Metro Inc
TSX:MRU
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Metro Inc
Earnings Call Analysis
Q3-2024 Analysis
Metro Inc
Metro Inc. reported solid sales growth for the quarter, with total sales increasing by 3.5% to $6.65 billion compared to the same period last year. Same-store sales rose by 2.4% in the food sector and 5.2% in the pharmacy sector. This growth is attributed to effective merchandising and the execution of strategies in their food and pharmacy banners, even in a competitive market environment.
Metro's internal food basket inflation slightly lagged behind the reported food CPI of 1.1% for the period. Although the overall transaction count increased across all banners, there was a slight decrease in the average basket size. This indicates the continuing impact of cost-of-living pressures, driving consumers to seek value, which increased promotional penetration and led private labels to outperform national brands.
Online sales for Metro grew by an impressive 35% year-over-year, thanks to partnerships for same-day delivery and the expansion of the click-and-collect service to discount banners. The pharmacy division also showed strength, with same-store sales up by 5.2%, fueled by robust performance in organic growth, specialty medications, professional services, and commercial sales, which saw a boost from a strong cold and cough season.
During this quarter, Metro made significant progress in their automated distribution centers. The fresh and frozen distribution center in Terrebonne became fully operational, and the final phase of the Toronto automated fresh facility began. These investments are expected to bring long-term benefits through increased efficiency and reduced operational costs. The company reaffirmed its capital expenditure target of approximately $650 million for the year.
Metro’s Moi Rewards program marked a successful first year, with active members more than doubling to 2.5 million. Points redeemed totaled over $65 million, and participating members spent an average of 50% more than non-members. Metro plans to launch Moi Rewards in Ontario later this fall, aiming to drive even greater customer engagement across its food and pharmacy banners.
Looking forward, Metro remains focused on delivering value to customers in a challenging economic environment. The company aims to continue capturing growth in the discount sector through its Super C banner, while maintaining a strong conventional offering with their Metro banner. Despite the competitive landscape, Metro is confident in its diversified mix of formats and its ability to create long-term value for shareholders.
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Good morning, ladies and gentlemen, and welcome to the Metro Inc. 2024 Third Quarter Results Conference Call. [Operator Instructions] Also note that this call is being recorded on Wednesday, August 14, 2024.
And I would like to turn the conference over to Sharon Kadoche, Director, Investor Relations and Treasury. Please go ahead.
Thank you, Sylvie. 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 6.
With me today is Mr. Eric La Flèche, President and CEO; Francois Thibault, Executive VP and CFO; Marc Giroux, COO, Food; and Jean-Michel Coutu, President of the Pharmacy division. 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 a forward-looking statement. Words or expressions such as expect, intend, are confident that, will and other similar words or expressions are generally indicated a forward-looking statement. The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy, our annual budget and our 2024-2025 action plan.
These forward-looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks, known and unknown, as well as uncertainties that could cause the outcome to differ materially. Risk factors that could cause actual results or events to differ materially from our expectations as expressed in or implied by our forward-looking statements are described under the Risk Management section in our 2023 annual report. We believe these forward-looking statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking statements, except as required by applicable law.
I will now turn the call over to Francois.
Thank you, Sharon, and good morning, everyone.
For the quarter, total sales reached $6.65 billion, an increase of 3.5% versus the same period last year. Same-store sales were up 2.4% in food and up 5.2% in pharmacy. Our gross margin stood at 19.6% of sales, essentially flat when compared to our third quarter last year.
Operating expenses amounted to $681.7 million, up 4.8% versus last year. And as a percentage of sales, they stood at 10.2% versus 10.1% in the same quarter last year. The higher ratio is mainly due to the start-up of our new automated distribution center for fresh and frozen product in Terrebonne, and we also continue to have higher third-party e-comm fees than last year. Last year's operating expenses did include $5.1 million of launch costs related to the Moi loyalty program.
EBITDA for the quarter totaled $620.2 million, representing a 9.3% of sales and is up 1.6% year-over-year when we remove the gain and loss of sales of assets. Total depreciation and amortization expense for the quarter was $174 million, up $14.5 million versus last year, and a significant portion of the increase is due to our new Terrebonne in DC -- Terrebonne DC, sorry. We also started depreciating the fresh Phase 2 investment in Toronto in the last month of the quarter.
