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Metro Inc
Earnings Call Analysis
Q4-2023 Analysis
Metro Inc
Metro Inc. concluded its fiscal year with a strong fourth quarter characterized by 14.4% sales growth, reaching $5.072 billion. However, the results reflect a 13-week quarter compared to the prior year's 12-week quarter. Adjusting for this, sales experienced a solid 5.4% increase. The sales growth includes a 6.8% uplift in food same-store sales and a 5.5% rise in pharmaceutical sales, though these figures exclude the impact of a significant labor strike in Ontario. The operating environment proved tough with the strike at 27 Metro stores in Ontario impacting earnings. This resulted in an estimated loss of $36.7 million pretax and directly influenced the quarter's gross margin to settle at 19.5%, down from 20.4% from the same period last year.
Metro's management highlighted a 5.5-week strike that caused direct costs and estimated loss profits, dampening an otherwise potent quarter's performance. While handling such headwinds, Metro managed a 7.6% increase in adjusted net earnings per share to $0.99. Simultaneously, Metro invested $680 million in capital expenditures, slightly below the guidance due to postponed real estate purchases. Looking ahead, the company plans to further invest, with a projected capital expenditure of over $800 million for fiscal 2024, aiming to modernize its supply chain operations. Further affirming its shareholder commitment, Metro repurchased over 6.7 million shares at an average price of $72.09 under its issuer bid program.
Metro disclosed several key initiatives, including loyalty program expansion in Quebec, a staggering 116% increase in online food sales, and new store openings across Quebec and Ontario. The company is in transition with supply chain investments, particularly their new automated Terrebonne distribution center, expected to be fully operational by the end of fiscal 2024 and operational shifts in Quebec and Toronto to bolster performance. These investments, while foresighted, mean that fiscal 2024 is projected to be a transitory year with certain nonrecurring costs. Management remains optimistic about these investments fortifying Metro's competitive positioning for sustainable, long-term growth.
Despite a challenging operating environment, including ongoing pressure due to the pandemic and a shift in customer behaviors toward discount grocers, Metro anticipates moderating food inflation in the future. They've committed to investing in initiatives like the science-based targets for emissions reduction, aiming to align with long-term profitability and growth. Looking ahead, they do not provide explicit guidance but share insights on the expected impacts of their large-scale investments, implying that fiscal 2024 will be a transitionary year with heavy investments potentially hindering reported profits but setting the stage for future gains.
As Metro navigates a competitive retail landscape with sustained discount trend and private label growth, the company's actions suggest it's positioning itself for long-term success. They are confident in their ability to return to 8-10% annual growth for EPS after a dip in fiscal 2024, indicating a potential 8-10% compound annual growth rate in EPS over the next five years. Understanding the balancing act of increased operating expenses due to salary wages and margin pressures, Metro's management reassures their capability to absorb these costs while aspiring to improve gross margins in the future.
Executive commentary reveals that some of the expenses related to the distribution center investments will persist beyond fiscal 2024, although the increase in depreciation expenses is expected to taper off afterward. Metro Inc.'s executives remain vigilant, anticipating that the first part of the year will incur higher operational costs compared to the latter part. However, they are affirmative about the company's resilience and ability to harness the efficiencies and improvements to their full extent in the times ahead.
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Good morning, ladies and gentlemen, and welcome to the Metro Inc. 2023 Fourth Quarter Results Conference Call. [Operator Instructions] Also note that this call is being recorded on Wednesday, November 15, 2023.
And I would like to turn the conference over to Sharon Kadoche. Please go ahead.
Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our fourth quarter, which ended on September 30. 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 fourth 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 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 of forward-looking statements.
