty normal -- more -- much more normal levels. I don't have a split between acute and chronic, to be honest, Irene, but we're very pleased with the 9.3% Rx growth. And we expect to have good growth going forward.

[Irene Ora Nattel]

And then just moving on to the bigger business. Inflation you noted was basically half of prior quarter's levels. What kind of discussions are you having at this point with the supplier community and recognizing it's challenging to anticipate, what's your general expectation around inflation as you move through Q4 and into 2022?

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

So, the inflation number is down this quarter, mostly on the -- driven by Produce deflation. It's aggressive out there in Produce, and there are market conditions that support that aggressiveness in the general market. That's the main driver. Discussions with our suppliers, we're hearing for demands for increases in packaged goods. There were some cost increases in the meat department this past quarter. It's a tight market. It's volatile. So, some weeks, supply can be tightened and there are some cost increases that we have to live with and try to pass on. I would say, generally, the expectation is that, given all the cost increases that on labor and other aspects of supplies and transportation, I think we can expect generally this fall that there should be some more inflation at retail. But again, we will have to wait and see. We fully intend to remain competitive. It's a competitive market out there. I don't expect inflation in our fourth quarter to be that much different from our third quarter. Bookings are in place and merchandising plans are in place. But I would expect some inflation to be reflected at retail in a more pronounced way this fall.

[Operator]

Your next question comes from Mark Petrie with CIBC.

[Mark Robert Petrie]

Obviously, there's been a significant shift in consumer behavior in sort of pre-pandemic. You touched on traffic and basket, but I'm wondering about stuff like promo penetration, private label as well as category mix.

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

Yes, we are seeing a gradual shift to more normal pre-pandemic behavior. I think the discount channel, in general, is benefiting from that versus conventional, whereas conventional had a big uplift during the pandemic, as you all know. Promotional levels are back to almost pre-pandemic levels. We're very close to that, as I said in my opening remarks. So, I think you can, going forward, expect that to be back to normal levels. Our private label penetrations are up. I think private label penetration increased throughout the pandemic and is continuing to stay at a higher level, which is a good thing. So, we're pleased with that. So, I would say, yes, the consumers are shopping around a little more with the easing of restrictions. We're seeing that in the number of visits. We're seeing that in the lower basket year-over-year. Traffic is not back to where it was 2 years ago, and the basket is higher than it was 2 years ago, but we're seeing a shift for sure.

[Mark Robert Petrie]

And discount is still below what it would have been pre-pandemic, but is growing faster than conventional today. Is that fair to say?

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

In general terms, yes.

[Mark Robert Petrie]

And then just with regards to gross margin, it's up modestly from 2 years ago. Can you just share some commentary on the moving parts behind that? I mean, I know you don't segment between food and pharmacy. But obviously, there's a lot of variables between the segment mix as well as category mix. So, any commentary would be helpful just with regards to the drivers and then the sustainability or outlook for gross margin.

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

Well, the gross margin is down slightly 20 basis points over -- versus last year in the quarter. Food is -- food gross margin was down. We said clearly last year that the large basket with lower promotional ratios was favorable to gross margin. So, as we cycle that with a smaller basket and more promotions, you can do the math. It has an impact on gross margin. The good news is that pharmacy was strong in the quarter and helped on the gross margin. So, net-net, we're pleased with our performance. And the diversification of our business model is a benefit and we're pleased with that. Going forward, I'm not going to give you guidance on gross margin, but we will be competitive and we will balance the top line and the bottom line as best we can.

[Mark Robert Petrie]

Just a follow-up, just to clarify, with regards to the food gross margin, I understand sort of down versus the elevated levels of last year, but is it fair to say it's still elevated from sort of pre-pandemic levels? And the main driver of that would be the higher sales level or is there something else to consider?

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

It's getting comparable to pre-pandemic levels. Yes, the basket is higher than pre-pandemic level, but the margin is in the same ballpark. So, again, I want to give you too much precise details like that. I think the comment I made is the answer I have.

[Operator]

Your next question comes from Vishal Shreedhar with National Bank.

[Vishal Shreedhar, Analyst]

I just wanted to get your comments on the acquisition opportunity that you see in the market, if any. I know some competitors are seeing opportunity in consolidating independence in more rural areas. Wondering if that's something that would appeal Metro or do you have other sites and other types of deals?

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

I'm sorry, Vishal, I could not hear your question. You said acquisitions and then what? Sorry.