Net financial costs for the third quarter were $46.6 million compared to $37.1 million last year, and the increase is due to a higher level of debt and interest rates as well as lower capitalized interest related to our distribution center automation projects. Adjusted net earnings were up $305 million compared to $314.8 million last year, a 3.1% decrease. And our adjusted net earnings per share amounted to $1.35, flat year-over-year.
On the retail side, in the first 40 weeks of fiscal '24, we opened 6 Super C stores, including 2 conversions. We carried out major expansions and renovations of 7 stores and relocated another 1 for a net increase of 237,000 square feet or 1.1% of our food retail network.
Under our normal course issuer bid program, we may repurchase up to 7 million shares between November 25, 2023 and November 24, 2024. As of August 2 of this year, we have repurchased 6,045,000 shares for a total consideration of $430 million, representing an average share price of $71.14. In closing, our third quarter results are tracking well to the guidance we provided in November for fiscal '24.
That's it for me. I'll now turn it over to Eric.
Thank you, Francois, and good morning, everyone.
We reported solid comparable sales growth in the third quarter on top of a very strong quarter last year, reflective -- reflecting effective merchandising and good execution in our food and pharmacy banners. Our teams did an excellent job to offer good value to our customers across all banners in a challenging environment. This resulted in overall market share gains in dollars and tonnage.
For the quarter, food same-store sales were up 2.4% for a 2-year stack of 12%. Our discount banners continue to fuel this growth on top of high comps in discount last year. As Francois mentioned, so far in fiscal '24, we opened 6 Super C stores. 3 more stores will open in the fourth quarter, a Food Basics in Ottawa that -- Petawawa that just opened, plus a Super C in Montréal and a Metro store in Ottawa.
Our internal food basket inflation continued to decelerate and came in slightly lower than the reported food CPI of 1.1% for the period. Similar to previous quarters, transaction count was up in all banners with higher foot traffic growth on the discount side, and the average basket came down slightly. Promotional penetration was up compared to last year as cost-of-living pressures are still present and consumers search for value. Private label sales continue to outpace national brands.
Online sales grew by 35% compared to our third quarter last year, fueled by third-party partnerships for same-day delivery and the ongoing expansion of our click-and-collect service to our discount banners. The service is now deployed at Super C and in progress at Food Basics.
On the pharmacy side, we delivered a strong performance this quarter with comp sales of 5.2% for a 2-year stack of 11.4%. Commercial sales were up 3%, driven by a strong cough and cold season and growth in core categories such as OTC, HABA and cosmetics. Prescription sales were up 6.3%, driven by organic growth, specialty medications and professional services. We are well positioned to deliver on the expanded role of pharmacists with our dedicated pharmacist owners and our leading footprint across Québec.
In May, we celebrated a successful first year for our Moi Rewards program. In addition to more than doubling the number of active members from 1.2 million to 2.5 million, over $65 million in points were redeemed by members on their everyday essentials. Members spend, on average, 50% more than non-members. And we are very pleased with the level of cross-shopping and customer engagement in our different food and pharmacy banners. We look forward to the launch of Moi Rewards in Ontario later this fall.
Our new automated fresh and frozen facility in Terrebonne is now fully operational with productivity levels ramping up in line with our plans. During the quarter, we transferred most of the dairy volume from our Laval DC to Terrebonne. As planned, on June 10, we launched the final phase of our Toronto automated fresh facility, starting with the transfer of the produce volume from the conventional section of Phase 1 to the new automated section in Phase 2.
Other fresh categories like meat, deli and dairy will transfer gradually from our old facility every week until the end of September. With both phases now in operation, we expect to see a step change in overall productivity once activities reach the steady state. The benefits will be gradual and will come from efficiency gains and lower transportation costs.
To conclude and as we approach the end of this transition year in our distribution centers and while food inflation continues to decline, we know the environment remains difficult for many of our customers, and our teams are focused on delivering the best value possible to them, and we remain confident in our ability to create long-term value for our shareholders.
Thank you, and we'll be happy to take your questions.