The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy, our annual budget and our 2023, 2024 action plan. These forward-looking statements do not provide any guarantees as to the future performance of the company, and are subject the 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 2022 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. I have more to cover the usual this quarter. I'll start by highlighting that the fourth quarter of this fiscal year had 13 weeks versus 12 weeks for the same quarter last year. Also, our fourth quarter was unfavorably impacted by $36.7 million pretax of estimated loss profits and direct costs from the labor conflict at 27 Metro stores in the Greater Toronto area that lasted 5.5 weeks. This figure applies to 27 stores and does not include other unfavorable impacts, which affected our network, such as those resulting from the illegal picketing of our distribution centers. For competitive reasons, we do not disclose the impact on the sales of these 27 stores.
Turning to our results. Sales reached $5.072 billion, an increase of 14.4%, versus same period last year. And when we exclude the 13 week, sales grew by 5.4%. Food same-store sales were up 6.8% in the quarter and pharma same-store sales up 5.5%. The comparable food sales figure excludes the impact of the strike.
Gross profit was unfavorably impacted by $36.3 million as a result of the strike and gross margin for the quarter came in at 19.5% versus 20.4% in the same quarter last year. The decrease in gross margin reflects the impact of lost sales related to the labor conflict as well as a decline in our food margin partly offset by an increase in our Pharma division.
Operating expenses amounted to $540.3 million, that's up 13.5% or 4.7% when we exclude the 13-week. The net impact of the labor conflict on operating expenses in the fourth quarter of 2023 was an increase of $400,000. Operating expenses as a percent of sales was 10.7%, same as last year. But if not for lost sales due to the strike, operating expenses as a percent of sales would have been lower than last year.
EBITDA for the quarter totaled $448 million, up 1.5% year-over-year and represented 8.8% of sales versus 10% last year or 9.7% of sales when we removed the large gain on sale of assets that we did last year. Total depreciation and amortization expense for the quarter was $125 million versus $119.8 million last year, and the 4.2% increase reflects the additional investment in supply chain logistics as well as store technology.
Adjusted net earnings were $228.8 million compared to $219.4 million last year, a 4.3% increase, and our adjusted net earnings per share amounted to $0.99, up 7.6% versus last year's adjusted EPS of $0.92. The strike had an unfavorable impact on adjusted EPS of $0.12 per share, whereas the extra week had a favorable impact of $0.12 per share as well.
At the end of fiscal 2023, capital expenditures amounted to close to $680 million versus $621 million last year. We invested less than our original guidance, mostly due to some real estate purchases that were postponed. For fiscal 2024, we expect CapEx to reach a record level north of about $800 million as we continue our investment in the modernization of our supply chain in both provinces. CapEx will reduce to a more normal level post 2024.
On the retail side, fiscal '23 was a busy year as we opened 8 new stores. In Quebec, we opened 1 Metro store and 3 Super Cs, while converting another metro to a Super C in Gatineau. And in Ontario, we opened 1 Metro store and 2 Food Basics. We also carried out major innovation in 10 stores representing a net increase of 256,300 square feet or 1.2% of our food retail network. In the pipeline for fiscal '24, we are budgeting 8 new discount stores, including 2 conversions and 1 new Metro stores. We will also undertake more than 25 major renovation projects.
Under our normal course issuer bid, we have repurchased over 6.7 million shares for a total consideration of $484.4 million, representing an average share price of $72.09. The program ends on November 24, and we plan on renewing it as we remain committed in returning excess free cash flow to our shareholders through share repurchases.
I will finish by providing an outlook for fiscal 2024. As we speak, we are ramping up our new state-of-the-art automated distribution center north of Montreal, and the expansion of our Montreal produced facility as planned. We are also preparing for the launch of the final phase of our automated Fresh facility in Toronto next spring. While these investments position us well for continued long-term profitable growth, we are facing significant headwinds in fiscal '24 as we incur some temporary duplication of costs and lend curve inefficiencies as well as higher depreciation and lower capitalized interest.
In comparison, the investment we made so far in Ontario to modernize the supply chain were phased over a longer period. Therefore, we will not fully absorb these additional expenses, and we are currently forecasting EBITDA to grow by less than 2% in fiscal '24 versus the level reported in fiscal '23 and adjusted net earnings per share in fiscal '24 to be flat to $0.10 down versus the level reported in fiscal '23. We expect to resume our profit growth post fiscal '24, and we are maintaining our publicly disclosed annual growth target of between 8% and 10% for net earnings per share over the medium and long term.
