North West Company Inc

TSX:NWC

Earnings Call Analysis

North West Company Posts Strong Quarter

The North West Company saw consolidated sales rise by 5.1%, with net earnings jumping 26% compared to the previous year. Underpinning this growth was a 9.5% increase in Canadian operations, propelled by robust same-store sales and a fruitful quarter for North Star Air. International operations experienced a 2.6% downturn due to economic challenges, yet managed a modest increase in operations earnings. Gross profit grew impressively by 148 basis points, benefiting from a favorable shift in sales blend, reduced markdowns, and effective inflation management. Expense control was a focus, with an increase of just 10 basis points as a rate to sales. The company's attention to operational excellence continues as they aim for efficiency and a strong, sustainable future.

Canadian Sales Exhibit Resilience Amid Inflation

In the face of inflationary pressures, sales in Canada have shown robust growth, climbing 9.5% overall with same-store sales up by 10.1%. This growth is powered by a surge in demand for general merchandise (up 16% in same-store sales), propelled by factors such as mid-single digit food inflation remaining aligned with the Canadian purchase index, ongoing inflation relief payments, and the company's effective stock management ensuring product availability. Notably, North Star Air contributed solid top and bottom line growth, partly driven by increased cargo contracts and charter passenger volumes, hinting at positive future economic developments.

Challenged International Operations Amid Economic Headwinds

International operations encountered challenges this quarter with a 2.6% fall in total sales and a 2.7% decrease in same-store sales, primarily due to lower supplemental nutrition assistance program benefits and a substantial reduction in the Alaska Permanent Fund dividend. Furthermore, reduced wholesale demand and prices for salmon in Alaska, along with the persisting effects of Typhoon Mawar in Guam, weighed heavily on sales. Despite these hurdles, a modest increase in earnings from operations was achieved, thanks to an enhanced gross profit rate and tight expense controls.

Gross Profit Margin Expansion Amid Modulating Inflation

The company experienced a notable 148 basis point surge in gross profit rate, largely attributed to changes in sales mix, lower markdowns, and effective inflationary cost pass-through to customers. Although inflation persists, its escalation has ebbed, and ongoing supply chain vigilance is assisting in mitigating its impact on the gross profit rate.

Inventory Management Strategy in Canadian Operations

The company has shrewdly increased sea lift inventory in Canada to capitalize on lower freight costs and improve cost efficiencies within their logistics. This strategic inventory build-up, especially of durable general merchandise such as motorsports equipment, despite inflationary pressures, is expected to pay off with a strong sell-through, given the strong sales performance in preceding quarters.

Emphasis on Operational Controllability to Curb Expenses

In an effort to manage what's within their power, the company is rigorously focusing on operational controllability, improving productivity, and setting ambitious goals particularly in labor cost management. This commitment has resulted in a reducing trend in expenses relative to sales since the first quarter and a slight 10 basis points year-over-year increase in the third quarter.

Cautiously Optimistic Outlook for the Fourth Quarter

Looking ahead, the fourth quarter is anticipated to deliver results that, while not replicating the exceptional performance of the third quarter, should align with the previous year's fourth quarter results. This tempered outlook accounts for potential headwinds, such as uncertainties related to government relief payments continuance, a potential dip in third-party cargo and charter revenue, and a projected higher effective tax rate compared to prior favorable rates. Nonetheless, the expected tailwinds from lapping last year's inflation impacts on the gross profit rate and a strong in-stock position in Canadian operations could offer a partial buffer. Particularly, anticipated First Nations drinking water settlement payments could boost consumer demand, although the timing remains uncertain with the claims period extended to March 2024.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to The North West Company Inc. Third 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.

[Daniel McConnell, executive]

Thanks, Paul. Good afternoon, and welcome, everybody, to The North West Company Third Quarter Conference Call. I'm joined here today by John King, our Chief Financial Officer; and Amanda Sutton, our VP, Legal and Corporate Secretary. I'm going to start things off with asking Amanda to please read our disclosure statement.

[Amanda Sutton, executive]

Thank you, Dan. Before we begin, I remind you that certain information presented today 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. For additional information on these risks, please see North West's annual information form and its MD&A under the heading Risk Factors. Dan, back to you.

[Daniel McConnell, executive]

Thanks, Amanda. I'll get things started today by providing an overview of our third quarter results and then transition to talk about our company's outlook and journey ahead. We are very pleased with this quarter's solid performance. Consolidated sales were up 5.1% and net earnings increased by 26%. Similar to last quarter, Canadian operations continue to spearhead the results driven by strong same-store sales another good quarter for North Star Air. These results offset softer performances in our international operations, which faced more challenging economic conditions related to lower Supplemental Nutrition Assistance Program and Alaska Permanent Fund dividend payments compared to last year.