[Operator Instructions] And your first question will be from Irene Nattel at RBC Capital Markets.
Another great quarter from you guys. Thinking about consumer behavior, from your commentary, Eric, it sounds as though what you're seeing in store is really a continuation? Or are you seeing any kinds of shifts at all as we continue to hear a narrative around consumers really tightening, tightening, tightening?
Very similar consumer behavior across our networks. So as we've been reporting every quarter for over a year, almost 2 years, I would say, the search for value continues. As I said, people are searching for deals. Promotional penetration is really high, and private label sales are doing really well. So it's really the same environment as we've been describing for several quarters.
Understood. And can you talk a little bit about why you mentioned the increased uptake in terms of cross-shopping? Can you talk about what you're seeing more broadly both at food and pharma and how maybe you're using some targeted promotions to continue to drive traffic and basket?
I'll let Marc answer or give a shot to that.
Thanks, Irene, for the question. So we've launched the Moi a year ago, as Eric was mentioning. We're able now to use the data and analyze customer behavior across our food banners and across food and pharma. And the point that Eric was making is that we're happy to see consumer engaging more and more in the Moi program, but also engaging in our banners as they cross-shop between our banners.
And as we continue to use the data, the teams have started and will continue and accelerate offers to consumers to promote that cross-shopping, promote basket and transaction across our store network in Québec. So we're satisfied about the launch. We're satisfied about the increased performance of Moi, and the team will continue to be focused at offering value through Moi, through the program across all of our banners.
Next question will be from Tamy Chen at BMO Capital Markets.
I wanted to focus more on the DCs here. Just first, stepping back, can you talk about the Phase 1 in Toronto? I'm just curious about that. Since it's launched, how that's unfolded in terms of the benefits to your results? And specifically, I think for this quarter, just given the strong same-store sales versus the year ago, has any of that been driven by the gains from the Toronto Phase 1, perhaps also some initial gains out of the Terrebonne DC?
I would say Toronto Phase 1 was January of '23. So it's been a while, so it's up and running. It's a combo DC, right? Phase 1 was manual and automated. The freezer in Toronto was fully automated. So those 2 centers have been in operation for a while, have been ramping up well and, I think, supporting our store network really well. Together with that, we have automated replenishment in our stores.
So the combination of our supply chain modernization efforts, clearly in Toronto, that has been up for longer, has contributed to our performance, but it's not the main driver, but it's one of the contributing factors. Terrebonne is still very early days. We're happy with the performance so far, but it's clearly in the ramp-up period, and it would be a stretch to say that Terrebonne has contributed to higher same-store sales. So I hope that answers your question.
Yes, that does. Okay. And my follow-up is these DCs, the automated ones, in particular, can you remind us how to think about the benefits, just specific line items that they help you in your P&L? And if you could talk in any way about the magnitude, the cadence, I think there's just a lot of questions as to how we and investors should think about, especially now with the Terrebonne and Toronto Phase 2 gradually coming to their finish line, how we should think about the impact that they could have over time to your earnings going forward?
Francois?
Well, listen, DCs are our cost centers. I think we made these big investments to make sure that we remain -- first of all, address capacity issues in fresh and frozen. So the status quo was not an option. We had to invest, and I think we picked the best option. So the benefits will accrue over a long period of time, but they -- obviously, as Eric said, the Phase 1 in Toronto has been performing as planned.
So the benefits will be both on the OpEx and on the gross margin as you improve your in-stock position, your store servicing, we also made investments in automatic replenishment. So you should expect -- the objective is to have benefits accruing across several lines of the P&L, but they will be over time. Now the other benefits now that these are fixed cost centers is as sales increase, as volume increases over time, we also expect to have more benefit just because we are -- we'll be leveraging a fixed-cost operations for all practical purposes.
So that's how we view the benefit. But these are now cost centers integrated into overall OpEx, and we will manage accordingly. And we will -- that's what we said that we expect to be back to our usual profit growth targets starting in fiscal '25.
