North West Company Inc
TSX:NWC
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North West Company Inc
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Please be advised that this conference call is being recorded. Welcome to The North West Company Inc. First Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead.
Okay. Thank you very much, and good afternoon, and welcome to The North West Company first quarter conference call. John King, our Chief Financial Officer, joins me today. And I'm going to start off the meeting by asking John to read our disclosure statement.
Thank you, Dan. Before we begin today, I remind you that certain information presented may constitute forward-looking statements. Such statements reflect North West's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements.
Any forward-looking statements are current as of only the date they are made and the company disclaims any intention or obligation to update or revise the forward-looking statements, whether as a result of new information, future results or otherwise, other than what's required by law. For additional information on these risks, please see North West's annual information form and its MD&A under the heading Risk Factors.
All right. Thanks, John. I will begin by providing a brief overview of this quarter's results, and then I'm going to move on to provide some color on sales, starting with the Canadian and then the International operations. And then I'm going to expand on consolidated gross profit and expenses. I'll wrap the call up with a few comments on our outlook before opening the call up for some questions.
Okay. We had a solid start to the fiscal year. Consolidated sales for the quarter were up 4%, and net earnings increased by 22.3%. Same store sales gains in both Canadian operations and International operations drove our top line performance. Food same store sales increased in both Canada and International while general merchandise sales in the quarter were mixed with strong same store sales in Canada, more than offsetting softer same store sales in International.
Top line growth and 117 basis points improvement in the gross profit rate to sales compared to last year, drove a 7.9% increase in GP dollars. On the other hand, selling, operating and administrative expenses increased by 5.7%, largely driven by inflationary cost pressures. Overall, we are pleased with our results for the quarter, including a 17.9% increase in EBIT and a 22.3% increase in net earnings.
All right. Let's talk about sales in the Canadian operations. Sales in Canada were up 4% in the quarter and 4.7% on a same-store basis. There are 3 key terms to highlight. First, our strong in-stock position, particularly on key staples in our assortment. As I mentioned in my AGM remarks, we are laser-focused on operational excellence and execution as we aim to ensure we are in-stock on the key items that our customers are looking for. Second, we are seeing increased consumer demand driven by inflation relief payments and First Nations Drinking Water Settlement payments issued to the individuals. However, it is important to note that the volume of these settlement payments in the first quarter relative to the total settlement remains low. And while there continues to be uncertainty regarding the timing of the payments, we expect to see the payments spread throughout the year with a higher weighting in the back half of the year and on into 2025.
And third, food inflation continued to be a factor, but to a lesser degree than in previous years. In our International operations, sales results were driven by gains in same store food sales, which mitigated softer performance in general merchandise. International sales increased by 4.2% in total and by 2.5% on a same-store basis, which is an overall improvement in trend compared to 2023. There are a few puts and takes in International operations, which are netting out to overall positive results. For example, a soft fishing season is negatively impacting certain Alaskan communities.
On the upside, we have been observing better performance in certain Caribbean tourist economies such as BVI. From a more macro view, we are also seeing the ongoing impact of inflation, which has resulted in consumers continuing to shift their spending from general merchandise and over to food. This shift in spending was a key factor that contributed to a same store food sales increase of 3.1% and a decrease in general merchandise same store sales of 4.3%.
All right. Let's transition and talk about consolidated gross profit results. As previously noted, our gross profit rate increased by 117 basis points in the quarter. This rate improvement is largely a result of 2 key factors: First, a greater pass through of cost inflation in retail prices compared to last year. Inflationary cost pressure has started to moderate, particularly when compared to the significant ramp-up in prior years. This change in trend, combined with competitive pricing actions, has enabled a greater pass through of inflationary costs compared to last year. And although competitors in our markets are passing through more inflation, our local key value items are being actively monitored to ensure we have the most compelling offering for our customers.
Our retail pricing philosophy has remained consistent. We continue to challenge cost increases from suppliers. And when cost increases do occur, we aim to take a balanced approach to passing through the supplier cost increases while keeping in mind the impact on our customers and providing the best value that we can.
The second factor that impacted our gross profit rate is the shift in sales blend, including the impact of lower wholesale food sales. In order to maintain our margins, it is instrumental that we have strong inventory management. Let me expand on this briefly. As mentioned during previous calls, product availability is a top priority for our organization. This is a challenge for all retailers, but even more so for us given the remoteness of our stores and our role as a provider of essential food and general merchandise.