These factors, combined with inflationary cost pressures affected demand and shopping patterns as customers continue to prioritize their spending on food and have less disposable income for discretionary regional marketplace. Overall, we are happy with the torque we are getting for the translation of sales into gross profit, which increased 10% in dollars and 148 basis points as a rate of sales. The increase in gross profit rate was largely due to a combination of changes in sales blend, including a lower blend of cost less sales and a higher blend of airline revenue.

A decrease in markdowns and a higher pass-through of cost inflation and retail prices compared to last year were also some factors. We have also maintained a consistent retail pricing philosophy, and we continue to monitor that adjust prices using a balanced approach, always with our customers' top of mind while striving to maintain margins and volumes. Overall, expenses were well controlled in the quarter, with a 10 basis point increase as a rate to sales in spite of the inflationary headwinds that we continue to see in such areas as labor costs.

As a whole, the impact of these factors resulted in strong results in the quarter with EBIT and EBITDA, up 24% and 18.8%, respectively, and net earnings increasing 7.9% or 26.1% compared to last year. All right, I'm going to pack some of these results and provide some additional context and I'll start off with the Canadian operations. Sales in Canada were up 9.5% in total and increased 10.1% on a same-store basis, driven by a 9% increase in same-store sales and a 16% increase in same-store sales in general merchandise. These strong same-store sales results are mainly attributed to 3 factors.

Number 1 being food inflation to remain in the upper to mid-single digits, in line with the Canadian purchase from stores index. Ongoing inflation relief payments to individuals and 3 being our strong or good in-stock position. Similar to last quarter, sales were positively impacted by government inflation relief and support payments to individuals through the Indigenous Services Canada to help mitigate higher cost of living in the north. Our in-stock position was also a key factor in enabling us to capture additional sales.

We have continued to focus on maximizing our transport mix by leveraging lower seamless transportation costs to help ensure our stores are in-stock on essential products to meet our customers' demand. In addition to the strong results in our retail business, North Star Air and another solid quarter with both top and bottom line growth, and it's both driven by -- they were driven really by increases in the third-party cargo contracts and higher charter passenger volumes. It's also worth noting the higher earnings for our investment in transport and dock, at Nordic Shipping company in Canada was another factor in the quarter. Overall, shipping volumes to the North were up compared to previous years, which may be an indication of the positive future economic and employment trends in Norther Canada, and this is obviously existing in sectors such as construction, mining and other such items.

These factors, combined with an increase in gross profit rate and well-controlled expenses contributed to the strong results in Canadian operations for the quarter. On the flip side, it was a tough quarter for international operations. Total sales decreased 2.6% and were down 2.7% on a same-store sales basis, mainly due to the economic headwinds that I mentioned earlier related to lower supplemental nutrition assistance program benefits being SNAP and Alaska Permanent Fund dividend or PFD payments that were compared to last year.

SNAP benefit payments in the U.S. are down compared to last year as we lapped COVID-19 top-ups, but we expect to compare to more normalized SNAP payments in Q4. On top of that, there was a 60% reduction in the Alaska Permanent Fund dividend payment this year from around $3,300 to $1,300 per res. In general, the combination of lower SNAP and PFD and higher inflation continue to negatively impact customer purchasing power during the quarter. Additionally, there were specific local circuits that compounded the macro economic headwinds. For example, in Alaska, the fishing season encountered a low wholesale demand and prices for salmon globally, which has affected local fishing economies in the southern regions.

And in Guam, the lingering effect of Mawar Typhoon, including ongoing power outages, declining tourism and a lack of disaster relief and income support has definitely hurt the customers and their confidence. All these factors contributed to a decrease in same-store sales of 1.1% and a 17.1% decrease in general merchandise same-store sales. On a positive note, our gross profit rate increased compared to last year and expenses were well controlled, which helped offset some of the impact of lower sales and resulted in a modest increase in earnings from operations in the quarter.

Now let me just turn trasition and I'll expand on our gross profit results. Overall, we are seeing more torque in our gross profit rate with 148 basis point increase, largely driven by the changes in sales blend that I previously mentioned, lower markdowns and a higher cost through inflation costs, increases in retail prices compared to last year. The modernization -- the moderation, sorry, of inflation continues. Inflation is still present, but the pace at which vendor and freight costs are escalating has decreased.