So just to complement on that, clearly, with automation, we will save labor. We're not cutting jobs necessarily. We're adding capacity, we're doing more volume, more throughput through our DCs with basically the same labor force. So our cost per case from a labor point of view is coming down, will come down. That's offset by a higher amortization, higher investment. So these investments will meet -- we're confident will meet our return targets. And so far, we're pleased with that. So these are large investments. They are -- over the long term, they will take time to give us the full benefit, but we're confident we're well on our way to getting there. And so far, we're meeting our targets and our plans.
Next question will be from Chris Li at Desjardins.
Just a few questions from me. I guess, starting with the strength in your food comp this quarter, are you able to share whether it's sort of well balanced between both Ontario and Québec?
Well, as we said in the opening remarks, it's driven mostly by discount. That said, we're pleased with our conventional store performance on a relative basis. Conventional is under pressure in both markets, no question about that. But overall, versus other conventionals, we're pleased with our performance. And overall, when we combine discount and conventional, as I said, we're seeing some market share and tonnage gains. So pleased with our performance, good execution by our teams and good merchandising.
Okay. That's helpful, Eric. And maybe just a related one. I don't know if it's easy to answer at all, but just obviously, there was a boycott at one of your competitors during the quarter. Did you notice any notable benefits from that event?
No. It's hard to pinpoint to that single event.
Okay, that's fine. Okay. And then just a follow-up on the question about the cross-shop. I remember last year at your Investor Day, you kind of disclosed, before Moi was launched, your cross-sell was around 60%. That was about a year ago. I was wondering if you can share what is that percentage now.
Chris, I don't remember sharing that information. But what I can tell you is that post-launch of Moi, we're very satisfied with the sales penetration on the card. We're above target in our food banners. And in pharma, we are also above Air Miles penetration pre-launch. And as we continue to track cross-shop across our banner, our goal is to really maximize the overall wallet share of our customer. And that's where the focus of the team is. We shared with you that we invested in technology to allow us to personalize better, personalize at a greater scale, and that's what we're executing on right now.
Okay. And maybe just last one before I get back to the queue. Francois, I guess you sort of reiterated that the Phase 2 of your DC modernization will be done by end of September, end of fiscal year this year. I'm just wondering sort of as we look out into next year, are there any more lingering costs related to this initiative that we should be thinking about as you kind of gradually ramp up the automation? Any more cost that we should be aware of as we kind of think about the outlook for next year?
Yes. Well, obviously, as we just launched fresh Phase 2, there will be similar duplication of costs, not the same magnitude, but similar costs in terms of extra labor as you're running 2 sites at the same time, transferring volumes. So we've got transport, you got shunting, you got utilities. So you'll see a similar pattern, not the same magnitude, but similar pattern to what we added in Terrebonne. And that should start to ease as we enter fiscal '25.
Now it will take some time to take care of some of the old sites that we have. So -- but in terms of the impact versus this year, that will be quite minimal. So we don't expect any other lingering extra costs. It will be focused on ramping up and generating the efficiencies of these 2 sites in Québec and Ontario.
Next question will be from Michael Van Aelst at TD Cowen.
I just want to follow up on the DCs. When you look at the scale and complexity of Toronto Phase 2 transition, is it -- would you say it's similar or maybe a little bit easier than Terrebonne was in Q2?
Sure, pretty similar. Again, every time we do, the first one is always harder than the second one. So fresh Phase 2 Toronto will benefit from Terrebonne, and Terrebonne benefited from Toronto Phase 1 and Toronto freezer. So we live and learn, and we improve every time we do these projects.
So as I said, we're gradually transferring deli, meat and dairy in Toronto from the old cold chain to this new fresh 2, and 50,000 or 60,000 or 70,000 cases a week are transferring. So by the end of September, it will be done. And so far, it's going well, and service to our stores is maintaining at good levels.
So it's something we have to get through. But the team is really doing some heavy lifting all year, and everybody is looking forward to getting this behind us by the end of September.
Yes, I'm sure. So I'm assuming based on that, that we shouldn't really expect the disruption to be any significantly different, let's call it, that maybe a little bit less than what we saw in Q2?
Than Q3, that's fair. That's fair. Yes.
Okay. And then on the gross profit side, so it was pretty stable year-over-year. I'm sure there's a decent amount of pluses and minuses that go into that. But can you talk a little bit about some of those main sources of gross margin pressure and some of the initiatives you're undertaking to offset them?
