North West Company Inc

TSX:NWC

Earnings Call Analysis

Strong Sales Growth Despite Earnings Challenges

The North West Company experienced a 4.6% increase in consolidated sales and a 7.5% increase in gross profit for Q2. However, net earnings decreased by 3% due to higher investment repairs in Transport Nanuk, increased share-based compensation costs, and a new global tax, despite adjusted EBITDA rising by 6.1%. Canadian operations saw a 5.6% sales growth, while international operations faced mixed results amid challenging economic conditions. Despite these factors, the company's Next 100 program remains focused on operational excellence, promising incremental EBIT growth while preparing for future settlement payments to drive demand into 2025.

Solid Second Quarter Growth Amid Challenges

The North West Company's second quarter results showcased a commendable sales growth of 4.6%, translating into a 7.5% rise in gross profit. However, net earnings took a 3% dip compared to last year's impressive performance, which was bolstered by a 17.5% increase in net earnings during the same period last year. This decline in net earnings was mainly attributed to several non-recurring factors: a $1.8 million drop in earnings from its investment in Transport Nanuk due to higher repair costs and delays in the sealift season, a $1.8 million rise in various expenses from share-based compensation, and a $1 million increase arising from the new Global Minimal Tax.

Insights into Canadian Operations

The Canadian segment instructed a robust performance with a 5.6% increase in sales and an impressive 6.8% growth on a same-store basis. This positivity was largely driven by heightened consumer demand, particularly from First Nations communities receiving settlement payments. Although the volume of these payments remains low, expectations indicate they will persist throughout this fiscal year and into 2025. Additionally, there was increased demand for nutritious food facilitated by certain governmental programs aimed at improving access to resources. While these factors undoubtedly contributed to sales, it is essential to note that last year's government payments to mitigate inflation left a high bar on comparisons.

Tricky Terrain for International Operations

Conversely, the international operations faced tougher conditions with a mere 0.8% increase in sales. This was compounded by a decline in wholesale sales and decreased discretionary spending in key markets, reflecting broader economic challenges, particularly affecting tourism-dependent areas. Food sales managed a slight increase of 1.1%, but general merchandise sales were down by 2.5%. The mixed results underscore the importance of understanding the economic backdrop in these international markets, particularly the slower start to efficiencies in Alaska.

Operating Expenditures and Future Outlook

Operating expenses surged by 10.1% during the quarter, driven by the aforementioned non-comparable expenses, inflationary pressures, increased labor costs, and currency translation issues on international expenses. Nonetheless, management is actively engaging in cost control measures through their 'Next 100' initiative, which focuses on optimizing resources and labor scheduling, aiming to enhance operational excellence. The macroeconomic forecast presents uncertainties, especially internationally, but expect Canadian consumer demand to rise towards the fiscal year's close, supported by additional spending from government programs.

Long-Term Initiatives and Guidance

Looking ahead, The North West Company is optimistic about the operational improvements expected from The Next 100 program. This initiative is designed to bolster efficiency and increase profitability, with anticipated annualized incremental EBIT expected to commence later this year and grow through 2025 and 2026. There are also expected onetime costs associated with these improvements. However, management expressed confidence that these costs will not outweigh the long-term benefits. Additionally, awards for diversity, equity, and inclusion demonstrate a commitment that may bolster community relations, furthering business growth in targeted markets.

Earnings Call Transcript 2025-Q2

[Operator]

Please be advised that this conference call is being recorded. Welcome to The North West Company Inc. Second Quarter Results Conference Call. I would like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead.

[Daniel McConnell, executive]

Thank you very much, and good morning, and welcome to The North West Company second quarter conference call. I'm joined here today with -- by John King, our Chief Financial Officer; Alexis Cloutier, our VP of Legal and Corporate Secretary.

I'm going to start the meeting by asking Alexis to read our disclosure statement.

[Alexis Cloutier, executive]

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 only as of the date they're made, and the company disclaims any intention or obligation to update or revise any 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 annual information form and its MD&A under the heading Risk Factors.