Of course, not all inflationary pressures have subsided. We continue to closely monitor certain parts of the supply chain where cost increases occur on a vendor or carrier level. Our teams continue to prioritize is operational excellence to help mitigate the impact of inflation as we work with the suppliers and transportation partners to help minimize cost escalation affecting our gross profit rate. Similar to the retail business, North Star Air also had an increase in the gross profit rate from changes in sales mix, driven by higher third-party cargo and passenger sales and improved aircraft utilization rates.

Now I'm going to give you a little bit of an overview or make some comments on the inventory. As mentioned previously, in order to maintain a stock, we have intensely increasing sea lift inventory in Canadian operations to leverage lower freight costs as we refine our transport mix and find better ways to make our logistics cost more productive. At the same time, inflation continues to affect inventory levels, which is a more pronounced effect this quarter with the resupply of sea lift inventory. As I previously noted, we do have higher general merchandise inventories in Canada compared to last year, mainly concentrated in motorsports, snow machines, ATVs, boats and motors. Given the durability of these items, the relevance they have in the communities we serve and the strong sales we had in Q2 and Q3, we expect good sell-through of this inventory.

On the expense side of the business, cost control has definitely been 1 of our top priorities this year. Inflationary pressures have been felt throughout the year on the expense side, and our teams are focusing on controllables as much as possible, and this is without compromising customer and employee experience. We are making progress through our operational excellence focus where we aim to be as productive and efficient within our cost structure and setting specific ambitious goals in areas like labor costs with promising results.

During the year, and inspite of inflationary headwinds in labor and utilities, expenses as a rate to sales have continued to trend lower from the first quarter and were up 10 basis points year-over-year in the third quarter. Now I'm going to talk to you a little bit about our strategic initiatives and our journey ahead. The organization as a whole is highly focused on reinforcing policies and procedures at both store and corporate levels to control expenses and drive meaningful productivity and efficiency gains.

These savings will be reinvested for sustainable growth while optimizing margins and delivering meaningful ESG outcomes. As mentioned during previous quarters, our teams continue to identify opportunities to unlock value and drive bottom line performance with an operational excellence focus. This includes initiatives to enhance store labor planning, supply chain optimization across different transport modes, reducing shrink and finding operating expense savings. Additionally, our merchandising teams are refining our assortment, which is expected to help drive sales of items our customers want.

I'm going to wrap up by providing some brief comments on our outlook. Overall, as we prepare to wrap up the fiscal year, the results in the upcoming fourth quarter are expected to be below the very strong results this quarter, but in the range of the results from the fourth quarter last year. Normally, we don't give this level of guidance in our outlook. However, given our strong results in the third quarter and some factors that may impact our results in the fourth quarter, we wanted to provide some additional context. A few headwinds and tailwinds underpin our fourth quarter outlook.

In terms of headwinds, 3 factors are uncertain and can affect our results next year -- next quarter. First, there is uncertainty of both the continuation of government inflation relief payments to individuals that positively impacted our results in the second and third quarter in our Canadian operations; second, we are coming off a very strong quarter. And then I say, driven by increased third-party cargo and charter revenue that is not expected to fully continue into the fourth quarter; and third, we expect to have a higher effective tax rate compared to lower tax rate in the fourth quarter last year that was positively impacted by onetime adjustments and the blend of earnings across the various jurisdictions.

Having said that, there are some tailwinds that may partially offset these, we do not expect -- we do expect to lap the negative impact of the ramp-up of inflation on our gross profit rate last year. And in our Canadian operations, our strong in-stock position will help us meet the expected increase in consumer demand arising from the First Nations drinking water settlement payments to individuals that are anticipated to begin in the fourth quarter and extend into 2024.

However, it is very important to note that there is uncertainty regarding the timing of these payments as the period for claims has been extended to March of 2024. So I'll just kind of close and indicate that in North West, we have an unwavering commitment of making a positive impact on the communities we serve and help them move better. Our strategic initiatives and goals are a reflection of this intention and vision, and our teams and leaders are motivated by this commitment day in and day out. With that, I'd like to open it up for any questions. Thank you.

[Operator]

[Operator Instructions] The first question is from Mark Petrie.

[Mark Petrie, analyst]

I guess first, maybe helpful to hear the comments on inflation. But Dan, maybe we could just follow up on that and specifically around food inflation. How quickly is that decelerating for you? Is it relatively stable now? Or is it still falling off pretty quickly?

[Daniel McConnell, executive]

I would say it's relatively stable right now, Mark.

[Mark Petrie, analyst]

Yes. Okay. And how about in general merchandise, obviously, the purchasing cycle is different, but what's your general sense of how inflation is affecting costs on general merchandise?

[Daniel McConnell, executive]

I would say that it's also probably -- it's been stabilized at this point. And obviously, demand, particularly around urban Canada has gone down. So as a result, that puts downward pressure on pricing. So I would say that it's stabilized to say the least at this point.