Well, the market is competitive. Promotional environment is strong, so that has an impact. We get cost increases still from vendors on the CPG side. So it's a delicate balance, and it's an effort to come up with the right gross margin and generate the sales that we're looking for.
Like I said, it's puts and takes. Shrink is an issue, theft is an issue. We manage that as best we can, I'm sure we can improve some more. But it's all of the above. So people have -- we have targets to meet, and we're trying to do the best mix we can between our sales and our margins. And we're pleased with the results that we've been delivering this year.
Yes. I mean, clearly, to hold it -- just to hold it flat in an environment where your promo penetration is hitting highs and your shift -- there's a shift to discount and shrink is still an issue, but is there anything you can kind of point to that you're doing really well, too, that's kind of offsetting it, that's a primary offset?
I can add. I think it's about delivering value to our customers every week, and I think that's what we've been able to do. That's what our teams have been able to do on a weekly basis through a commercial program. We're well positioned with our store network and discount to capture the continued significant growth in discount. There's still a gap between conventional and discount, and we're well positioned to capture that.
And in conventional, I think our teams have been able to manage the pressure by -- with good promotional program and meeting customer expectation on a week-to-week basis. So we're happy how we -- how those banners are performing within their segment even though, overall, conventional is under pressure. Hopefully, that gives you a bit of color.
Next question will be from Mark Petrie at CIBC.
I wanted to ask about the Québec market specifically. Obviously, grocery is always highly competitive with weekly flyers, active loyalty offers. But have you noticed any shifts in the competitive balance in Québec? And I know discount has taken share maybe a bit more in Québec than other regions, just given the square footage growth over the last year or 2. But any shift in the relative balance of between discount and conventional in Québec?
Well, the discount market in Québec is growing, as you point out, given the square footage additions on the discount side, massive conversions by one player. We have added square footage with new ones and a few conversions ourselves. So the discount total market is growing in Québec, faster than it is in Ontario because of that square footage and number of doors. So like Marc said, it's a reality. The discount conversions are going to end pretty soon and then we'll see where the market settles.
We like our position with a good mix of both conventional and discount. Clearly, there's been a little more pressure on conventional these last couple of years with this shift. But we anticipate that at the end of the conversion wave, our Metro banner will be on a good footing to grow again. And we're confident that with our Super C banner, we will capture the growth on the discount side as we've been doing. And with our pharmacy, we deliver value at Jean Coutu every day with strong programs. So we have a good diversified mix, and we're pleased with our solid position in the Québec market, both food and pharma.
Yes. Okay. I appreciate the answer, Eric. Maybe just a follow-up on that, have you seen any different behavior in the full service or the conventional channel in Québec versus other regions of the country or, I guess, specifically for you, Ontario?
You mean within conventional, how are the customers are behaving compared to Ontario?
Yes. Yes, yes.
I would say the behavior is very similar. Consumers are looking for value. They're participating to promotion more. They're trading down, especially in meat, I would say, that are a more expensive category. But I would say that the behavior within conventional is similar in both Québec and Ontario.
Yes. Okay. And probably one for you, Francois. Just when you look at the business case, coming back to the DC topic, when you look at the business case for the Toronto phases and Terrebonne, is there any significant difference in terms of the expected return from each of those initiatives or the materiality of the impact to the P&L?
No. Obviously, since we started look -- building these business cases back in 2017, 2018, obviously, the market has changed. We've been -- we went through some events and costs have gone up. But on a relative basis, the return of these projects are as good as when you compare to the other alternatives that we have studied. So we're still -- even though we -- the inputs may have changed in terms of cost and so forth, the returns are as they were expected.
Sorry, let me just clarify my question. What I meant was those shifts, as the market has shifted and the cost dynamics have shifted over the last number of years, has that affected one of the DC projects more or less than the others? Or have they all been affected similarly?
The same, very similar.
Next question will be from Vishal Shreedhar at National Bank.
Your food same-store sales gap versus peers is noteworthy. And I'm just wondering if there was anything transient in this quarter and as we look to the next quarter, does this glide path that we're on still hold? Or is there any considerations we should think about?