That's it for me. I'll turn it over to Eric.
Thank you, Francois, and good morning, everyone. We are pleased with our fourth quarter results, which were achieved in a challenging operating environment that included a 5.5-week strike at 27 metro stores in Ontario. For the first time in our history, sales for the year exceeded $20 billion and net earnings reached $1 billion. Our sales momentum remains strong, fueled by our discount banners and pharmacy.
For the quarter, Food same-store sales were up 6.8%, driven by the continuing shift to discount for a 2-year stack of plus 15%. Our internal food basket inflation decelerated to 5.5%, which is about 2% lower than the reported food CPI and down from 8% in our third quarter. Similar to previous quarters, transactions were up, the average basket increased slightly, tonnage was up, promotional penetration remained high and private label sales continue to outpace national brands.
In pharmacy, we delivered a strong balanced performance despite the expected decrease in demand for over-the-counter medication as we were lapping exceptionally strong sales in Q4 last year. Total pharmacy comparable sales were up 5.5% on top of 7.4% in the fourth quarter last year. Prescription sales were up 6.7%, driven by the dispensing fee indexations, growth in high-cost molecules and professional services. Commercial sales were up 3.1%, primarily driven by cosmetics, HABA and Seasonal. The 2-year stack is 13.5% for prescription sales and 13.3% for commercial products.
As you know, the employees in 27 of our Metro stores located in the GTA were on strike for 5.5 weeks in August. We reached a satisfactory 5-year collective agreement, which provides significant wage increases as well as pension and benefits improvements for all employees. As an offset, we were able to improve scheduling flexibility, which will lead to increased productivity.
Turning to our loyalty program. We are pleased with the early results following the launch of the Moi program in Quebec. We doubled our member base, which now counts more than 2.4 million members with the majority shopping at least 2 of our banners. The Moi program performance continues to improve week-over-week with healthy growth in swipe rates and loyalty sales penetration. We see many opportunities to grow customer engagement with more personalized offers and communications to our customers based on their shopping habits across our banners.
Our online food sales were up 116% versus last year, beating total market food e-com sales, which were essentially flat. Our growth is fueled by third partnerships and by expanding click and collect to our discount stores.
Turning to our supply chain, we started operations last month in the frozen section of our new Terrebonne D.C. north of Montreal. This new automated distribution center represents the future of Metro's fresh and frozen product distribution in Quebec. It will strengthen our market position, generate new opportunities for our company and our employees and enable us to remain competitive while pursuing our growth. The state of the art facility is expected to ramp up in stages over the coming months and be fully operational by the end of fiscal '24.
In Toronto, our fresh Phase 1 and frozen DC are tracking to the business plan and teams are getting ready for fresh Phase 2 set to begin operations next summer.
As we begin our -- our first quarter, the current trend of food inflation stabilizing month-over-month and declining year-over-year is continuing as we will cycle high inflation numbers over the next 3 quarters. However, we are still receiving price increase requests from the big [indiscernible] companies, which our teams will negotiate as much as possible. So we expect food inflation to moderate going forward.
On the pharmacy side, we will be going up against tough comps in the first half of fiscal '24 as we lap extraordinary demand in OTC medication due to post-COVID-19 cough and cold symptoms last year.
Following our commitment in October 22 to rigorously evaluate the feasibility and cost of achieving the science-based targets initiative, Net Zero standard. The company reviewed and adjusted the scope of its existing objectives by committing to set near-term emission reduction targets in line with the SBTi standards. We are setting science-based targets that are ambitious but realistic.
In closing, I want to address the outlook Francois just gave you for fiscal '24. As you know, we normally do not give guidance, and we don't intend to give guidance in the future. However, we wanted to be transparent on the impact of our major investments will have on our results for fiscal '24, which I would describe as a transition year. I am confident that these key investments will improve our competitive position, allowing us to better serve our customers and will position us well to continue our long-term profitable growth.