[Mark Petrie, analyst]

Yes. Okay. And in the general merchandise business in Canada, specifically in the same-store sales number, what were the key categories of growth? Was it the big ticket product that you were talking about where you're investing in inventory like stone machines and that type of thing? Or was it smaller ticket? Or what was it?

[Daniel McConnell, executive]

No, no. It was absolutely exactly like you said, it was in our -- it's where we put our bets. It was in the big ticket motorized. And so a factor of just being in stock really helped us over the last 2 quarters, really, kind of realize some of those sales. And it was 1 of the biggest success factors that are contributors to our success was just being in stock with those items.

[Mark Petrie, analyst]

Yes. Understood. Okay. With regards to the airline, I just wanted to follow up. I mean you touched on it in your outlook comment there. But -- but could you talk just about sort of the demand levels that you've seen so far in Q4 and what your outlook is for that business into 2024?

[Daniel McConnell, executive]

Well, that's a great question. It's still volatile. I mean if you follow some of the instigators behind the business, obviously, in Q3, Q2 was some of the unfortunate forest fires and all the other events that went up -- that were going on in the area. We definitely see -- we don't see as much demand going on into the fourth quarter. But there's -- that's not to say that it's not going to fall off considerably, but it's definitely going to not be at the same level as it was during the third quarter.

[Mark Petrie, analyst]

Okay. And when you're talking about sort of encouraging freight volumes into the north with regards to just development and economic activity you're talking about in the other parts of your freight business.

[Daniel McConnell, executive]

Yes, that's right. That was on our -- yes, that was on the barge business.

[Mark Petrie, analyst]

Yes. Okay. Okay. And then just a last question, I guess, or maybe 2 more. store labor, is that a new IT platform? Or what is that exactly? And then what are you seeing with regards to labor availability and also wage growth?

[Daniel McConnell, executive]

Great question. I would say it's more practice. We've employed -- we already employed the labor technology a couple of years ago. It's more just leaning into it and getting a lot more disciplined on how we utilize all the functionality of it. But it was a major focus. Obviously, our Q1 was a great indicator that it's something we needed to kind of barrel down on it. And it's kind of a sync and it's kind of a theme that we've been working on with our cost controls trying to increase productivity, as you can see from our -- the torque that we've gotten off our productivity of expense control from Q1 over to Q3. So I would say, no, not new technology, more discipline, more concentration, and it's effectively integrating within our culture of how we're looking to operate moving forward.

[Mark Petrie, analyst]

Okay. So nothing to call out with regards to availability or wage rate escalation?

[Daniel McConnell, executive]

I mean wage rates, we've had wage rates over the last number of quarters actually depending on the different regions. And as far as availability, it is tough, but we have, we think, good mitigating plans in place in order to try and offset some of those issues. So it's something that we're cognizant of. It's always been tough in our markets, Mark, as you know. But we feel that we're not any worse off than we were last quarter. We see some of the efforts that we're putting in to benefit us over the next number of quarters.

[Mark Petrie, analyst]

Yes. Okay. Okay. And then just my last question, just with regard to the outlook, what are you referring to when you say the results in the fourth quarter expected to be below very strong results in the third quarter, but in the range of fourth quarter last year, what results are you speaking to exactly. I mean you talked about the tax rate. So are you referring specifically to EPS? Or what are you referring to?

[John King, executive]

I think Mark, it's John, more globally, the overall results. If you looked at our third quarter and the results from top to bottom was overall quite strong. As you look into Q4, it's not replicating off that for the reasons that Dan talked about. And there's headwinds and tailwinds. So it's difficult to judge how that's all going to shake out, but the overall trend would be lower than the kind of run rate that we had in Q3 but more in the range of what we were last year in Q4.

[Mark Petrie, analyst]

Okay. But that -- so you're talking about that like for earnings, like for EBITDA and earnings.

[John King, executive]

Yes, earnings.

[Daniel McConnell, executive]

Yes, Mark, that's why we mentioned the tax rate differential just to...

[Mark Petrie, analyst]

Yes. Perfect.

[Operator]

The next question is -- sorry, the next question is from Stephen MacLeod.

[Stephen MacLeod, analyst]

Just a couple of questions. Just on the water settlement payments that you called out for potentially impact in Q4 and extended into Q1. Just curious like what kind of visibility or leeway do you have into those payments being extended? And -- and how do you expect it to sort of fall out between Q4 and Q1 of next year?

