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. Fourth Quarter Results Conference Call.I would now like to turn the meeting over to Mr. Edward Kennedy, President and Chief Executive Officer. Mr. Kennedy, please go ahead.
Thank you, and welcome, everyone, to our Q4 end of year conference call for fiscal 2020. Joining me today from North West is Amanda Sutton, our VP, Legal & General Counsel; John King, our Chief Financial Officer; Alex Yeo, President of our Canadian Retail Group; Dan McConnell, President of our International Retail Group; and Sandy Riley is here with us, who's the Chairman of The North West Company.I'm going to start the meeting by asking Amanda to read our disclosure transcript.
Thank you, Edward. 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 of Risk Factors. Edward?
Thanks, Amanda. So we're going to follow a format. I'm going to invite Sandy to make some remarks regarding the CEO transition, which I hope you've read and seen in our press release today. We'll stop the call there for questions and try to segment it. And we'll then move on to the fourth quarter and year-end results and take that approach.So with that, Sandy, I'll turn it over to you.
Well, thank you, Edward. It's a pleasure to be on this call. I'm not normally, obviously, part of the analyst call and haven't done one of those for a while since I was a CEO of a public company, but I am delighted to be here. You will all have seen from the press release, the information that Edward Kennedy will be retiring as CEO of The North West Company on August 1 and will be replaced by Dan McConnell, who is currently the CEO -- or President of our Operations -- International Operations based in Boca Raton. This is a very, very sort of interesting time in the history of the company.Edward has been the Chief Executive Officer for nearly 25 years. And that in itself is extraordinary. But when you add on top of that all that's happened in this company over those years, whether it's the expansion into the international operations, the increased focus on food, the many partnerships that we forged with indigenous entities and the growth into areas like health and transportation, it's been a remarkable process of diversification and growth.And that's been reflected in the numbers. North West sales, when Edward became CEO, were just slightly under $600 million. And this year, we're -- we'll be in excess of $2.4 billion. The EBITDA growth is -- has grown from nearly $60 million to over $300 million. There'd been nearly $1.2 billion of dividends paid out to shareholders over that time. And what I find particularly remarkable, is the compound annual total return for the company over that 25-year period or 24-year period of 15.6%.It's a remarkable track record for Edward and for the company. And for that reason, it is kind of a bittersweet moment for us on the Board because we've all come to really value all of Edwards' contributions, his knowledge of the company. It's going to be a difficult time for us to -- in the sense of thinking through what the company will be like without Edward as its leader.Having said that, I know from my own experience in business that change brings opportunities. It brings opportunities to rethink how you look at a company and its operations, it gives us an opportunity for fresh eyes to look at the processes that work within a company, it gives people fresh oxygen and a chance to flex their muscles in a business setting and gives new people a chance to make their mark. And as part of that process of revitalization, I am very, very pleased to announce that Dan McConnell will become the present Chief Executive Officer of the company on August 1.Dan has spent 20 years with the company. He was hired originally by Edward to do various corporate development projects, but he's evolved over the years in a number of key roles, most -- very instrumental in the acquisition of Roadtown in the British Virgin Islands and then heading up our international operations based in Boca Raton. We've all on the Board watched Dan evolve as a business leader and as an executive over that 20-year period, and we all feel that his brand of enthusiasm and leadership and vision will really resonate well with the company, and will be -- and he's going to provide a tremendous leadership for this company in the years ahead. And so we're all really pleased and delighted that Dan is in place to take on this challenge.I want to assure all the investors that this has been a very thoughtful and long process we've worked our way through. Edward and I started talking about his desire to retire 3 or -- 4 or 5 years ago, I guess, was our first set of -- first conversation. And we've been talking about the process we should go through and what would be required. It's been part and parcel of a process at the Board of The North West Company as we moved out longer-standing Board members and brought in new members to the Board who would be able to work -- to help in the selection process and work closely with the new CEO. It's been thoughtful, and it continues to be thoughtful in the sense that we have -- we're announcing today that the change will take place. We're giving you a date, August 1. That gives us a number of months for a proper transition to take place, a full download of information on the various files that Edward continues to work on.Edward himself has agreed to be available for a number of months and years, in fact, after his retirement, to be available to help with -- to help Dan in any way that he -- that Dan feels is helpful to him. I can tell you that all of us, of course, everybody in a company when a transition like this takes place has to rethink how they are going to work. And I can tell you that the Board of the company has also gone through that same process of figuring out how best we can support Dan going forward in his position as a new CEO. It's one thing to have the CEO who's been doing the work for 20 years, leading the company is another with a new CEO. So we are committing ourselves to the -- to spend the time and the effort required to be as helpful to Dan as we possibly can be.And I also have to -- I have to reiterate that Edward has built a wonderful management team, very capable. All in the sweet spot of their careers in terms of their experience and