Metro Inc
TSX:MRU
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Metro Inc
Earnings Call Analysis
Q4-2024 Analysis
Metro Inc
Metro Inc. reported total sales of CAD 4.94 billion for the fourth quarter, reflecting a 2.6% decrease from the previous year. However, on a comparable 12-week basis, sales increased by 5.7%, largely due to improvements in the retail network and the absence of labor disruptions like last year's strike. Specifically, same-store sales in food grew by 2.2% and pharmacy sales surged by 5.7%.
Gross margins improved slightly to 19.7%, up from 19.5% a year ago. Operating expenses decreased to 10.4% of sales, down from 10.7% in the prior year. Adjusted net earnings were CAD 226.5 million, a 1% decline compared to CAD 228.8 million last year, but adjusted earnings per share rose by 3% to CAD 1.02 from CAD 0.99.
The company highlighted the effects of a previous strike that negatively impacted results in Q4 last year. The estimated cost of that labor conflict was approximately CAD 27 million after tax, equivalent to a CAD 0.12 share impact. This was contrasted with the favorable effects from an additional week in the fiscal year, which also amounted to about CAD 27 million.
During fiscal '24, Metro Inc. opened 9 new stores, which included 3 conversions of Super C, and executed significant renovations across 11 locations. With a net increase in square footage of 318,000 (1.5% of the food retail network), the company anticipates adding about a dozen new discount stores in fiscal '25.
Looking forward, Metro Inc. expects to gradually resume profit growth in fiscal '25, reiterating its guidance for a 2% to 4% growth in sales, 4% to 6% in operating income, and 8% to 10% growth in adjusted earnings per share over the medium to long term. However, it cautioned that this growth may not be evenly distributed, with incremental improvements anticipated throughout the fiscal year.
The company experienced a significant uptick in online sales, which grew by 27% on a 12-week comparable basis. This surge was attributed to expanded click-and-collect services and partnerships with third-party delivery services. Furthermore, Metro launched its MOI Rewards program in Ontario, which has already seen over 1 million enrollments within four weeks, indicating positive customer reception towards loyalty initiatives.
Metro reported increased depreciation expenses attributed to investments in new automated distribution centers, reflecting an 8.6% rise to CAD 135.8 million. Despite experiencing elevated net financial costs of CAD 32.6 million due to higher debt levels, the company maintained a strong cash flow position, ensuring coverage for capital expenditures and dividends while also facilitating share repurchases.
As part of its growth strategy, Metro Inc. plans to enhance its pharmacy services, bolstered by the adoption of Bill 67, which allows for expanded clinical offerings at pharmacies. The company recorded over 4.3 million clinical services in its network over the past year and anticipates further increases in service availability due to regulatory changes.
Metro's strategy remains focused on balancing cost controls with operational growth. The company is well positioned in both the food and pharmacy sectors, demonstrating resilience amid changing consumer behaviors and market dynamics. The combination of a solid financial performance, strategic expansions, and strong customer engagement initiatives paints a promising picture for future growth.
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Good morning, ladies and gentlemen, and welcome to the Metro Inc. 2024 Fourth Quarter Results Conference Call.
[Operator Instructions]
Also note that this call is being recorded on November 20, 2024.
I would now like to turn the conference over to Sharon Kadoche, Director, Investor Relations and Treasury. Please go ahead.
Thank you. 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 28. With me today is Mr. Eric La Fleche, President and CEO; Francois Thibault, Executive VP and CFO; Marc Giroux, Executive VP and COO; and Jean-Michel Coutu, President of the Pharmacy division.
During the call, we will present our fourth quarter results and comment on its highlights. We'll 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 indicative 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 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. Before I go through our results, I just want to remind everyone that 2023 was a 53-week year versus 52 weeks this year. Additionally, in Q4 last year, we had a 5-week strike at 27 Metro stores located in the Greater Toronto Area. Also, starting this quarter, we are segregating our total sales between food and pharmacy, and you'll find a breakdown in Note 3 of our Interim Report.