In order to improve product availability, we have revisited our transport mix to find better ways to make our logistics' cost more productive. As a result, we have increased Sealift and Winter Road inventory to leverage lower freight costs in order to improve our in-stock levels on the most relevant assortment for our customers. We have also increased our inventory position on key items such as snow machines, ATVs, boats and motors and home furnishings in anticipation of increased consumer demand from water settlement payments. Given the durability and relevance of these items in the communities we serve, we expect good sell-through of this merchandise.
All right. Let's take a moment here and just I'm going to talk about some expenses. Our teams continue to focus on controllables as much as possible without compromising customer and employee experience. During the quarter, expenses increased 5.7% and were up 41 basis points as a percentage of sales. This increase was mainly driven by inflationary headwinds in labor costs, new store expenses and an increase in depreciation. These factors were partially offset by lower share-based compensation costs due to changes in the company's share price.
We have been very intentional with our efforts to control expenses at the store level, making sure they are tied to productivity. For example, we are reviewing our store resources and launching initiatives to optimize labor scheduling using a data-driven approach, making sure that it is aligned with customer demand. As a result, the net impact of these factors is helping to offset the inflationary cost pressures that I referred to.
Okay. To wrap up, I'd like to briefly mention 2 macro trends that are relevant for our outlook this year before speaking about our Next 100 program. First, we expect that merchandise and freight inflation will continue to moderate for the remainder of 2024. And second, we expect an increase in consumer demand arising from the First Nations Drinking Water Settlement payments in Canada. However, it is very important to note that the number and amount of settlement payments received by claimants in the first quarter is low compared to the overall amount of the settlement. The period for filing claims was extended to March of 2024, and we do expect water settlement payments to be issued throughout '24 and on into 2025.
Looking forward, these are exciting times for our company, and we continue to focus on driving operational excellence, expanding our capabilities and relentlessly pursuing value for our customers, our employees and our shareholders. In my team remarks, I noted that collectively, we have framed this as The Next 100. The Next 100 program aims to drive annualized incremental EBIT over the next 3 years while ensuring sustainable investment back into our core operations. The benefits are expected to begin ramping up later this year and continue to accelerate through 2025 and 2026 as our initiatives reach maturity. As we lay the groundwork for these improvements, we anticipate incurring some onetime costs and making investments in technology, and we'll share more details on these impacts in future updates.
The scope of The Next 100 is comprehensive and touches every aspect of our business. We are refining what we sell to ensure our product to serve and meet the evolving needs of our customers and enables us to offer even more value. We are building on our logistics operations and enhancing our forecasting and replenishment capabilities to reduce costs while improving product availability and freshness for our customers. And we're improving processes and employing new technologies to streamline operations across all of our teams. This is more than just a traditional business project that is focused on reducing cost.
The Next 100 is a tangible program to improve the value that we offer to the communities we serve and setting a foundation for sustained growth that benefits all of our stakeholders, including customers, employees and shareholders. The whole organization is energized and excited about this journey, and I look forward to updating you on our progress.
Thank you, and I will now open it up for any questions.
[Operator Instructions]. First question is from Michael Van Aelst from TD Cowen.
First off, I was wondering if you could give me a sense as to what percentage of sales these 30 communities account for that it will be impacted or benefit from the water infrastructure settlement payments?
No, we wouldn't disclose that level of information, Michael. Sorry.
Okay. So I guess is it -- do you consider it a meaningful portion of that $2 billion is going to be spent in your -- like is the majority of that going to be spent in your communities?
No. I wouldn't say. No.
Okay. So when I look at the inventory that you've built up -- ATVs and snow machines, some of these are pretty high-priced items. I'm wondering if you're not in those areas -- if you're not getting a good chunk of those payments, and when you look at the payments for individuals, do they really have enough money to pay for an ATV or a snowmobile or things like that?
Oh, yes, absolutely. I mean, this isn't our first rodeo with these types of settlement payments. If you remember, the residential school payment was another one. The thing is the payments that are coming on us now are actually bigger than what they have been in the past. And so I can tell you that we've aligned the information and the knowledge that we've gained over the last number of years and through the different events that we've had, to align our inventory levels to our sales expectations. So we're very comfortable that the inventory will meet the demands of our customers once they receive those settlement payments.
Okay. And what are the risks about the age of this inventory? You've been holding this inventory for a little while now. And if they only get the money, payments in late this year and sometime next year, is there a risk that what you have in stock is old models and they want the new models and dollar discount.
Sorry, Michael, I didn't mean to interrupt you. No, there's not a risk there. I mean, the technology in these machines, particularly over the last number of years, the last 1 or 2 years, has not changed that significantly, if at all. And that's not something that we're concerned about.