their age. They worked well together. I think their performance through the pandemic this year has been nothing short of extraordinary. And all the many experiences I've had in my business, I can't think of any where I've been more proud to be associated with men and women who have really had to deal with challenges as I have been this year with The North West Company in the face of COVID and operating in the markets that we operate in and dealing with the responsibilities that we have to those communities. And I know those men and women are going to step up behind Dan and help him really be successful in his new role.So we are going to miss Edwards. It's going to be a period of transition, but the fundamental core strengths of this company remain. We have a very talented group of managers and key people throughout the organization. We have a very strong culture of enterprising -- of enterprise and hard work and community care. We operate in markets that -- where we understand our obligations, and we have done a really good job of supporting those communities in an extraordinarily challenging time for them. And we have learned through COVID that there are more opportunities for us to build the business, and those are going to be the things that drive the development of this company over the course of the next 5 to 10 years.I think I'll stop there, Edward, you may want to say a few words or do you want to...
I guess we'll start with questions. And then I'll...
Yes. I would say this, on the questions, we're not -- this is a -- if you call and ask me or Dan what are you going to do tomorrow, we're just going to do what we're doing right now. So -- but this is really -- I'm trying to give you a sense of the thoughtfulness of the process, the time that we've taken and where we're going, and I'm happy to answer any questions around that part of my comments.
Operator, can you queue any questions?
Thank you, operator. So we will stop for questions again after the results or discuss them. I'll just start by saying -- picking up where Sandy was, that -- and I'll talk again about North West and my career and everything that may be of interest to you or not at the annual meeting, because I got one more crack at a quarterly report.But it has been a good process. It's been very robust. The Board has been very engaged, as you'd expect. And this has been a big piece of work for me. I have a personal stake in every sense in how North West continues. And I feel the Board has really done good work here. And I'm very pleased that I'll be able to work with Dan now in the next 4 months. Dan and I have worked together for almost 20 years. We do see, I guess, eye to eye.But I also feel, like, Sandy has referred to the fact that -- I mean I said this morning when we talked to our senior team that I'd like to join a company where the 30-year guy had just left because I think it does open up new possibilities for people in terms of the roles and the scope of what they can do. And I don't consider myself to be super suppressing that way. But I think it kind of comes with the territory when you've been doing something as I have for so long. I've seen a lot of stuff, and it's kind of like that farmer's insurance, but I also have also felt energized or I wouldn't have stayed this long. Everything is, to me, is fresh and vital at North West. And I'm sure Dan will see it that way.And I feel, again, lucky, and I'll just echo Sandy. When I look at the team, they're kind of in the prime of age and experience. It is a sweet spot, and North West has got a ton of energy. And I think a lot of energy was not reignited, but it was just stoked further. We're merchants with a community focus. And who wouldn't love being a merchant with that focus in a safe way over the last year and even this one, which we're headed into.And with that, maybe I'll just segue into the financial results. I'm going to turn it over to Dan first and then, Alex, and I'll come back and talk about the airline. The numbers kind of speak for themselves, their continuation of the other quarters. I think semantically, we are coming into another year that's going to have a lot of uncertainty because we can't tell when we're going to see whatever new normal looks like. There's 2 parts to that, when will it revert and what will it revert to? We do see a lot of stimulus in communities that we serve, ex some of the Caribbean countries that don't have a stimulus like the BVI, Curacao, St. Maarten.But the lion's share of our business is in communities that do have income supports. And those will continue -- and that will continue to help drive with our merchant instincts, very good performance, we believe, in the first half. We also see broader stimulus from the Biden administration and the federal government, the liberal federal government, probably in the next budget that is usually good news for Northern communities.The North is strategic in a lot of ways. But the indigenous population is infrastructure starved, and the native Alaskan population over Alaska as well. And we are already seeing early indicators that there's going to be investments in these regions. So we think it will probably be, call it a softer landing income-wise for communities that we serve as we go into the back half of next year and then into '22.So that's a good theme. But I know you'll probably poke and prod with your questions on what are the comps going to be. And I mean they're looking okay right now as we get into another tough comp months, but we've had good, good comps into it so far. But it's all about 2LY. I know other retailers are talking about that, too. And then how we're comping against 2LY. And obviously, we've got a positive comp against LY, you're way up on 2LY.It won't always be that way through the year. We're going to have negative comps in some quarters and periods. But we just don't know when and by how much. We do feel this is set up to be probably our second best year ever, but it's going to take a lot of hard work, and there's still a lot of uncertainty. So we kind of stopped forecasting that, but we do have good plans. And I'd like to let Dan and Alex walk you through both the quarter and give you kind of a sense of where they see the '21 unfolding in their respective businesses.With that, Dan, I'll turn it over to you.