That's it. Thank you, and we'll be happy to take your questions.
[Operator Instructions] And your first question will be from Tamy Chen at BMO Capital Markets.
Wanted to start with the fiscal '24 outlook and the DC here. So can you elaborate a bit more on what the challenges work. I think you alluded to that in Ontario, it was all phased over a longer period. So over here, are you just trying to do everything faster and that's what's leading to some issues? And the press release had called out some learning curve in efficiency. So are you able to elaborate on all of that a bit more?
Yes. Thank you for the question. It's exactly that. In Ontario, we did fresh Phase I in 2021. We did the freezer in 2022. And we're going back there next for fresh Phase II. Here in 2024, we have fresh and frozen for Quebec, which is just opening. So it's a mega center. It's 550,000 square feet, brand-new automated DC. We're operating in that center right now, but we have not seized the operations in the former DC. So the former fresh and frozen DCs in Quebec City and in Montreal are still operating to this day as we transition volume from those DCs to the new DC. It will be done over several months. We started with frozen. Things are going well. We're going to do fresh next, then we're going to take a pause for the holidays and then go early in the new year to start with the fresh product. So there's duplication in warehousing costs and transportation costs. So there are nonrecurrent excess costs, for sure.
Then we will expand our produce DC in Montreal to enable our growth. We're moving all dairy products from that DC to the new automated DC in Terrebonne. So that's another transition. And then we ramp up the new expanded space at [indiscernible] for produce. And we go back to Toronto all in the same fiscal year to do fresh Phase II. So there's a lot of moving pieces, a lot of work. We're confident that it's going to go well, but it's going to cost money. It's going to cost money to do that, especially in the first year. And that's why we're transparent, and we're saying that's a big headwind. It will impede our reported profits next year, but it positions us well for the future.
Depreciation is going to go up. No question about that. Capitalized interest, we will no longer capitalize. So that's affecting our bottom line next year. So in a nutshell, it's a big transition year. We're confident it's going to go well. We have learned a lot in Toronto. We expect ramp-up periods to be faster here in Quebec, but there's always some learnings and there are some issues as you start new DCs, new systems, new ways of doing things. So it's going to be -- it's going to have an impact next year. That's why we're doing this onetime guidance.
I see. Okay. I guess I'm wondering, as a follow-up to that, there was more of, I guess, pacing with the Ontario work I'm just curious as to why for the second round of work largely in Quebec, the time line much shorter and yet so much more going on?
Well, in Ontario, we built the projects on existing land. It was our existing facilities that we built next to it, demolished and did it in phases. So we were able to stage it. Here, the new DC and [indiscernible] is one site, one big facility for both fresh and frozen. So it's all at the same time. And then when you open this large facility, you want to increase throughput, you want to bring merchandise in from all the other DCs. So the dairy, which is with our produce today is going to go into the automated facility. So that's going to incur some costs, but it's going to improve the profitability or the returns on the new fixed cost facility. So it's just that the sequencing in Quebec is faster because of -- it's one big center.
Okay. Got it. And my last question is, so are you expecting this to all be fully resolved by the end of next fiscal year? Or could there be some spillover into fiscal '25. I was just reading your press release outlook part, it sounded as though you expect this all to be the drag to be fully resolved within 24?
Yes. Well, we're saying that post fiscal '24, we'll be back on our growth path. And our growth track is to -- and we maintain our long-term average medium and long-term annual target growth objectives are maintained. 8% to 10% EPS has been our long time number, and we're still committed to it.
Next question will be from Irene Nattel with RBC Capital Markets.
Just following on the discussion about the guidance. Can you please walk us through what your anticipated return on investment is, does it exceed your, I guess, mid-teens hurdle rate? And over what period of time should we expect to see those returns coming through?
Irene, well, the same as what we said for Ontario, our internal rate of return or return on investment that we're looking at is the same, whatever the project, a new store renovation, a conversion, CapEx is CapEx funded from the same sources. So we are looking for the same double-digit after-tax cash-on-cash return. Obviously, this is a longer-term project.