Turning to our quarter. Total sales reached $4.94 billion, a decrease of 2.6% versus the same period last year. On a comparable 12-week basis, sales were up 5.7% in Q4, driven by higher sales in our retail network this year and the negative impact of the labor conflict last year. Same-store sales were up 2.2% in food and up 5.7% in pharmacy. Our gross margin stood at 19.7% of sales versus 19.5% in the same quarter last year.
Operating expenses as a percentage of sales came in at 10.4% versus 10.7% last year. And if we exclude the impact of the strike in the fourth quarter of 2023, our operating expenses as a percentage of sales are the same in both years. EBITDA for the quarter totaled $459.6 million, representing 9.3% of sales versus 8.8% last year and was up 2.6% year-over-year. Total depreciation and amortization expense for the quarter was $135.8 million, up $10.8 million and that 8.6% increase is mainly due to the commissioning of our new automated Terrebonne DC and the final phase of our fresh DC in Toronto.
Net financial costs for the third quarter were $32.6 million compared to $30.1 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. The effective tax rate for the fourth quarter of fiscal '24 was 24.5% compared to an effective tax rate of 24.1% for the same quarter last year. Adjusted net earnings were $226.5 million compared to $228.8 million last year, a 1% decrease. And adjusted net earnings per share amounted to $1.02 versus $0.99 last year. That's up 3% year-over-year.
Recall that in our fourth quarter last year, the strike had an unfavorable impact of approximately $27 million after tax, or $0.12 per share. And the additional week had a favorable impact of $27 million after tax, or $0.12 per share.
On the food retail side, in fiscal '24, we opened 9 new stores, including 3 conversions of Super C. We carried out major expansions and renovations at 11 stores and relocated another 2 for a net increase of 318,000 square feet or 1.5% of our food retail network. Turning to in-store technology. We ended the fiscal year with 529 stores equipped with self-checkout technology and 397 stores equipped with electronic shelf tags.
Under our normal course issuer bid program, we repurchased 7 million shares for a total consideration of $510 million, representing an average share price of $72.09. Yesterday, the Board of Directors authorized the renewal of our share repurchase program, which will enable us to repurchase in the normal course of business between November 27, 2024, and November 26, 2025, up to 10 million of our common shares, so an increase of 3 million shares.
In closing, our fiscal '24 results have landed well within the guidance provided last year, and we expect to gradually resume our profit growth in fiscal '25, and we maintain our publicly disclosed annual growth targets. That is, to grow sales by 2% to 4%, operating income by 4% to 6% and adjusted earnings per share by 8% to 10% 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. Before going over the quarter, I would like to take a moment to highlight the completion of our supply chain modernization project that we started in 2017. Last September, we completed the second and final phase of our Toronto automated fresh facility, reaching the final milestone of our 7-year, nearly $1 billion investment in our supply chain. It was by no means an easy journey, building on existing sites while maintaining service to our stores during the COVID pandemic was a significant challenge as was the implementation of new systems and automation technology.
In Ontario, we built 2 new automated distribution centers, a frozen facility that opened in 2022 and the fresh facility with Phase 1 in 2021 and Phase 2 that we just finalized. In Quebec, we built a new automated fresh and frozen distribution center in Terrebonne that opened in 2023, and we expanded our fresh produce distribution center in Laval this year. So we now have state-of-the-art distribution centers for fresh and frozen products in both provinces. And this transformation will provide capacity for future growth and efficiency while strengthening our market position. I want to really thank my colleagues and our partners for their hard work to successfully deliver this ambitious program.
Fiscal '24 ended with a solid fourth quarter, driven by strong comparable sales growth in both food and pharmacy on top of a very strong quarter last year. Our teams continue to offer good value to our customers across all banners in a very competitive market. This resulted in overall market share gains in dollars and tonnage. As Francois mentioned, our results for this transition year met our expectations and have landed well within the guidance provided last year. For the quarter, food same-store sales were up 2.2% for a 2-year stack of 9.1%. Our discount banners continue to outperform our conventional banners. However, we are seeing the gap narrow as we cycle our strong discount performance over the past 3 years.