[Daniel McConnell, executive]

Thanks, Alexis. I will begin by providing a brief overview of this quarter's results. I'll then provide some additional color on sales within our Canadian and International operations before making some comments on the key factors impacting our consolidated gross profit and expenses. Finally, I'll wrap up with a few comments on our outlook in The Next 100 programs before opening the call up for questions, all right.

So let's dive right in. Overall, we are very pleased with the results this quarter, especially considering the impact of some noncomparable factors this year and the fact that we were up against a 17.5% increase in net earnings in the second quarter of last year. Our second quarter results this year were driven by strong top line growth, with consolidated sales up 4.6% and gross profit up 7.5% for the quarter. However, the strong sales and gross profit results did not fully translate to the bottom line of the quarter and was primarily due to 3 factors: First, earnings from our investment in Transport Nanuk, which is a Canadian shipping company serving the arctic were down $1.8 million compared to last year due to higher investment repairs, which has also temporarily delayed the start of the sealift season in Canada. Second, a $1.8 million net increase in expenses resulting from 2 noncomparable expenses, which include higher share-based compensation costs, this year partially offset by the loss of our store in Fox Lake, Alberta last year due to wildfire.

And third, the implementation of the Global Minimal Tax that resulted in a $1 million increase in tax expense for the quarter. The net impact of these factors resulted in a 3% decrease in net earnings this year compared to the strong net earnings last year. That said, within this backdrop, we are very pleased with the results that delivered increases in adjusted EBITDA of 6.1% and adjusted net earnings of 1.6%.

With that context provided, let me unpack the operational results. Sales in Canadian operations increased 5.6% for the quarter and were up 6.8%, on a same-store basis, led by strong food sales. Sales were positively impacted by increased consumer demand arising from First Nations Drinking Settlement payments to individuals. However, the volume of these payments in the second quarter relative to the total settlement remains low. That said, we expect to see these payments continue throughout the remainder of this year and into 2025. We also experienced increased consumer demand in certain markets from First Nations Child and Family and Services and Jordan's Principle programs that help provide greater access to nutritious food.

The positive impact of these factors was somewhat muted by higher sales in the second quarter last year, resulting from the impact of the government inflation relief payments, including the grocery rebate paid to individuals to help mitigate higher cost of living. Underpinning these financial drivers is a good in-stock position and improved execution at store level, particularly in fresh categories, as we remain focused on operational excellence as part of our Next 100 program.

In contrast, our international operations had a more challenging economic environment, which contributed to a softer performance in the quarter. Sales in our international operations have increased by 0.8% and were up 0.9% on a same-store basis as the sales increase from new stores was partially offset by lower wholesale sales, weaker economic conditions, particularly in tourism dependent markets in Alaska and the South Pacific and a slower start to the commercial efficiencies in Alaska, reduce discretionary spending in certain markets. The shift in discretionary spending is evident in our sales mix with food sales up 1.1%, while general merchandise sales decreased by 2.5% compared to last year.

Okay. Let me transition here and talk about consolidated gross profit results. Our gross profit rate for this quarter increased by 91 basis points, largely as a result of 2 key factors: first a shift in sales plan, which includes a decrease in sales in our lower margin wholesale business; and second, we also experienced an improvement in markdowns and strength compared to the prior year and an increased focus on being in stock and execution in fresh departments.

I will now briefly touch on the key factors that contributed to higher expenses in the quarter. During the quarter, expenses increased by 10.1% and were up 127 basis points as a percentage of sales. This increase was mainly driven by non-comp expenses I noted at the beginning of the call, which included the higher impact of vessel repairs in Transport Nanuk. And the increase in share-based compensation partially offset by the $3.7 million loss in our Fox Lake store, destroying by wildfires last year.

In addition to these factors, inflationary headwinds and labor costs and increase in depreciation and the impact of foreign exchange on the translation of international operation expenses also contributed to the increase in expense for the quarter. As mentioned on previous calls, we have highlighted our efforts to control expenses at the store level through The Next 100 initiatives. This includes reviewing store resources and launching initiatives to optimize labor scheduling to align with customer demand using a data-driven approach.