[Vishal Shreedhar, Analyst]

So, I was just referring to the acquisition market and what Metro sees. I know there's pharmacy peers that are consolidating rural markets. So, I'm wondering if that's an appeal the Metro or there's other types of deals that are appealing to Metro?

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

We're always on the lookout for acquisition opportunities in food and pharma in Canada. So, there's no change there. No announcements to make. Yes, we're aware of a new quote unquote player consolidating small rural pharmacies in Ontario. We are interested in making acquisitions that make sense for us. And we'll be -- we continue to be on the lookout, but there's nothing -- no change and nothing imminent.

[Vishal Shreedhar, Analyst]

And with respect to Adonis, I know during the height of the pandemic it had a little bit of challenge with respect to the prepared food categories and perhaps labor availability. Wondering how that banner is performing now and if it's back to pre-pandemic levels or above.

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

Adonis, with the mix of stores, which is largely in urban areas, Montreal and Toronto, mostly Montreal, it's not -- it's been a challenge throughout the pandemic and remains a bit of a challenge today because of all of our -- some of our urban stores that are seeing lower traffic these days with the summer and restaurants opening up and vacations and whatnot. So, banner is still doing well, but we're not quite back to pre-pandemic levels. And we're confident that we're going to get there soon as COVID restrictions ease more and more and people are getting their shots. So, I believe...

[Operator]

Your next question comes from Peter Sklar with BMO.

[Peter Sklar, Analyst]

I noticed that you mentioned that your online sales were up 19% year-over-year. As we emerge from COVID, do you expect that that sales -- like that sales growth is going to slow and we're going to see some negative growth rates in online because you're up against some big quarters. And I'm just wondering if you're seeing any evidence of that kind of trend.

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

Yes, we are. So, yes, you can expect online sales growth to slow down. Again, the growth this quarter came from additional capacity. As we cycle that capacity quarter-over-quarter, we expect sales to decline. So, versus the peaks of the pandemic still sales remain elevated versus pre-pandemic. So we clearly skipped a few years of e-com growth. And -- but you can expect that the e-com sales should come down a bit. That said, I think we're very confident in our model, hub stores for the large urban areas, excuse me, the dark store for the larger urban areas, the hub stores for the medium density areas where we can have delivery and click-and-collect in the rest of our stores. So, I think we're well positioned with our model to capture the demand that's out there, and we expect that demand to level off a bit from the peak of the pandemic.

[Peter Sklar, Analyst]

And lastly, Eric, on the dark store that I believe you said you started ramping it in June. Are -- I mean, is it too early to make any comments or are there any learnings or is there anything you can tell us about how that model is performing versus the hub stores?

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

So, it opened in June in Montreal. It's a ramp-up there too. But we're pleased with the progress. We're using the same technology as we did in our hub stores. It's a more efficient picking environment. It's a more efficient delivery environment. So, we're confident that we're going to gain the efficiencies that we are planning for. We're not there yet after a few weeks, but we're very confident that we will get there. There are always learnings. So, every week, we see something changes, and we try to improve. The test and learn is the norm in e-com, as you know, and we're continuing to test and learn and fine-tune to improve the economics and improve the customer experience. The customer satisfaction scores that we're getting are pretty encouraging. So, the in stock position, the orders with missing items, so all those metrics are improving in the dark store versus the hub stores, as we expected and as we hoped for. So, we're looking for more of that going forward.

[Operator]

Your next question comes from Kenric Tyghe with ATB Capital.

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

Eric, I wonder if you could help us just understand perhaps on the cosmetic and beauty journey. Where are those businesses today versus where they were pre-pandemic? In other words, how much room do you have to go to get back to prior levels? And how material, even just directionally from a margin perspective, could a recovery or let's call it, normalized cosmetic sales potentially be as we look through to 2022?

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

So, cosmetics and our pharmacies grew nicely in the quarter versus the same quarter last year. We expect that to continue going forward as more people, I guess, return to work and return to the office. So, I won't give you a number, but I think it's upside, for sure, in the front-end sales of our pharmacies going forward. We expect that category to do better as it did this past quarter. You have to remember that in our front-end, at this time last year in pharmacies, we were selling a lot of COVID items like masks and gels at full prices. So, selling less of that. So, that's a bit of a headwind for our front-end in pharmacy right now, but cosmetics and confectionery and other departments, we're confident they are going to see some benefits. So, those are -- that's my answer.

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

And then just one other quick follow-up on consumer behavior. Can you provide any insight on across markets, how different the responses may or may not have been in Ontario versus Quebec for consumers and the shift between full-service and discount. Have you seen a more marked shift between channels in either market or how has the consumer response varied across your 2 markets and the channel shift varied across your 2 markets?