Our internal food basket inflation came in slightly higher than the reported food CPI of 1.7%. Our merchandising programs continue to resonate well with customers, with transaction counts up in all banners while the average basket remained stable. Promotional penetration was up again this quarter compared to last year. And private label sales continue to outpace national brands. Online sales grew by 27% on a 12-week comparable basis, 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 Basics, with additional stores planned in '25.
As Francois mentioned, we opened 9 new stores in 2024. We see more opportunities in the coming years, and our plan calls for a dozen new discount stores in fiscal '25, including a few conversions.
On the pharmacy side, we delivered another strong performance this quarter with comp sales of 5.7% for a 2-year stack of 11.5%. Prescription sales were up 6.8%, driven by organic growth, specialty medications and professional services. Commercial sales were up 3.3%, driven by consistent growth across all core categories. In fiscal '24, we recorded 4.3 million clinical services performed in our network of pharmacies, a number that is well aligned with our leading market position in the province of Quebec. Additionally, 650,000 of these services were for treating minor ailments, helping to take pressure off the health care system.
Following the recent adoption of Bill 67 here in Quebec, we are expecting further increases in professional services that may be performed in our pharmacies. As such, our teams are working hard to inform customers that more clinical services will be offered at their neighborhood pharmacy. In the pharmacy network, we delivered 28 major renovations in fiscal '24. And for fiscal '25, we are planning another 30 major projects, including 12 expansions and 18 major renovations, of which 9 will be our new store layout design.
Turning to loyalty. Building on the success of MOI in Quebec, we launched MOI Rewards in Ontario in late October. Members will earn points by shopping at Metro Food Basics and our pharmacy banners across Ontario. We are pleased with the customer response to date, with more than 1 million enrollments in less than 4 weeks. New members have already started to redeem in store and are providing positive comments on the ease of accumulation and redemption of rewards.
In Quebec, our MOI program continues to achieve strong performance metrics, with 2.7 million active members across our banners. Members visiting multiple banners are spending on average 5x more than single banner members. Our strategy to drive more member engagement is delivering results.
So to conclude, as we begin the new fiscal year, our teams are focused on executing our business plans to deliver value and a great customer experience in all of our banners. And with the significant investments in the modernization of our supply chain behind us, we are well positioned for growth to create long-term value -- shareholder value.
Thank you, and we'll be happy to take your questions.
[Operator Instructions]
First, we will hear from Irene Nattel at RBC.
It sounds as though you're continuing to see an intensification of consumer value-seeking behavior. Can you talk a little bit about sort of -- other than sort of promotional intensity and trade private label, what you're seeing in both your front of store in pharmacy as well as in food?
Irene, I wouldn't say there's intensification in the search for value. It's been there for several quarters, actually, the last couple of years, and it continues, I would say, in pretty similar fashion. So on the buying behavior, people are buying more on promotion, no change there. Like you said, they're buying more private label, no change there. We see that in both food and pharmacy. We're well positioned to service those value needs in all of our banners. So be it Metro Basics, Super C and Jean Coutu, Brunet. We have effective promotional strategies. They're resonating well. Customer counts are up in all banners.
So the value search has not changed. There's value searching in all of our banners. Obviously, more in discount than conventional, but still the value is on in all of our banners. So not a big change. I wouldn't call it intensification. I think the behavior is pretty much the same.
Much appreciate it. Quick question. On -- you mentioned that there were going to be some conversions from conventional to discounts. Is that in both Ontario and Quebec?
There could be. So we're not going to telegraph for competitive -- obvious competitive reasons, but we have a few planned in Quebec. We'll see about Ontario. It's more of a Quebec program. But there could be, you never know.
And just 1 final question, if I might. And this goes to the introduction of MOI in Ontario. Here in Quebec, we're very used to the compelling features of the program. How do you expect the adoption rate to mature in Ontario as word kind of spreads about the significant value add of MOI relative to Air Miles?