So you don't get -- you don't get the savings in the first couple of years like you do for a store, for example. But over the medium term, you start to get there. But we will -- we are confident we will achieve our targeted rate of return as expected. And based on what -- as Eric said, based on the experience we've had so far in Ontario, we're confident that we're in a good position to achieve that rate of return.
That's great. If we could turn back to operations. Obviously, really nice number on the same-store sales from what you were saying, it sounds as though all the key metrics are going in the right direction. Can you talk about what you're seeing in terms of consumer behavior where you think the incremental traffic is coming from and what you're seeing in conventional versus discount?
Thank you for the question. No material change to customer behavior. The trends we've been observing for the last 1.5 years now, that the shift to discount continues. The growth in sales on the conventional side versus discount, there's a gap, and that gap is significant. We are well positioned with Super C and Food Basics to capture that growth. So we're very pleased with our traffic and our tonnage in our discount stores. It's the momentum is strong, and we're happy about that. So trading down, private label growth heavy-duty promotional pressure not pressure, but penetration is consistent with what we've described over the previous calls, and that's still happening. So it's a very competitive environment. as more discount square footage is being added to the market, it's having an impact, for sure, but we're well positioned to continue to grow in that market.
Next question will be from Mark Petrie at CIBC.
Just a follow-up, maybe first on that food same-store sales result. I know you don't like to get into the details, but clearly, the continued shift to discount is a tailwind for you and you're gaining share. But I wanted to ask you what the relative performance in full service? How that has trended from Q3 to Q4? And if the share gains look different by channel?
Well, we're pleased with our share performance by province and by format compared to the direct competition. So we won't disclose more than that, but the share of our conventional stores versus the conventional peer set is growing. If you exclude the strike in Ontario, of course, so we're pleased with that, and it's been consistent over the last several quarters. On the discount side, our share has been growing for over a year.
In Quebec as the discount market size due to a competitor converting many, many stores. As that pie grows on the discount side. We are very pleased with our growth, but on a relative market share basis, discount. It's -- the performance is not the same as it was a quarter or 2 ago. But in total market terms, our discount banners in Quebec are growing share for sure. I hope that's clear.
Yes. Yes. No, that is clear. I appreciate the color there. And Francois, just to clarify, with regards to same-store sales for this period, does your -- do those -- I think you said the strike stores were included in same-store sales, but does that mean that the full period of -- in the same-store sales base includes those stores that were impacted by the strike. But then in the current period, they were not included. Is that right? Or they were excluded in both?
They were excluded in both the 27 stores for 6 weeks are out of the same-store sales numbers last year and this year.
Yes. Understood. Okay. And then one more question, if I could, please. I mean, obviously, there's a lot of volume pressure in the industry, just given the shifts in consumer behavior. And I'm curious just to hear how you think about the impact in your business? Obviously, lots of different elements across private label penetration, promotional investments, cost leverage. Is that a factor in your outlook for fiscal '24? Or is it really I mean that's predominantly the DC issues, but just curious about the sort of industry pressures for fiscal '24.
No, the guidance we're giving on EPS for next year is all related to the headwinds due to our distribution program modernization program. The market is the market. We expect to compete really well and to continue to do well from an operations point of view and sales growth, margins, those -- we're very confident will continue to perform well. The headwinds are related to the distribution program.
Next question will be from George Doumet at Scotiabank.
Just a follow up on the Terrebonne. Is there a way you can give us a sense of the margin benefits that we should expect once that's ramped up? And presumably, we should grow well above 8% to 10% of fiscal '25 as you get some of that benefit from Terrebonne, but maybe any color there would be appreciated.
Well, as we said, the rate of return that we get in the investments are long term by the bulk of these extra costs the edification and learning curve efficient and so forth will be behind us. I expect to be behind us post '24. So yes, as we did in Ontario, we're looking for improvements or at least more tools to be able to improve margin, better in-store servicing, better in stock position, better quality, which all has a rippling effect on our growth. So that's why we're confident that we maintain our growth targets.