Thank you, Edward, and thank you, Sandy. Good afternoon, everyone. I am deeply honored to have been appointed CEO of The North West Company for the next stage of its development, and I'm very excited about our future. During my 19 years here at The North West Company, I've had the opportunity to work not only with incredible leaders within the company, but I also had the privilege of working in creating strong relationships with community leaders throughout Northern Canada, Alaska, the Caribbean as well as over in the South Pacific.I am stepping into some gigantic shoes, but thankfully, I'm doing so alongside some very experienced and highly capable leaders and passionate North Westers. I have learned and developed under Edward for the last 19 years, and I'll be working together very closely with him over the next several months to ensure a seamless transition. I look forward to speaking with you more about the future of The North West Company in future meetings.Now let's get down to the current business. Wrapping up our fiscal 2020, it's only fair for me to start by acknowledging and thanking our teams for the terrific job done over this past year. A pandemic was and continues to be an unprecedented event, and I'm extremely proud of how our teams are responding to the challenge. They not only embodied our core values of passion and being customer-driven, but truly took to heart our role as leaders and essential service providers for our communities.Throughout the year, our teams were steered by 3 guiding principles: one, the health and safety of our customers and employees; two, maintaining dependable assortment through a strong supply chain; and three, our social responsibility to our communities. We believe that the execution of these principles uniquely position ourselves to capitalize on market tailwinds this year and achieve our current sales momentum.Now from a supply side standpoint, coming into Q4, we were particularly aware of the importance of having a solid strategy on assortment and inventory flow. Leveraging strong relationships, we partnered with our vendors and carriers and set up our procurement, logistics and store teams to gear up into holiday season. We plan in advance to have several event-driven promotional days scattered throughout the holiday season months as opposed to having single day events like Black Friday or Christmas.We also included a cyber week event in our CUL banner. We made sure this was executed this way with a twofold objective: a, keep enforcing health and safety standards for our staff while offering a safe environment for our customers to shop; and b, to make sure our inventory flow processes shielded any possible disruptions in the global supply chain.From a demand side, throughout 2020, we experienced a shift in consumer spending, particularly towards one-stop shopping, customer stock ups and more in-home dining and entertainment. Mobility restrictions were also a factor. Especially in Alaska, with less out-of-market travel that allowed customers to shop more in our stores. All of this was coupled with additional income support within U.S. states and territories.In Q4, the December 2020 bill stimulus brought to our market an additional $600 per person, an extension of unemployment benefit top-ups and additional temporary allotments of SNAP funds commonly known as food stamps. Partially offsetting this were headwinds in the Caribbean, notably the BVI, St. Maarten and Curacao, without deep government resources, which had now carried on into Q4.In these situations, we have focused on cost control, execution, our signature categories and sharper sales promotions to capture available market share. Equally, we have focused on social responsibility and the well-being of communities in need. For example, given our infrastructure and leadership position in the BVI, we recently partnered with the local government to store at our facilities the COVID-19 AstraZeneca vaccines that will be made available for distribution in the community. To date, we have received around 32,000 vaccines for storage.All right. Now let's talk about the yearly and quarterly results. For the year, international sales increased 18.2% to USD 734 million. Same-store sales increased 13.6%, coupled with very solid performance of our reopened store in St. Thomas, USVI. For the quarter, total sales increased by 10.4%.Overall, Alaska Commercial and Cost-U-Less