Well, I'll let Marc answer and give you more color. But we've had a good start, a very good start, 1 million members in 4 weeks or so is quite strong. We're very confident that we're going to reach the metrics that we had with our previous program quite fast. Comments are good. We have a good strong program that is going to improve personalization, provide rewards. So our teams are really focused on engaging customers, signing them up and then engaging them digitally to get more of their spend. So Marc, if you want to add a little bit.
I think you said it well, Eric. I would just add that as we talked about, in a little less 4 weeks, we had about 1 million new enrollment in the program in Ontario and already consumers shopping our stores are happy about their -- the ease of accumulation of points and how fast they can redeem for dollars and savings. So we're confident that the program is going to resonate.
We're leveraging our experience in Quebec, and we're looking forward to continue to grow the base of member and to continue to increase the engagement in the program and to the overall commercial program in both our banners and pharmacy in Ontario.
Does that answer your question?
It does.
Next question will be from Tamy Chen at BMO Capital Markets.
First, just wanted to start off with your expectation for fiscal '25. You mentioned you expect profit growth to gradually resume. Can you talk about how you thought about that expectation? Maybe 1 of the things I think we're curious about is what you expect of the unwind of the duplicative costs from the supply chain projects and any other notable pieces that factored into your outlook?
Yes. So Tamy, so by gradual, what we mean is that there's no magic line in the sand that after September 28, we're back to full pre-transition year. So what we mean is that, for example, we're still ramping up the fresh DC Phase 2 in Toronto, and we're improving the metrics at the other DCs. So we see gradual improvements and reductions in the duplicated costs. Now they're better than last year, for sure. So by gradual, what we mean is when we build our plan for fiscal '25, we built a plan to achieve our EPS growth objective, but our profitability will improve gradually throughout the year. That's what we mean by the term gradual.
Got it. Okay. And for the gross margin this quarter, I think you're lapping year-over-year from last year that had the strike impact. I just would have thought there'd be a bit more improvement. So anything to call out on the margin performance this quarter?
No. I think our gross margin was very much in line with our expectations, our mix and the market environment we're in. So gross margin was up 20 basis points. Yes, the strike impacted us a bit last year. But like I said, pretty consistent environment. So the margin came in at the level we expected.
Okay. And my last one is on the pharmacy side here. You mentioned the same-store sales of almost 7%. Several things drove that. I don't know if you could rank that between organic growth, specialty and professional services? And when you talked about the projects for next year, I think you mentioned 30 major of them. So is that kind of the pace we should expect between either expansions or major rentals, kind of like that 30 a year?
Okay. Jean-Michel will take that.
Yes. So on -- when you look at retail sales, pharmacy growth, a lot of it is coming from organic growth and then the rest is complemented by some of the newer sales from some of the higher-cost medication specialty, as we mentioned, and professional services. That's probably the way you should look at it. And the 30 major projects next year is fairly close to the run rate. We're hoping a little bit higher at term, but it's fairly close to where we want to be in terms of investing in our network and making sure that we're rolling out the best concepts possible to better serve customers.
So just on the growth of Rx, there is strong organic growth, and it's helped also by the services and the specialty to Jean-Michel. We're not going to break it down between the different contributors. There's a few contributors, but there's strong organic growth. We have new patients, and the aging demographics in the province of Quebec are a tailwind, if you want, for Rx in Quebec. And we're really well positioned to capture that.
Makes sense. That's it for me.
Next question will be from Vishal Shreedhar at National Bank.
Now with these major supply chain investments largely behind us and all the work associated and with the announcement of Francois's pending departure. And there have been media indications of changes in responsibilities among senior management as well. Just wondering how investors should think about the likelihood of more executive changes in the year ahead? Or do you think there'll be a period of constancy with the executive team looking into the near term?
Well, the announced retirement of my colleague was a little earlier than we would have liked. I'm saying this tongue in cheek. That was a little faster than we would have liked. The rest of the succession plan is working as planned. Marc Giroux was elevated to Chief Operating Officer, we went back to the EVP structure for Quebec and Ontario, so with internal candidates. Carmen Fortino, who heads our supply chain, is at a more advanced stage than Francois is. So he's going to stay on for another year. So there will be normal succession after that.