Just a little more color on that. We're not going to give you specific numbers on the benefits. But -- just an example, for those of you on the Investor Day, who saw that Frozen DC, you were able to see the automation level, the number of employees and the volume that is going through that facility. And we were able to internalize a lot of formerly DSD product into our warehouse.
So we're going to do the same in Quebec. We're confident that this will help improve service to stores. It will help improve in-stock position in stores it will help our sales. And that will help our margins. It will help our same-store sales, it will help our market share. So there's a lot of factors at play when you do big supply chain investments that should benefit at retail. We're seeing some of that in Ontario, with our frozen DC, and we expect more of the same in fresh and frozen down the road in Quebec.
We're not going to give you an exact number. But in our business case and the return calculations, we do. We do put some money in there for those benefits. So that's why we're confident we're going to get the returns that we need on the investments that we needed to make. We were -- we needed capacity, we needed to grow. And these investments were required. So it wasn't as if we could continue to operate in our DCs over the next 30 years. We've grown a lot in the last 20 years, and we want to grow some more in the next 20 years.
Okay. I just want to touch on the pharmac. Some pretty good numbers there. So maybe first on Rx. Can you maybe help break out that number? How much of that was higher indexation fees, maybe volumes? Anything that you can tell us what's happening over there?
So the Rx number at 6.7% is healthy. There's a -- we said indexation of the script fees by the government on the public sector scripts. Same on the private sector fixed fees. So there's indexation of the script fee that's contributing to that lift. Expensive molecules are contributing to that lift. Ozempic is contributing to that lift. And professional services, vaccinations, flu shots, that's increasing. So there's a lift in the 6.7% on top of the normal Rx counts. So we're pleased with that. And our share of Rx in the Quebec market is very consistent and continues to be #1, and we're pleased with our performance.
Okay. And just last one from me. Shifting over to the front store. Obviously, some pretty strong numbers there, but I think inflation is high for HABA product. So can you talk a little bit about the volume trends that you're seeing when it comes to HABA in general? And are you seeing a trade down? Are you seeing a slowdown? Can you talk a little bit about that?
Inflation in HABA is a little lower than food inflation that we're reporting. So it's not abnormally high inflation in HABA at all. The front store sales number is impacted by OTC. Those numbers are down year-over-year. Last year, OTC numbers were sky high because of post-covid and sanitary relief and whatnot. There were a lot of symptoms last year in Q4 and in Q1 of '23. So we're cycling that.
So given that, we're pleased with our HABA performance, cosmetics are strong, seasonal performance was good. So 3.1% doesn't sound like a home run, but compared to what we were cycling last year on a 2-year stack basis, it's quite strong, and we're pleased with that performance.
But there's still going to be pressure for the first half of '24, like I said in my opening statement on OTC sales because of the -- in Q1 and Q2 of fiscal '23. The cough and cold symptoms and the flu season was very high, and that contributed to big numbers last year, and we expect that to be lower this year.
Next question will be from Vishal Shreedhar at National Bank.
I just wanted to go back to the DC in Quebec. Would you consider the delta that you issued in your outlook for fiscal '24 relative to Street expectations. Is that predominantly from planned costs that you saw coming and the Street didn't adequately reflected? Or was there some unplanned initiatives or unplanned events in there that caused that delta to magnify? It is a large delta on EBITDA versus the Street. So I just want to get that thought.
Well, we were responsible for which the Street expectations will be we've been pretty transparent that we're making. These are well-known investments. We've been talking about it since 2017, 2018. It's a multiyear program with we started at $800-plus million. It's going to be more like $1 billion because of inflation and construction and all that. So we've been on this program and these facilities need to be ramped up and they need to be amortized going forward. So that's the math here. So that's why we're giving that guidance to be very transparent.
Okay. I appreciate that. And on the actual D&A increase, are you going to give us some specific help on those numbers?