With that overview of our results, I will finalize my speaking briefly about our outlook for this year and provide a few remarks on The Next 100 program. The macroeconomic term really looks uncertain, particularly in our international operations and tourist independent markets and countries that do not have government income support programs for individuals. As it relates to water settling payments in Canada, we'll expect an increase in consumer demand, particularly towards the end of this fiscal year and on into 2025. Longer term, the impact of government and Canada transfer and settlement payments combined with higher infrastructure and services spending is expected to benefit indigenous peoples in the communities we serve. Through Next 100 program, our teams are driving operational excellence, expanding our capabilities and pursuing value for our customers, our employees and our shareholders.

The outcome of this work in The Next 100 programs is expected to drive annualized incremental EBIT, which is anticipated to start later this year and continues to accelerate through 2025 and 2026 as these initiatives reach maturity. As we did groundwork for these improvements, we anticipate incurring some onetime costs for professional fees and other expenses. These onetime costs are expected to incur in the back half of this year and continues to 2025 as The Next 100 initiatives are operationalised. Our expectation is that the incremental EBIT from these initiatives will more than offset the onetime costs. However, there will be a timing difference as these onetime costs will be occurring before the full annualized benefits are achieved. We'll provide further information on these onetime costs in our quarterly reports as they [indiscernible] incurred.

On that note, let me wrap up by highlighting that we are very proud to have received from the Canadian Grocer and the impact in the diversity, equity and inclusion category for indigenous procurement strategy. Diversity, equity and inclusion, our core principles of who we are as a company, and this award is reflective of our promise to indigenous peoples.

With that, I will now open it up for any questions.

[Operator]

[Operator Instructions] We have a question from Michael Van Aelst from TD Cowen.

[Michael Van Aelst, analyst]

I have a few questions for you. So -- just looking at the higher same-store sales in Canada, particularly on the food side, it was quite strong. And you did highlight some areas where they had higher access to nutritional foods. So -- is this part of the $48 billion child welfare reform or that's supposed to come over the next 10 years? Or is this something separate?

[Daniel McConnell, executive]

Michael, it's Dan here, obviously. So yes, it is -- I believe it is. It's more part of Jordan's Principle, but it hasn't been necessarily identified as such. But I think it's just along the -- whole emphasis behind providing more healthy living options in Northern Canada. But I can't say particularly if it is part of the settlement, but it is definitely aligned with the Jordan's Principle that has some other buckets that have been reached into.

[Michael Van Aelst, analyst]

So, I guess it's just hard because they don't describe in detail where that $48 billion is going to be spent. And I don't think they give a lot of detail on how they're going to fund, how they're going to change their approach with Jordan's Principle. But do you feel that the spending and the increased access to nutritious foods in certain communities is actually sustainable? Or do you think that this was something that might have been more onetime in nature for some reason?

[Daniel McConnell, executive]

I think it's sustainable because I think it's aligned with again, the overall initiative of the Jordan's Principle. I would -- what I would almost venture to say that it hasn't really come into the overall benefit of the -- child benefit, child welfare benefit. I would say that this is just part of the Jordan's Principle. But as far as what bucket of money is coming out of, Michael, I can't really -- I can't give you that information because it's not entirely clear.

[Michael Van Aelst, analyst]

Okay. So maybe a better way to ask is, are you seeing this continue -- are you seeing the benefits of that continuing into the third quarter?

[Daniel McConnell, executive]

Yes, direct answer to that would be yes.

[Michael Van Aelst, analyst]

Excellent. As far as your onetime charges are concerned, how large should we expect these to be? And will you be backing these out of adjusted earnings?

[Daniel McConnell, executive]

Like I said, we're going to -- they're going to come in. As they come in, we'll be very directive as far as what they are. So that will give you an indication on the size. I mean really, it's too early. We don't want to disclose that at this point, Michael, but we will give a lot more information once they come in. And like I said in the call, we expect some to start coming in later half of this year, which I think will create a sequence, if you will, as to how we report it and how we expect you to interpret it.

[Michael Van Aelst, analyst]

Okay. At this stage, do you expect to remove it from adjusted earnings?

[Daniel McConnell, executive]

Yes.

[Michael Van Aelst, analyst]

Perfect. And then on the vessel repairs at TNI, the -- and you mentioned that it delayed the start to the sealift shipping season?

[Daniel McConnell, executive]

Yes.