It's difficult to predict same-store sales going forward with the competitive environment. But as you said, we're satisfied with our same-store sales in Q3. I think our programs are resonating well. And for us, an indication of performance is tonnage, and we're happy about the tonnage that we're generating. It means that customers are appreciating our programs and are coming through our doors, and that's what the teams are going to try to continue to do.
We talked about Moi in Québec. The team are now using Moi more and more and more to understand customer behavior and to try to influence that behavior across our different banners, and we're going to be launching next fall in Ontario. The first focus is going to be the launch and customer membership, growing members and then move to engagement. But overall, we're satisfied in the quarter in the overall competitive environment. And we'll continue to -- we'll try to continue to go in that direction, but difficult to predict, as I said.
Management commented on shrink and the challenge with controlling that. Just wondering how that relates to management's initiatives to roll out self-checkout and if that's going to continue at the same pace. And do you deem self-checkout to be problematic for controlling shrink?
So shrink is the result of a balanced promotional program and a balanced program at store that can be executed in tonnage, but also tech as Eric has mentioned. So as consumers shift behavior and promotional ratio increase, we need to adapt our store operations. So in the first quarter, we saw a little bit of elevated shrink in meat, and the team have been able to manage that afterwards. And so that was my first comment.
Second comment is on theft. And as Eric said, during these challenging times for consumers, theft has increased in our stores. And we have multiple initiatives to manage theft, from security, from camera. And at SCO, in particular, we're piloting technology right now to better track consumer behavior at SCO. And hopefully, those pilots will be successful and then deployed and will allow us to better manage theft as well.
Okay. So self-checkout is proceeding with the rollout as planned?
Yes. We were pretty much deployed already in most of our stores. The SCO deployment has happened in the last few years. The continued deployments, I would say, are adjustments in store. There's not a major deployment of SCO right now. It's more about how do we manage our self-checkout area more efficiently, first, to deliver customer satisfaction; and second, to manage theft.
Okay. And my last question...
Vishal, if your question is, are we removing self-checkouts from certain stores? We haven't gone to that measure yet. But it's something we manage carefully store-by-store, market-by-market, but we're not there. We're -- we want to provide good service, and the self-checkout is part of that service with the regular checkouts to -- for customers to get out of our stores as fast as they want.
And Eric, just a conceptual question for you on conventional versus discount. And obviously, the inflation that consumers have seen has placed pressure on the conventional offer. But if you look at some of these newer discount stores being rolled out, so they have -- some of them have conventional-like offerings. And I'm wondering if that's causing you to reflect on what conventional is offering to the consumer, if there needs to be an adjustment made to the conventional format, either offering more services, more exciting products. Is that something that you deem needs change for it -- to get the consumer excited again? Or is it merely an issue of anniversary-ing this high inflation?
Well, it's the mission of all of our stores to continuously improve their offer and attract customers. So clearly, as discount stores offer more and are fully renovated and some brand-new stores, they're attractive stores, so that puts pressure on the conventional stores. They have to provide something different. They have more assortment, more services, the experience for the customer has to be elevated. And I think that's what the Metro banner is trying to do.
So again, market by market, store by store, and we are investing in our conventional stores, we're investing in our programs, we're investing in our loyalty programs. So there's more for the consumer in our conventional stores, and it's a differentiated offer versus discount, and that's the way it needs to be. So at a conceptual level, it has to be executed that way. And overall, I think we're having some success.
Next question will be from Michael Van Aelst at TD Cowen.
Just a clarification. When we were talking about the performance of discount versus conventional in Québec, I'd like to try and separate the conversions from the actual kind of same-store performance. So if you're able to look in Québec markets where there are no conversions happening, how meaningful is the gap in performance between conventional and discount?
Similar -- I would say, similar to Ontario. So as -- and we're seeing it as we're cycling conversions in the market, competitive conversions or own conversions. We continue to be happy with the performance of our discount stores and conventional stores. So that's why Eric earlier said that we're going to be cycling the turbulence or the square footage growth in the Québec market. And we're confident that both our discount and conventional offer are competing well. But if you exclude the square footage growth and discount in Québec, I'd say that the competitive dynamic and the growth of discount would be similar.