Yes. I think we're not going to -- we're not going to break down the headwinds per category and so forth. But I think for depreciation, what we can say for next year is the total of increase, not just not just for the DC that we're talking about. But total depreciation expense, you can use a $50 million-plus delta for the year. Obviously, gradual, but the bulk of the increase happening in Q1 because of [indiscernible] starting live. So you could assume about $50 million more depreciation in the expense, and you could assume about less than $15 million of lower capitalized interest. And I'll leave it at that in terms of the impact for next year.
Okay. And the duplicative costs, are you going to -- any help on those? And how long will those duplicate costs stay in the P&L?
Well, we gave you some -- we gave some impact as we tell you that our EBITDA is expected to grow by less than 2%. So we are absorbing part of these increases, but we're not absorbing all of it. And we will obviously, as a quarter -- as we progress in the year, we'll talk about our results. But as I said, based on the experience we had in Toronto, the bulk of the inefficiencies and edification should be behind us post, that's the expectation.
Got it. Okay. Just changing topics here. I just want to -- I was hoping you could update us on your view on acquisitions, if there's been any changes. And what's your interest in pharmacy assets?
Well, like we said before, Vishal, we are always on for acquisitions in food and pharmacy in Canada. And if an opportunity arises, we'll take a close look.
Okay. And is it fair to say on pharmacy assets you'd want to self-distribute if assets were to become available?
That's our model. Yes, we would prefer. We'll see what the opportunities are.
Next question will be from Michael Van Aelst at TD Cowen.
Sorry to go back to this, but I wanted to talk just kind of a better sense of the timing of the DC impact. Do you expect these duplicate overhead costs and the inefficiencies to be highest in the first half of the year or second half of the year? Like how would you expect that to go through the year?
Well, those kind of fees is gradual. You expect that your learning curve by definition is the curve so that the during part of the year will be tougher than the last part. We're not going to give you a precise month by month, but that's -- you can assume a gradual improvement as we move along the fiscal year, just like we had in Toronto.
Okay. All right. And then it was asked before, but I just want to clarify a little bit here. The -- a lot of these costs that you're calling out for fiscal '24, they're onetime in nature, they're temporary. So -- and the industry continues to progress as you expected. So should investors be expecting an outsized growth in fiscal '25 to make up for the shortfall that you're seeing in growth in fiscal '24?
Well, some of the expenses are going to be permanent. Depreciation, as Francois called out, is going to be with us for a long time. There's some onetime. There's some cash. There's some noncash. There's some onetime, there's some permanent. So it's a mix of all that. To say you're going to expect outsized return in 1 year. I don't think that would be fair or appropriate, but we expect it to generate our returns on our investments over time.
We're confident we're going to get there. But some of these expenses are going to be with us and not just for 1 year. Some of that is onetime -- although obviously, the growth and depreciation in '25 and beyond will be a lot lower than what we're showing in '24. And so with the extra volume that we are we'll be able to absorb going forward. It's just that 1 year. That's what we call a transition year. But after that, we're in a good position to absorb and drive the efficiencies and the margin improvements we discussed.
So when you talk about 8% to 10%, getting back on to our 8% to 10% annual growth for EPS, if we look back 5 years from now, are you saying you're expecting to have 8% to 10% CAGR in EPS over that 5 years?
Yes.Yes. That's exactly what we're saying.
So similar to historical, we're just going to see a drop this year and then you'll make up for it gradually in the following years as you get reference from these investments.
Exactly. And as we said in the past, those targets doesn't mean that we hit them every single year. There are reasons why you like what we're talking today where you make investment for the future, but if you take a period of time and medium to long term, we are confident that we can still achieve those targets.
Okay. You've done it historically on a pretty consistent basis. So Okay. And then finally, on labor, we're -- clearly, you alluded to the significant wage increases from this late agreement. But it seems like both your OpEx and your competitor that also reported today had higher OpEx growth as well. And I'm just wondering, how much of that is coming from labor at this point? Like are we seeing -- are you already seeing some meaningful increases in labor expense in your OpEx line this quarter?