So yes, it's normal succession planning, and we're pleased that we have a good strong bench and that we were able to fill the positions as we execute on that plan. We are out in the market outside for a CFO candidate. That process is ongoing, and we'll keep you posted. But Francois is here until the spring. So you haven't seen the last of him yet.
Okay. One of your drugstore peers indicated softness in certain categories and is taking certain actions of pricing in stores. PJC's trends seem to be solid in the front store. So I'm not sure if you're seeing similar pressures partly perhaps due to different category mixes. But how does management feel about the value proposition at PJC? And are they seeing the search for value manifest in PJC's front stores that could suggest future weakening trends?
Well, I'll let Jean-Michel say something, but Jean Coutu price positioning is very competitive with the best prices in the market with an effective promotional high-low strategy. So it's a well-established brand that resonates well in the province of Quebec, and that continues. So people looking for value, you can find value that Jean Coutu always have and always will if we do our job right.
So the mix of categories versus the competitor, the comments that you've made for sure, we don't sell many electronics, so I can't comment on that more specifically. And food is less of a -- it's a smaller part of the mix at Jean Coutu. There is some food, but it's a smaller part. So in the core categories, health and beauty, cosmetics, seasonally, Jean Coutu is providing good value.
Jean-Michel?
Yes, that's exactly it. And as Eric mentioned in his opening statements, we're seeing the same underlying trends in pharma. So obviously, promotional is growing a little bit faster than regular sales. We're seeing customers seeking value every day in our stores. And our commercial plans are continuing to resonate well with customers. In our core categories, I think we're well positioned in terms of price point. On the cosmetics end, we're a little bit more of a masstige in terms of our offering, which is resonating very well right now with customers. So the dynamic is a little bit different based on the assortment that we have. And right now, it's working well for us.
Okay. And CapEx came in a little bit lighter than we would have expected this year. I think the guide was around $650 million. Do we expect some of that CapEx to flow into next year, that delta? And how should we think about CapEx next year? I know you've given us some indications, but further thoughts would be appreciated.
Yes. So it's timing, Vishal. So yes, that will -- some of these projects will flow into the next fiscal year. CapEx is more choppy than P&L, obviously. So while we have a budget, we have a plan, we constantly -- we go back every project, we make sure we have the right project, the right returns for the right reasons. So it's timing. And so what I said earlier was that next year, given the big supply chain behind us, we should expect an environment of $550 million to $600 million, so we'll probably be on the higher end of that range, given the -- some of the CapEx will be pushed into the fiscal '25.
Next question will be from Michael Van Aelst at TD Cowen.
So Francois, I just wanted to quickly confirm that you did say at the end of your comments on the guidance earlier that you were expecting it to hit that 8% to 10% EPS growth target in fiscal '25, just not necessarily in the first quarter, I guess, is what you're assuming.
That's what I was -- I meant, yes. So we -- our targets are medium to long term, they are annual targets over a medium, long-term perspective. However, we're comping a transition year. So we build -- we always build plans to achieve those objectives. What I meant is that, as you just said, it's not going to happen all in Q1. It's going to be a gradual improvement in profitability as we expected. So there's no change in our perspective.
Perfect. Just want to make that clear. Okay. The e-commerce growth is still pretty elevated at 28%. And I know you mentioned click-and-collect rollout, but can you kind of break down or rank the growth in terms of third-party apps versus Metro online delivery versus click-and-collect?
So as you know, we've had a prudent approach to the deployment of our e-comm strategy. So we're continuing to deploy it. So part of the growth is due to increased capacity in our own store as we finalize the click-and-collect deployment in Quebec at Super C and continue to deploy in Ontario. Third party has contributed to that growth as well. Consumers in the market are looking for immediacy. So express delivery within 2 hours. And the partnerships that we have with multiple third-party is allowing us to capture that growth in both discount and conventional.
And then your online delivery business, is that kind of flatter, then?
No, it's growing as well, slower than express delivery and click-and-collect, but it has been growing as well.