led our food performance, partially reduced by the headwinds mentioned in some of the Caribbean markets, particularly in the BVI. Our signature category program in Cost-U-Less and programs like our Meat Packs in Alaska continued to resonate with our customers throughout the year and during this past holiday season.Food sales increased 17.1% for the year and 11.5% on a same-store basis. In Q4, food sales increased by 7.5%. General merchandise sales increased 31.5% in total and 31.8% on a same-store basis. In Q4, general merchandise sales increased by 35.2%. Here, the supply side strategy mentioned earlier was instrumental. It positioned us to have the most relevant assortment to capture consumer spending shifts, less travel outside communities and government income support. In the fourth quarter, category sales were led by motorized, particularly in Alaska, as well as electronics, home furnishing and seasonal categories through our banners.Gross profit dollars for the year increased 16.4%, driven fundamentally by sales. The gross profit rate decreased since the slower performance of BVI resulted in a higher blend of Cost-U-Less sales, which are lower margin consistent with the warehouse club format. Our expenses in 2020 increased 7.7% last year when excluding impacts of higher share-based compensation costs this year and insurance-related gains in the prior year. This includes around $4 million in COVID-19-related expenses wage premiums and a 5% bonus to non-bonus eligible frontline and support office associates.Now I want to transition to talk more about what's ahead and how we plan to maintain some of the strong momentum and market share gain. In 2021, we have entered a new phase of this pandemic. With the rollout of vaccines in the majority of our markets, we expect to see an uptick of our out-of-community travel, particularly in Alaska. However, social distancing measures might be staying in place for the foreseeable future, and we expect degrees of travel restriction and quarantines upon arrival. This, at least, until herd immunity is reached through vaccination. We continue to learn on this topic every day, and we'll continue to monitor closely.That said, we outlooked that somewhere around mid- to late 2021, our tourist-dependent markets will start to see positive impacts of the vaccine in terms of mobility and its resulting economic pickups. In U.S. markets, income support will continue to flow with a third stimulus package approved by Congress mid-March and will probably impact our markets up until the middle of our fiscal Q3. We don't believe a fourth COVID-19-related stimulus will be issued in the U.S. markets in 2021, but we do see a softer landing for U.S. states and territories based on forecasted federal infrastructure spending over the next 2 years.Of note, native American tribal governments will receive $1 billion in funds over the next 2 years for this purpose. We do expect some headwinds on the supply chain side. We have been observing delays and cost pressures in moving freight due to the pandemic ripple effects of supply-demand imbalance. This was heightened with the recent blockage incident in Suez Canal. Leveraging our relationships with the broader range of vendors we source from 2020 to mitigate these impacts will continue to be a top priority, especially for our island markets.Similarly, inflationary pressures are also a hot topic in the headwinds we expect to encounter this year. Rising cost of commodities, fuel and freight are at the forefront of our challenges in this up and coming year. Again, leveraging and diversifying our relationships with vendors and carriers here will be a deciding factor on mitigating some of the more controllable price increases. We will closely monitor the market and competitors in this front. But some of those rising costs are expected to be passed on to consumers, in line with what other retailers are doing.In Alaska, we expect to continue growing by expanding our footprint in new markets, adding 3 new stores in 2021. Our e-commerce business expansion will continue to be a focus in the area to 2021, together with additional partnerships with community support programs like the USDA Food Box program.That's all I have today. Thank you, and I'll turn it back to you, Edward.
Okay. Thanks, Dan. Actually, I'm going to turn it to Alex now, and then I'll come back on with NSA and opening for questions. Alex?