[Michael Van Aelst, analyst]

I guess the question I have is, I know how important is in getting your inventories up into the north at the lower cost. I was wondering if -- did it shorten the shipping season for you? And did you get the inventory into the north that you wanted to?

[Daniel McConnell, executive]

Yes, we did. We got the inventory into the North that we wanted to.

[Michael Van Aelst, analyst]

Okay. So we shouldn't expect any additional impact from that event in the coming quarters.

[Daniel McConnell, executive]

Correct.

[Michael Van Aelst, analyst]

I think that other than -- it sounds quite positive in Canada, given that sales are starting to pick up already even though -- we're not really seeing meaningful payments being made yet in either Water or Child Reform, Welfare Form. And I guess the first question is, does that -- before I get on to national, is that -- would you agree with those statements?

[Daniel McConnell, executive]

Yes. Yes, we're optimistic about the outlook in our Canadian business for sure.

[Michael Van Aelst, analyst]

And then on the international side, there obviously more has been given the macro economic conditions and -- are you seeing that deteriorate further? Because you're still able to grow their sales modestly, which is a positive given this in this environment. So are you still expecting to be able to grow? Or is there some bigger headwinds coming that you're seeing?

[Daniel McConnell, executive]

No, our anticipation and our intent is to definitely -- is to grow.

[Michael Van Aelst, analyst]

Yes. And that's on the international side, right?

[Daniel McConnell, executive]

Correct.

[Operator]

And the next question is from Mark Petrie from CIBC.

[Mark Petrie, analyst]

I just had a couple of follow-up questions to Mike's questions. First, just on the inventory levels. Look, I know it's flat on a dollar basis sort of year-over-year at the end of the quarter or flattish. How should we interpret that? Is some of that affected from the delay into the sealift season, which you've caught up now in Q3? Or how should we think about...

[Daniel McConnell, executive]

Well, we've had some -- it's flat off some pretty significant sales increases as you know last year. So it's -- I'd say it's optimism. And it's realism in the point that we feel and we know we're in stock and ready for business. But it's an optimism for sure, Mark.

[Mark Petrie, analyst]

Okay. So you would have expected it to be down if it weren't for the optimism and the builds in your inventories around some of these sales opportunities?

[Daniel McConnell, executive]

That's correct.

[Mark Petrie, analyst]

Yes. Okay. Okay. Fair enough. And I guess just on that, obviously, the food same-store sales growth is excellent to see, but the merch lagged a little bit. Could you just talk about some of the dynamics there and how you expect those 2 to sort of move relatively speaking, as the payments kind of flow through and accelerate?

[Daniel McConnell, executive]

Yes. I think there's definitely positive correlation between the general merchandise increase in sales and obviously with some of the settlement money coming into market. So the good news is that we're ready for business, and we have strong relationships with our vendors to ensure that there's a demand in cycle in place where if we don't have it in stock, then we can definitely get it with some of the agreements that we've been putting in place recently with some of our vendors. Fortunately, the rest of our business is doing well when some of the other customers of some of our major vendors are not having maybe the same increase as we are. So it's afforded us the right -- or the opportunity to kind of help out some of our vendors and some more creative, negotiating -- or more creative deal structures.

[Mark Petrie, analyst]

Yes. Okay. Understood. And I guess just on my last question is just with regards to the competitive dynamics that you're observing in the Canadian market, just given the flow-through of some of these benefits and the expectations, have you observed any changes to how your competitors are approaching the market?

[Daniel McConnell, executive]

No. I mean everybody is working with the same vigor and obviously, as they always have. And we're obviously to The Next 100, really focusing on increasing and improving our capabilities to ensure that we get our share of the business as well. So we're really focused on operational excellence, which would, I'd say, give us our fair percentage of the business that is coming into the markets.

[Mark Petrie, analyst]

Yes. Understood. Okay. Thanks for all the comments, guys, all the best.

[Operator]

There are no further questions registered at this time. I'd like to turn the call back over to Mr. McConnell.

[Daniel McConnell, executive]

Okay. Well, thank you, everybody, everybody who's tuned in, and I look forward to speaking with you again for -- in December for quarter 3.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.