[Daniel McConnell, executive]

We really don't have a lot of insight there. I mean it's difficult to say. Like I said, they have extended it out, which tells me that they didn't get the number of applicants that they had forecasted. I guess you could say they had escalations of people that had some difficulties and needed some extra time. However, it's really tough for us to understand. Like we're betting on it this year. Obviously, we've we anticipate to see some in Q4, but we're not anticipating a waterfall, more of a trickle. And again, it's a hypothesis. It's an educated guess. So it's really tough to say.

[Stephen MacLeod, analyst]

Okay. Okay. No, that's fair. I get that. Okay. And then -- and then just following back on North Star Air, like in terms of passenger demand, were you saying that Q3 was unusually strong because of the forest fires that we saw and things like that? Or I just want to make sure I -- I'm understanding that relative difference correctly?

[Daniel McConnell, executive]

Yes. And I would say, but it's not scheduled, right? It's a chartered passenger. So charter planes. So that's why it's incremental. So it's not like -- it's not a scheduled flight times. It was people coming in, doing charters and needing to access different communities on more of an emergent basis or just on a more sporadic basis. That's why we called it out, right? So it's not -- it's not -- if it were scheduled, I'd say, okay, we have a good -- or a good occupancy rate, and we expect it to carry on, but that's not the case. These were one-offs. And a lot of them because demand was high for access to the number of different Northern communities that we have.

[Stephen MacLeod, analyst]

Okay. Great. And then maybe just finally, turning to the international business and the outlook. Like Q3 was definitely a bit weaker than we were forecasting. And -- just curious, how many of the drivers that negatively impacted Q3 are expected to continue into Q4 or have not abated, I guess, so to speak. I mean I assume lower SNAP payments and the lower PFD will probably linger a little bit.

Is that a fair way to think about it, sort of lingering into Q4 and then potentially tailing off in Q1?

[Daniel McConnell, executive]

I would say PFD, there's probably a little trickle like over Q3, Q4. I think it was a little later this year. So it would have trickled into Q4 a little bit. SNAP benefits are going to continue. Obviously, coming into, call it, the Caribbean and the more tourist winter destinations. This is typically a stronger time of year for them in that regard, but we do think that just given the economic factors and the macro economy, in the U.S. that tourism is not going to be as vibrant as it has been in the past. So I would say aggregating those factors, it's I don't expect it to have a significant increase to the trajectory it's on right now for fourth quarter.

[Operator]

[Operator Instructions]

The next question is from Michael Van Aelst.

[Evan Frantzeskos, analyst]

It's Evan in for Mike. Congrats on a good quarter. Most of my questions have been answered, but maybe I could just touch on Canada same-store sales growth. You posted very strong growth in both food and general merchandise. Wondering if you could just tease that out a little bit. I know you mentioned inflation relief payments. And I believe the grocery rebate was paid in July. And I think some of that trickled into this quarter as well. But was there anything or is there anything incremental in Q3 in terms of government relief?

[John King, executive]

Yes, Evan, it's John. There was -- you're right on in terms of the grocery rebate, but there's also been in Q2 and Q3 other inflation relief payments from the government [indiscernible] Indigenous Services Canada to be specific that were both Q2, Q3.

[Evan Frantzeskos, analyst]

Okay. So there's nothing incremental then in Q3 versus Q2?

[John King, executive]

Yes. I would say maybe the capture was. I don't know specifically that there was a real increase in the payments, but some -- I don't think it was uniform through Q2, more in Q3 -- but the actual payments to individuals, I don't think there was an increase there. That's what I'm clarifying.

[Evan Frantzeskos, analyst]

Okay. That's good. And was there any maybe other income from like, say, increased hunting tourism or fishing tourism or anything like that, that would've helped in the quarter?

[Daniel McConnell, executive]

No.

[Evan Frantzeskos, analyst]

No. Okay. And then do you think you gained share in the quarter? And if so, is there any categories that you can point to that you did well or that maybe your competitors are struggling with?

[Daniel McConnell, executive]

I think our in-stock position definitely helped us. We've been a lot more deliberate, as you know, just moving, transporting goods through different means to be able to optimize our freight lanes. So we like to think that we're -- just given the operational excellence that we've been doubling down on. We do know that there's some markets particularly that we did gain share in but it's hard to quantify when that cost of money comes into the market. But we can tell you that we feel we're getting our fair share.

[Operator]

There are no further questions registered at this time. I will turn the call back to Mr. McConnell.

[Daniel McConnell, executive]

Okay. Well, thanks, Paul, and thank you, everybody, for coming by and joining us today, and I look forward to speaking with you next quarter, and I wish you and all your family the best of the holiday season and look forward to speaking to you next year.

[Operator]

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