Okay. And then as this continues to grow, are you seeing your margins improve yet? And is there a year-over-year earnings headwind again next year? Or are we starting to see that come down?
Well, we've been able to manage our e-comm growth as part of the overall business, and it has not impacted overall margin or earnings. As I said, our capital investment in e-comm has been prudent over the years, and we've been able to manage that as part of our regular business.
Yes. I'm not actually clear on that. So I know margins -- gross margins can be good on the e-commerce. But from a net margin or net profit standpoint, are you saying that you're not seeing any negative impact is not losing money?
No, it's dilutive. It's dilutive in the sense that e-comm is less profitable than our brick-and-mortar business. What I'm saying is that we've been able to manage that as part of our overall business with our approach with multiple platforms. Overall, e-comm is profitable at Metro because of our approach. But for sure, it's not as profitable as our brick-and-mortar business.
Great. That's helpful. And just finally, I guess, from Francois. With the supply chain transformation mostly complete here, would you say that the depreciation and interest numbers in Q4 are good run rates going forward?
Well, you should expect the depreciation expense going forward to have increases -- normal increases that you've seen pre those big investments. So we always invest in our business, retail and distribution, not to the level that we did in the last few years. So you should expect a more normal depreciation increase year-over-year, not -- nothing like you saw this year. And interest, again, as we comp that lower capitalized interest, interest expense will be, again, more in line with past years, but obviously reflecting the current environment of rates and the current level of debt. But yes, you should go back to more normal increases pre '24.
Next question will be from Mark Petrie at CIBC.
I did want to just follow up on the comments with regards to the gross margin rate. As you noted, you're lapping a weaker period, which was impacted by the strike. So it was maybe somewhat surprising to not see more of a bounce back. And if you look historically, Q4 typically sees a bigger jump from Q3, just with seasonality than what we saw this year. So is it fair to say this is just noise given the continued impact of ramping up the DC investments? Or are there some external factors that might have shifted somewhat that were affecting that rate?
No. I wouldn't say that there are different external factors. It's our merchandising, it's our mix. And like I said earlier, the number came in at a level that we expected and planned for. And we're happy with our overall top line performance, gross margin performance and bottom line performance with increased tonnage. So we're pleased with that performance.
Yes. Yes. Understood. Okay. On the square footage growth, the 1.5% for fiscal '24 in food. I mean, that's the highest in several years. I mean, is it just fair to characterize that as essentially a response to the population growth that you've seen in your markets? And how would you quantify fiscal '25 or even fiscal '26 when it comes to sort of the general expectations for square footage growth?
So it's a good observation. Yes, it's a little higher, maybe some catching up versus previous years. But we see -- where we open stores, it's because we see a good opportunity. There's been population growth, there's shift in population to certain areas or certain towns or certain neighborhoods. So we are acting on that and trying to capture that growth, either by relocating stores, expanding stores or building new ones. So that resulted in an increase this year in square footage. We expect about the same next year with a dozen discount stores that I talked about, and we see good opportunities.
In discount, mostly in both provinces, we see opportunities for us to expand our network, grow our market share and grow our tonnage. Food Basics in Ontario is doing really well. It's been on a very good run for a few years, capturing share, and we see more opportunities, same with Super C.
Is there any particular skew to that with regards to sort of location, whether it be urban, rural, suburban? Or is it all pretty consistent with the network? Is there sort of a piece of that where you feel like you might be underrepresented and you see somewhat more of an opportunity? Or is it pretty balanced?
It's really market by market. We're balanced. There are some urban, suburban, rural. There's opportunities in our markets in all of these market opportunities. So again, for competitive reasons, we're not going to telegraph our plan here, but we see opportunities for growth, and we intend to -- we have a plan to deliver on it.
Next question will be from Chris Li at Desjardins.
Just maybe a follow-up on the outlook for fiscal 2025. I was wondering if you can please provide us just at a high-level thoughts on a few of the drivers. So your thoughts on inflation. And also your thoughts on gross margin and SG&A rate, just directionally, how we should be thinking about those 3 items as we try to model the growth for next year?