Okay. All right. And then on the First Nations Child Compensation settlement, do you know if those payments that you're seeing are likely to come late 2025 or 2026? Do you know if these are onetime payments, if they're going to be spread out over a number of years, because that's a heck of a lot of money being paid out if they're onetime payments.
It is. Some of it will be onetime payments, but there's also infrastructure money in there. There is Jacob's (sic) [ Jordan's ] Principle money, and this has got more of a long tail effect to it because if you can appreciate their building infrastructure, their building programs within communities. So that will create more of a stimulus for their local economies, which is also beneficial for us.
Right. But the payments to individuals is $23 billion, and then the payments to the communities is $20 billion. Is that correct?
You got it.
So all those payments to individuals, you believe, are going to be lump sums?
That's the way I understand it today, yes.
Okay. That's great. And then...
[indiscernible] -- we'll be ready.
Yes. And then finally, on North Star Air. You mentioned lower sales there. Is that in passenger or in freight?
It was a little bit of both, actually.
So are we at a point where there's -- you're kind of near full capacity on third-party freight, and we're just going to see a [indiscernible] plus or minus?
Yes, I would say so.
Okay. Let me just ask a follow-up on that then, considering another plane.
That's a good question because some of our metal is -- like our capacity is there. We don't think it's a lack of demand. It's just more about some of the usage of our planes, obviously, with the C checks and some of the maintenance calls that have been in. We didn't have the capacity to fulfill the demand. If we thought the demand got to a place and there was a security there and a wise investment to make an investment in other plane, then we would do that. But currently, we think there's opportunity just getting some of our metal healthy that was, again, scheduled maintenance calls this year or in the first quarter.
Next question is from Mark Petrie from CIBC.
I wanted to just follow up on the inventory first. And is the right way to think about it? Just the entire increase from last year is sort of positioning for the payments flowing through in the increased demand do you expect? Or are there other moving parts in that inventory that we should be aware of?
There's some inflation in the inventory as well. So I'd say there's some inflation, but a lot of it is -- it's the getting ready for business as these large sums of money are just around the corner. Like I said, we have a trickle now, and we expect it to be flowing, I'd say, any day now because of the extended dates that I mentioned in my call of being March 2024 for their ability to do the application. We do anticipate though that this, Mark, will flow into the beginning half of 2025.
Yes. Understood. Okay. And how should we expect your inventories to grow in the coming quarters, just from a working capital perspective?
From a working capital, I don't expect them to grow. I think they'll grow in regular trajectory, like, with our cycles of buying over the next, call it, 3 months, similar to that of the last 3 months. But also with The Next 100, we are looking at doing rationalization. And that is something we'll be able to give you more direction as we kind of land on the proper level of inventories that we think we need in order to maximize our business. So being more efficient with the right inventory at the right time in order to basically increase our GMROI and bring down our overall inventory carry. But that's something that's a work in progress, but it's definitely on our radar, and as soon as I can give you more information on that, Mark, I will.
Yes, understood. Okay. And I'm just curious, like when you think about sort of the demand that you expect to see, is this demand that you need to have inventory on hand for? Or is some of it, demand that you think, someone will come in and be like, I want to place an order for this and then you can sort of flow that through your supply chain. So not necessarily reflected in the inventory? Like how would you balance those 2 opportunities?
Well, I think what you're asking is, is it necessary for us to hold all this inventory? Or could we set up some type of a solution whereby people put it in an order, we don't hold the inventory, and it's kind of factory to customer. Is that -- am I right?
Yes, yes, essentially. Or if you think that -- even if you think that opportunity exists.
You know what, we've learned in the past that it really helps to be in stock with the right products at the right time. People, often when they get the money, they want the product right away. So that's why we've gone the route that we have. We don't want to miss any sales opportunities. So we think it's really important to have the inventory to the best of our forecast there for them to touch and feel it and it enhances and increases the probability of them buying it.
Yes. Understood. Okay. And how are you communicating with your customers around this sort of in-stock position and this opportunity in general. Have you adjusted your marketing at all, your in-market marketing?
Well, definitely. In most of the markets, the products are visible. And it's not a matter of if the money comes. Let's just say that the anticipation is when it comes, there's a nice, let's say, quick pace to the store to make sure that they're getting the products that they want before anybody else can get them.
Yes. Yes, for sure. Okay. And I see you acquired a Powersports dealership in Alaska. I know these types of deals are very opportunistic. But is the right way to think about it, that it's just sort of a one-off? Or how would you characterize your perspective on those types of deals today versus a few years ago or pre-pandemic? Are you more open to them? Are you less open to them? What's your sort of thinking?