Yes. I'll pick some ways, some salary wages increases are higher and we plan for it. I'm pleased with our performance. Our OpEx as a percentage of sales is the same as last year. And obviously, if you factor in the strike, it's our percentage of OpEx as a percentage of OpEx on sales is lower than last year. So despite pressures from wages and other lines. So we're -- yes, to your question, it's a wage increase are there, but we've been able to absorb them.
Okay. And your labor, your weight are both in COGS and OpEx, correct?
Yes. Yes.
Next question will be from Chris Li at Desjardins.
Just a couple of questions just on how to model for next year. Maybe from Francois, just want to clarify, the adjusted EBITDA and adjusted EPS that you're anchoring your financial outlook for fiscal '24, I just want to confirm, is that excluding the extra week and also excluding the strike impact?
It's versus the reported figures for '23 as you've seen on the P&L.
Okay. So -- okay. Got you. As they reported, Okay, that's helpful. And then -- and then secondly, just in terms of just the classification of these onetime costs, will we see them being reflected in most mix of both COGS and SG&A?
Well, most -- some of it will come back when we do chapter 30, 31, when we bring back some of the cost increases to the margin. when we bring some of these cost increases, the margin, you'll see an impact on margin as well, but mostly OpEx.
Okay. That's helpful. And then, Eric, I think you already answered this question with Mark. But I just wanted to touch base again. So as I'm trying to wonder like if it weren't for all of these onetime noise from the DC investments next year. Do you think you'll still be able to achieve 8% to 10% EPS growth in fiscal '24? And I guess what I'm trying to understand is, I mean, has your outlook also incorporates some caution around the operating environment because, as you said, there are some tough comps and there's increasing promo penetration.
No. Like I said to Mark, we feel very confident about our KPIs and our operating performance in both of our markets. We're well positioned. Stores are in good shape. We have a good CapEx program. So I'm confident that our performance will be consistent with prior experience. So again, this guidance has nothing to do with the operating performance, all to do with our supply chain program.
Okay. And then my last question, just maybe on the gross margin. I know the result obviously included the impact of the strike. If you were to exclude that, is it fair to say your margin performance would have been somewhat similar to the performance in recent quarters in terms of the year-over-year growth or comparison.
Which margin -- margin, gross margin?
Gross margin, gross margin, sorry.
Well, gross margin is down for a few factors, the strike, obviously, and the margin in food by itself is also declining as it has been over the previous quarters, a combination of -- we're not passing on all the cost increases. And there's also a shift to discount.
So that also has an impact. And you're also comparing to a gross margin level of last year, which was the highest of the year at 20.4%, the whole year was at an average of 20%. So you are comping -- you're comparing to a very high gross margin last year. So I think all these factors explain why the gross margin is where it is.
[Operator Instructions] And your next question will be from Mark Petrie at CIBC.
Just a quick follow-up. I just wanted to clarify, for the new facility at Terra bond, does it have automated fresh like what you're going to be putting in, in Phase II in the GTA? And yes, I guess, first.
The answer is yes. And it will be -- it will be the pilot for Toronto whether we do next June. So say learning curve and ramping up on the fresh side, there's going to be some of that going on in Terrebonne. So yes, it's not fully automated, but it's more than 75% automated for fresh in that DC.
Yes. Okay. And is it -- would you characterize the automation in fresh as more difficult to execute or to ramp than automated in frozen?
Yes, it presents a few more challenges because it's a mix of conventional and automated picking. So it has more complications. We live through that for produce in Toronto. It will be more automated in Terrebonne, and it will be more operated in Toronto once we're done Phase II next to next summer. But as we ramp up, yes, there are more challenges with -- on the fresh side than the freezer. They all have challenge, but it's a little more complicated with fresh because it's hybrid.
And at this time, we have no other questions registered. Please proceed.
Thank you all for your interest in Metro, and we will speak again soon to discuss our first quarter results on January 30. Thank you.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.