Well, I'm not going to give an outlook on gross margin, Chris. But as far as inflation, we -- I think we mentioned that before, we see inflation at a normal level, if you will, around the 2% level. That's what we see now. So we don't see a 0 or deflationary environment. We still -- we think there's still some pressure in the system that we -- that's what we called it. But -- so it will be -- I think we're back to a more regular environment on that front.
But I won't comment on gross margin. We -- gross margin is based on our merchandising, the mix. So we'll give color as we report on our results.
Okay. That's great. Francois, if I just maybe just a follow-up on the gross margin, maybe not any numerical guidance. But just if you can walk us through some of the major drivers, be it positive or negative that would impact your margin? I'm thinking like shrink improvement, you mentioned mix, supply chain modernization, like just maybe a few drivers that we should be considering for next year?
It's all of those. We're always looking to improve our shrink. There's opportunities there always. But it's good execution, it's good merchandising to get to the margin level that we need to deliver value to our customers, number one, and to provide returns to our shareholders. So we have experienced teams both in store and on the merchandising side to deliver our program. And I think our track record speaks for itself.
Okay. And then just given your increase in your NCIB for next year, do you expect to incur sufficient free cash flow to fully fund the buybacks and dividends? Or do you envision taking advantage of your strong balance sheet and taking on some extra debt to fund the increase in the share buyback?
Well, we said that given the big supply chain investment that we had, our leverage was lower than normal levels. So there's definitely room to increase leverage somewhat, we're not going to -- but -- so that's why given the big investment behind us, we decided to increase the share buybacks. And we have sufficient free cash flow to fund our CapEx and dividends. And the buyback will be at a level based on where we want leverage to be. So it's for us to manage. But there's obviously no change in our ability to generate sufficient free cash flow to fund our growth.
Got you. Okay. And then thanks also for the incremental revenue disclosures between food and pharmacy. I'm just going to be greedy here and just ask maybe just on a onetime basis, can you share with us what is the split in pharmacy and food for -- on an EBITDA basis for Metro Inc...
You're right. You are greedy. No, we're not going to...
Okay. No worries. I thought I'd try. But seriously, if I look at just your revenue growth, if I just do the back of the envelope math, I think it's kind of growing around 7% to 8% CAGR for the last 6 years versus when Jean Coutu was still public. I know Brunet is probably in there, so that boosted growth a little bit. But I'm just wondering like as you look for it, is that high single-digit pharmacy revenue growth sustainable going forward?
Again, we don't give guidance like that, but we see growth in pharmacy for the reasons we've explained many times. We have a strong market share, a great network, 2 great banners. We cover the market well. And it's a market with the demographics that long-term, favor -- pharmacy is well positioned in the market like the province of Quebec, and our banners are well positioned to capture that growth. So yes, we have confidence in our growth opportunities in food and pharma.
The only point of reference I can give you, Chris, when we did the Jean Coutu transaction, I went around and we were at about 8% of our total revenues was pharmacy, and that was basically Brunet. So -- and now you see obviously, we -- our exposure to pharmacy obviously has increased significantly with the acquisition. But that's from -- the starting point was 8%.
Got you. Okay. And the last question just on maybe a pharmacy, again, taking a longer-term outlook on the industry. Besides Bill 168 and specialty drugs still growing very fast, as you look out to the industry for the next 2 or 3 years, are there other regulatory developments or trends that you are closely monitoring that could potentially impact sort of the growth of the business over the longer term?
I can take a lead on that. Chris, so obviously, in Quebec, the big shift in the big transformation in pharmacy is clinical services. And that's really where all the stakeholders here in the province are focusing on. Obviously, we -- pharma care is something that everyone is talking about. In Quebec, they're taking a little bit of a different approach to pharma care. So right now, when we look 2, 3 years out, really, the focus is making sure we maximize the delivery of clinical services within our network. That's really where all the stakeholders are heading. And other than that, there's nothing truly significant that we see as we look ahead and start -- and plan growth in our business.