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

So, I wouldn't call it a huge channel shift and a huge shift between the 2. I said earlier, we're seeing the general uptick in traffic in the discount stores or sales of the discount stores versus conventional stores in general, as we see in the market -- in the whole market. You can expect that discount should be advantaged going forward whereas it was disadvantaged last year. So, I would just leave it at that.

[Operator]

Your next question comes from Mike Van Aelst with TD Securities.

[Michael Van Aelst, Research Analyst]

Firstly, on the brand DC. I know it's been open for a little bit now. What has to be done between now and, I guess, the start of next year to get the $10 million in annualized savings?

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

Well, it's operations and the big decisions and the big savings are made. We're going to be operating -- we are operating from 1 DC as opposed to 2. Actually, McMahon had another little DC in Quebec city. So, we will have that savings also. So, it's occupancy and it's fixed costs associated with running a DC. And then the labor is variable. So, there's a transfer of labor from one to the other. But overall, we expect to save about $10 million a year in distribution. So, everything is in place to achieve that in our plan next year.

[Michael Van Aelst, Research Analyst]

So, can some of it trickle into Q4?

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

Well, there could be some -- yes. There would be some benefit in Q4, yes.

[Michael Van Aelst, Research Analyst]

And then COVID costs definitely down year-over-year, but they've been, I think, would relatively stable lately. So, excluding the gift card bonuses, how much COVID cost do you expect to stick around long-term due to the permanent changes in operating practices?

[Francois Thibault, Executive VP, CFO & Treasurer]

Listen, I don't know about long-term. It's hard to predict long-term. I think, looking in the short term, at least, moving into the fourth quarter, the way we see things, we expect COVID expenses will probably be max of $5 million a month going forward in the short-term, excluding gift cards of course.

[Michael Van Aelst, Research Analyst]

I know the gift card bonuses are they pretty much done?

[Francois Thibault, Executive VP, CFO & Treasurer]

For now, they're done, and we'll have to see, again. It depends if we will get back into a situation like we had this year. But for now, they're behind us.

[Michael Van Aelst, Research Analyst]

So, I mean, your 2 year EPS, normalized EPS growth is comfortably within your 8% to 10% EPS growth target. So, you must be happy with that. But can we expect the pharmacy DC consolidation savings and the new food DCs to push that 2-year CAGR a little bit above your normal targeted range in the coming -- over the next year or so or is it just not meaningful enough from these savings?

[Francois Thibault, Executive VP, CFO & Treasurer]

Well, that's the plan, obviously, to be able to maintain our targets that we give to the street in terms of profit growth, whether it's sales, EBITDA, EBIT and net earnings. Yes, that's a plan that we want to be -- make sure that we make the investments to be able to deliver that 8% to 10% EPS growth a year. We'll have to see how the productivity levels are improving, how fast, but that's a plan, but I will reserve comment until we can actually demonstrate it.

[Michael Van Aelst, Research Analyst]

So, the savings, though, on these programs are to help you achieve the 8% to 10% rather than increment.

[Francois Thibault, Executive VP, CFO & Treasurer]

Absolutely. Yes, absolutely. It's a way -- yes, in terms of reduction in operating expenses and better in-store service that's -- these are all the investments that we make to make sure that we remain competitive and that we continue to grow our earnings as we had in the past and meet our financial targets, yes.

[Michael Van Aelst, Research Analyst]

And just finally, your cash flows have been good and your NCIB has been pretty active. And it looks like if you continue the pace you've done so far, you would kind of run -- you'd hit that $7 million limit -- 7 million share limit before November. Are there -- are you expecting to kind of stop it and renew it to get more room or should we just expect it to continue to go to the 7 million and then renew it in November?

[Francois Thibault, Executive VP, CFO & Treasurer]

Well, we'll see. You're right. We're ahead of pace. Almost 6 million done out of 7 million program with a few months ahead of us. So, we will see. There's options available to us. We haven't made the decision yet, but that could be a possibility. But for now, as I said before, we will finish the program, and we'll see about additional capacity, but we haven't made that decision yet.

[Operator]

Your next question comes from Patricia Baker with Scotiabank.

[Patricia A. Baker, Analyst]

I just have one small question left. You referenced the fact that relative to last year we opened some of the services in the store, the hot meals and HMR. What was the experience when you reopened those from a customer perspective, how quickly did the customer pick up on those categories?