To complement on that, so in markets where there are no conversions, so it's status quo, the discount -- speaking for ourselves, our discount stores are growing faster than our conventional stores. So when you look at the total market, the number -- the gap between conventional discount, the total market gap is quite significant because of all the square footage. In markets where there's no difference in square footage, there's a gap. It's a much smaller gap, but there's a gap. And that's the reality of the market today.
And that's why we like to have -- that's why we like to have both banners, and we go to market with both banners and pretty much in every -- speaking for Québec and more and more in Ontario, we will go with conventional and discount in all markets.
Okay. So just -- so that's helpful. And just to clarify one a little bit more. So where are you -- where you aren't having -- where you aren't seeing conversions, is conventional actually growing? Or is it just -- discount, we know, is outperforming, but is conventional actually growing?
Yes. In certain markets, yes. In certain markets, there's lower -- there's some growth. It's lower than discount, but there's some growth. In other markets -- it really depends market by market. So I'm not going to call out a number for you. But yes, we do have conventional stores that are growing in several areas across Québec and Ontario.
[Operator Instructions] And your next question will be from Chris Li at Desjardins.
Just maybe a few quick follow-ups. Sorry if I missed this already, but was the gross margin largely stable overall, both in food and pharmacy?
Yes, overall stable.
Stable, okay. And Francois, just that you've always said that a key risk to earnings is sort of the lag between slowing food inflation and the rise in SG&A expenses from sort of labor cost. You guys seem to be managing this dynamic very well so far. And so my question is, do you expect this to continue? And are there any new meaningful cost reduction initiatives that sort of give you this confidence?
Well, you're right, I have been calling this lag in reflecting inflation in OpEx for a while now, and it's still present. Obviously, as inflation declines, over time, that pressure will diminish, but we still are seeing some pressures. And we have -- we always have several initiatives on the go to reduce or contain OpEx. I think the trend -- if you look at the trend this year, it's trending in the right direction and as expected.
In Q1, our OpEx was up 10.5% year-over-year; in Q2, 6.1%; and in Q3, 4.8%, probably a little bit over 5% when you account for the Moi launch costs and the e-comm fees, but it's trending down year-over-year. And as a percent of sales, we went from a 40 bps higher SG&A versus last year in Q1, 40 bps in Q2 and now 10 bps, closer to 20 bps when you account for the Moi launch cost.
So it's trending in the right direction. And as I said, as inflation continues to decline, we expect that pressure will diminish. But it's still not -- it's still -- you still need to be very focused on maintaining those cost pressures. That will continue -- that will still continue in the short term as I expect it to be.
Okay. That's helpful. And maybe just a couple of last ones. Just on CapEx, are you still on track to -- I'm thinking about $650 million targeted for this year. Are you still on track to that spend for this year?
Yes, it will be close to that, it would be around that level.
Would it be similar for next year?
I'm not going to call out next year yet. We're going to budget -- we're still finalizing our budget. I'll be able to give more color on the Q4. I've said -- what I've said before is a normal run rate without any other special projects would be $550 million, $600 million. I think that's a normal run rate CapEx for us. But it's never a run rate year for us. So I'll give you more color in Q4 once we've completed our budgets.
Okay. And last one for me. I mean your balance sheet is obviously in good shape with leverage around the low 2s. Is there an opportunity for you to perhaps upsize your share buyback next year, especially if your supply chain modernization is now complete and your free cash flow conversion at Jean Coutu remains very strong?
Well, it's a good question. There's no change in our capital allocation. There's no change in our leverage target. So yes, leverage has been coming down. As you say, we've been generating good cash from operations despite the high level of CapEx that we've been maintaining a solid balance sheet. So there's -- we said that we don't -- we want to be at no more than 3x adjusted debt to EBITDA. So that remains the limit. And there's room -- there's still room to grow that leverage from where it is today, especially now that those big projects are getting behind us, less risk. So it's something that we'll be looking at as we enter fiscal '25.
And at this time, I would like to turn the call back over to Sharon Kadoche. Please go ahead.
Thank you all for your interest in Metro, and please mark your calendars for our fourth quarter results on November 20. Thank you.
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good day.