Bill 67 is a major change. It's going to open up more clinical services to be performed in pharmacy, as you know. So the pharmacists today are performing many clinical services. They will be performing more of them over time. So again, like I said in the opening statement, we're capturing clinical services, and we expect to capture more or deliver more in the years ahead.
[Operator Instructions]
Next, we will hear from John Zamparo at Scotiabank.
I wanted to come back to a couple of topics that we discussed previously. Maybe we could start with loyalty and the MOI launch in Ontario. I think you said you're seeing 5x greater spending for members than not. Are there any other insights that you have immediately after customers have signed up, particularly on frequency or basket size? And is there any incremental investment we should be aware of from Metro launch in this program?
Well, so the first part of your question, referring to 5x. So what we're saying is that consumers that are shopping multiple banners are spending in Quebec, 5x more than members that are shopping only 1 banner, which really highlights the fact that the program allows us to capture more basket, more frequency from shoppers across all of our banners, pharma and food in Quebec. The members -- and the more loyal the members are, the bigger their basket within 1 banner, and that's driving incremental value -- incremental customer value.
The third part of your question was related to further investment in our program. The big -- the first part of the investment was the launch in Quebec, then the launch of Ontario. We'll continue to invest in improving functionality of the program as we have been over the last 10 years with the Metro MOI program in Quebec, but it won't be as significant as the investment we have made in the launch in Quebec and Ontario. Hopefully, I answered the question.
Yes. That's helpful. And I wonder when you think about launching Ontario following the Quebec launch, is there anything in particular you learned from the Quebec launch that's informed your Ontario strategy that you're willing to share?
Well, you saw the -- how we decided to tweak the program to be more adapted to the Ontario market. So we're the only program in the province in Ontario that offers in our conventional banner, Metro, base point for customers when they shop in our stores. So when you spend $1 in our store -- $3 in our store, you get a point. And consumers are reacting well to that because they feel rewarded on their loyalty on their regular shopping. So we've adapted the program. We wanted the program to be a little bit more promotional in the Ontario environment, allowing us to compete with loyalty -- a mix of our loyalty program and our commercial program.
Okay. Got it. I want to move to e-comm. Still pretty healthy growth in that part of the business. I wonder if that continues to grow at the pace it has, particularly on the third-party side, and that becomes more relevant to your results, would you consider taking higher pricing on third-party orders to the point where that would not be margin dilutive?
Obviously, for competitive reasons, we won't talk about our pricing strategy, but our strategy has been to offer in our e-comm strategy, same prices as in store for our own services and marketplace. We're going to market with an omnichannel strategy where we want consumers to have the same experience with the brand in-store and online. And it's paying off. Consumers that are shopping online are more engaged and more loyal than our stores. And we're seeing the overall customer value increase. So for now, that's been our strategy.
Got it. Okay. And then my last 1 is on the buyback. I want to get a sense of the appetite to hit the maximum level. The comments previously on leverage are helpful. But is the buyback share price dependent? Or do you anticipate you'll hit the maximum number?
Well, it's an amount that we can do up to. So it's not a -- we don't -- it's not an obligation to do $10 million. So -- but we feel that with the lower CapEx environment, now that the big supply chain investments are behind us, when we look at the capital allocation, we felt that we -- it was time to go for a higher amount. So we'll see -- obviously, we always see how the year progresses, but that's the plan is to do more and more buybacks than we did this year.
Again, the capital allocation has not changed. Our first priority is CapEx. So if, for some reason, we see more CapEx opportunities, and then that's the first priority. And then dividends, of course, that -- our policy continues, no change. So the buyback is kind of the last portion of that capital allocation. If we're in an excess cash position and we don't see immediate or short-term good project, we return the cash through buybacks. We find it's the most efficient way then to return cash -- excess cash to shareholders. So that's how we view the capital allocation, and we have more room for buybacks than we did in '24.
And at this time, Mr. Kadoche, we have no other questions. Please proceed.
Thank you all for your interest in Metro, and please mark your calendars for our first quarter results on January 28. Thank you.
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for your participation. At this time, please disconnect your lines.