Well, we're more open to them as you see and as I've talked to you about our inventory levels and what comprises of some of those increases in inventory. Big-ticket motorized is something that we don't just kind of move around the perimeter, like we're well into it. So it's more of a hub-and-spoke model. Not every community is big enough to house a motorized shop, but the ones that we do think can kind of do a hub and spoke and deliver service to the community of within and the surrounding areas, that's where we're strategically looking at placing these types of operations.
But I don't think that we're going to do 30 or 40 or even 20, but they're strategically placed and it's to be able to add some service to the existing community and surrounding community and just carry more inventory and be more on top of what the customers need. It is a lifestyle in these communities. So it has definitely been a strong business for us.
Yes. Okay. I got that. But this one was in Alaska. So this is separate from sort of the inventory investment in Canada. This is just holistically you want to be in this business.
Yes, absolutely.
Yes. Okay. Okay. Understood. And sorry, just to clarify, I just didn't catch it. But when you're referring to The Next 100, is that sort of a specific financial target? Or what is the context of that specifically? Is that an EBIT number over the next 3 years? Or what is that?
No, no, I'll be more direct with you in the future, Mark. It's really just about getting the teams to enjoy, to be proud of the legacy of the company and just think about setting it up and looking more into the future. So we get more strategic, build more capability to definitely generate stronger returns over the next number of years. So it's kind of a play. It's just, again, living off -- we're fortunate that we can live off of a pretty long -- number of centuries' legacy. So it's just about identifying with the employees and letting them know they're part of something special in the future.
The next question is from [indiscernible].
With Warta. Done a lot of looking into the benefits of the settlement here. Obviously, with the water settlements, pretty good confidence that you'll get a large catch that given the locations of the claims and the location to your stores. But when you look at the FNCFS settlements, it's a bit more vague, who's going to be receiving those claims. Do you imagine you'll get a similar chunk of the pie out of that $23 billion, as you will from the $8 billion?
No. Like there's going to be more spread. So we talked about 30 communities being involved in the settlement, just 30 of our communities. So with the childcare benefit, that will probably be in all of our communities, all of the First Nation communities. So much greater number of stores.
[Operator Instructions]. Next question is from Stephen MacLeod from BMO Capital Markets.
Lots of great color so far. But I just wanted to follow up on a couple of things. Just with respect to the water settlement, I mean, you've emphasized a number of times that Q1 represents a sort of small proportion of the actual volume of claims. And you saw gross general merchandise same store sales up nicely in Canada in Q1. So I'm just curious, I mean, is there a way to think about how that general merchandise growth could evolve through the back half of the year and into fiscal 2025 that you'd be able to share?
Well, it's tough, Stephen. The reason being, as you know, we would have thought that this money would have dropped a lot sooner. So it's really tough to forecast when this money is going to fall. I think we're pretty safe in the projections we gave you saying the latter half of '24 and early parts of '25. But as far as how that quantum would impact sales, I think I would just say, you've seen the inventory levels that we have, and we anticipate a pretty strong sell-through on that inventory once the money comes through.
Yes. Okay. Okay. That's helpful. And then just with respect to -- like if you think about the child welfare settlement, and moving beyond the individual payments, do you have visibility into -- because I wasn't able to find it myself, but I don't know that it's been communicated, but do you have visibility into sort of when the investments come through to the communities?
We will before they happen. Sorry. Sorry, did I cut you off. Sorry, Stephen.
No, no.
We will before they happen, but we don't have it right now. I mean it's -- there's programs that come out. And I'd say our ear is pretty close to the market in that respect. But no, I don't know the full script of what the scheduled investments will be by market at this point.
Yes. Okay. That's great. And then just following up on The Next 100 program. In previous quarters, you've had these strategic priorities listed. But is The Next 100 entirely new when you turn the page to fiscal 2024? Or just assigned a name to it.
Yes. Like it's a pretty strict program. Again, we've been working on it over the last number of months, a number of quarters. We've had the number of The Next 100. Basically, we've made it public. We put a name to it, but it's just to show you the vigor, the discipline is not to be undersold, I would say, because it's something that we're very engaged in because we think it's worth it for, again, the customers and for our shareholders for sure.
There are no further questions registered at this time. I would like now to turn the meeting back over to Mr. Daniel McConnell.
Okay. Well, thank you, operator, and I appreciate everybody attending our Q1 call, and we look forward to chatting with you next quarter.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.
Thank you. Bye-bye.