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

Patricia, so the HMR, the hot foods counters are back up, but it's not at levels of 2019. So, they have reopened. The offer is adapted to a COVID environment, but sales are starting to increase and we're happy about that. I'll color that by saying a lot of our HMR sales are in urban stores, Downtown Toronto, Downtown Montreal, and those stores traffic is down, especially this summer with restaurants opening up and people leaving for vacation. Those stores are quiet. So, HMR, which is a big part of their sales, is affected by that. Net-net, we see HMR trending up, continuing to trend up, and we expect this fall to be at a higher level. Will we be back to 2019, not sure, but we certainly expect more sales from our HMR departments as people come back to the city, students, office workers and everything like that.

[Operator]

Your next question comes from Chris Li with Desjardins.

[Christopher Li, Research Analyst]

Just a few quick questions. First one is now that the fresh DC in Ontario has been integrated, just wondering what is the timeline in terms of starting to achieve some of the efficiency and cost benefits?

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

So, we're working very, very hard. The teams are working extremely hard to ramp up productivity. So, we're in that phase of learning to work with a new system. It's semi-automated. It's not a fully automated facility, but it's semi-automated, which is new for Produce, for us. It's new period, but it makes it a little tougher in Produce. So, we operated with 2 warehouses for a while, transferring the store. So, there have been some cost, as we said in our remarks, of $8 million in the quarter. We expect some additional costs again in Q4, not at that level, but some costs. And we hope to be back to our expected productivity for the new fiscal year. Again, it's execution and it's making all the adjustments to get there. So, we're working really hard, like I said, to be at the expected levels for the new fiscal year and improving from there. So, we'll see how we do and we'll keep you posted, but that's the plan.

[Christopher Li, Research Analyst]

And maybe just a follow-up on that, just to help us frame the opportunity from a cost perspective. Would you say the opportunity is similar to the benefits that you're going to get from The Jean Coutu DC integration of $10 million, just sort of ballpark?

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

Well, the $10 million, at Jean Coutu was part of an overall synergy target. It was just not just warehousing, it was everything as G&A, procurement, warehousing, which was part of the acquisition business case. We take the same approach when we value these big investments is that we're looking for the same cash on cash return on our investments, whether it's the acquisition or whether it's the new warehouse. So, same approach you expect on the long-term term of that project be earning that rate of return. So, yes, at the end of the day, it's part of -- trying to achieve that same rate of return and the same achievement on our profit growth.

[Christopher Li, Research Analyst]

And just typically these type of benefits from the DCs you will see them at the gross margin line. Is that correct?

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

Both, the in-store benefits will be in the gross margin, but the operating expenses will be -- the reduction in labor at the warehouse will be in the operating expenses. So, it's across the 2 levers. But a lot of it will be SG&A.

[Christopher Li, Research Analyst]

And with respect to the frozen DC that's sort of coming online in January of 2022, do you expect to incur similar onetime costs as you had with the fresh DC?

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

Well, we -- there's always, as I say, a ramp-up period. I think it will be a simpler operation, the frozen DC. So, we're preparing and doing everything we can to have a successful transfer. Like I said, I don't expect the same level of cost in the frozen DC next January. But we'll see. We're planning and working to minimize the ramp-up costs. There will be some, but I don't think it's going to be at the same level as what we're seeing in the fresh DC.

[Christopher Li, Research Analyst]

And maybe a quick question on pharmacy. Eric, you mentioned in your opening remarks that I think the vaccination revenues did have an impact during the quarter. But did that benefit show up in the prescription drug same-store sales number?

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

Yes.

[Christopher Li, Research Analyst]

And would you be able to just quantify for us, because I'm guessing that's probably not going to be recurring at least to the same magnitude next quarter as vaccination slows.

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

We would have to get back to you on that, Chris. The contribution of vaccinations to the Rx number is -- it's there, but I don't have a precise number. It's not that significant.

[Christopher Li, Research Analyst]

And my last question, the longer-term question, I think, Eric or Francois, you mentioned last call that you're exploring maybe launching an advertising platform to monetize your online business longer term. I was wondering if there's any update you can provide us on that initiative or plan.

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

I said on the last call that we're aware of some large retailers doing that or planning to monetize their platforms for advertising. So, it's something our marketing and digital teams are working on. No announcements to make. It's on our radar screen, but we'll keep you posted.

[Operator]

There are no further questions at this time. Mr. Kadoche, you may proceed.

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

Thank you all for your interest in Metro, and we will speak again soon to discuss our fourth quarter results on November 17. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines. Have a great day.