Great. Thanks Edward and Dan. First of all, I wanted to just congratulate Dan and share my excitement about working with him. What I can say is I know we both share excitement about the growth potential of North West, especially when it comes to Northern Canada. And I look forward to supporting and partnering with him in his transition to CEO as he fully takes on the reins from Edward.So now I'll turn to Northern Canada. And Northern Canada, we ended the year strong with continued comps across food and general merchandise sales. Performance was driven by the same factors in earlier quarters, travel restrictions, our strong i-stock positions in everyday community offerings, coupled with continued income support from COVID-19 programs. Similar to international, these results came about not by luck, but as a result of commitment, passion and truly enterprising behavior by North West employees, from procurement marketing through the logistics and all the way through to the employees in our stores.On our last call, I had shared that our sales outlook remains largely positive going into this year. We anticipate continued travel restrictions through part of Q2 and income support through COVID-19 programs along with Day Schools settlement payments. This outlook has not changed. Our comparable sales to date, our 1-year comparable sales to date have remained positive even against double-digit increases last year in Q1. We anticipate that this will start to trend flat to negative as we start to compete against more travel and outspending.As this trend happens, however, we still expect positive income factors to give us a soft lending with less new versus old normal travel. Combined with our get sales, we anticipate and we believe we can get CAGR increases versus 2019 that are well above our historical growth rates. We feel positive of our ability to get and keep sales as COVID-19 has given us significant insight and confidence into customer and market share growth opportunities. And we have been aggressively working on initiatives to hold onto as much as we can of the increased market share gains once we are past COVID-19.I'll talk about a few of them today. Firstly, we're actively reviewing our buying and assortment plans to incorporate learnings from COVID-19, whether it be new items, new assortments, or promotional and pricing changes to retain greater market share in heavily out shopped categories pre-COVID. Secondly, we're starting to see benefits from our continued partnership with GT on food and general merchandise procurement. We do anticipate some cost benefits on the food side this year, and we have started flowing GT general merchandise assortment to our Northern stores, which we will leverage to create new item excitement, great new opening price points and drive incremental market share and sales.Finally, we're turning our minds to pursuing new business opportunities. In the CEO message, Edward already referenced opportunities around telehealth and virtual health and tele-optometry. In addition to these, I want to talk about our business-to-business growth. COVID-19 has opened our eyes to the significant funding that flows into communities through various government programs and our ability to service communities' needs through our business-to-business sales teams. We see a significant momentum going into 2021, and we're now building out a plan to grow this business over the next few years. Anticipate being able to share more details on the progress of our -- of these various initiatives in the next 1 to 2 quarters.Finally, I want to talk about pricing. In the last investor call, I mentioned that we're delaying a full roll of the pricing investment until the second half of this year, 2021, when we had a clear read on payback and results. That continues to be the plan. For 2021, we anticipate about a $4 million to $6 million investment for the full year versus pre-COVID in 2019. In the meantime, though, we are continuing with our pricing tests so that we're ready to measure and scale once we see clear payback post COVID-19.In summary, I am optimistic about the outlook for Canadian retail on a 2-year comp basis. COVID-19 and our ability to meet the needs of the customers and communities that we serve has clearly helped us to gain market share. Just like in our U.S. markets, we expect Canadian federal infrastructure spending to be an investment and wage economy driver in the regions that we serve over the next 2 years. Together, these factors give us confidence to go harder, faster, leverage the enterprising behavior of our people here in North West to retain as much as the market share once COVID-19 subsides. Many of these initiatives are now underway in Canada, and I look forward to sharing the results with you, working with Dan to shape the strategy over the next few quarters. And with that, I'll hand back over to Edward.
Okay. Thanks, Dan and Alex. I'll just close with some comments about the airline and other corporate developments that are COVID-enabled and add a bit more color on the outlook. So the NSA had another strong quarter. The -- there's a ripple effect on the amount of tonnage that we're moving to our stores and that travels through our air cargo division. We've also increased our Winter Road, and we'll have a big bump in our Sealift as we look at our forecast for the year on tonnage expectations.So high efficiency with our ATR program. We've also approved today the acquisition of a fourth ATR. It will be a wide door plane that will give us an advantage. There's only 1 other wide door cargo aircraft of this type in the North today. So this will help us in terms of efficiency and speed further. As well as open the door literally for more third party revenue, especially in the resource sector and other specialty payloads that are at premium revenue rates.Offsetting this was the passenger side of the business, which is affected, of course, by reduced travel, and it gives us a real good lens into how travel is taking place or not taking place in the North today. And I'll just make a point about this. We think about travel in the South, and the South is -- by the South, I mean urban parts of the world. It's for business and leisure.The North, it is more of a highway in the sky. And so people will travel just because it's -- there's no road. So they'll use it for more pedestrian purposes. And we'll see how that recovers. The vaccine rates are very high in the North today, Alaska and Nunavut. Good, good penetration or distribution of vaccines. But it isn't the same in their destination cities, i.e., coming down to Winnipeg or to Thunder Bay, into Ottawa or Edmonton, for example. So there certainly has not been any recovery, any meaningful recovery in passenger travel.We did get support in the quarter of -- I think it's in our numbers, of the $2.3 million. That was a combination of the Qs payments that have been going on all year. And then this -- a new program the federal government pushed into the provinces of Northern air carrier support. We didn't take up all the money that was put on the table for that program because we didn't need it. And I'm not sure -- again, the money was there and that's another story, but we did need a bit of assistance, we felt. It's not a lot of money, but it helps. I mean the past airline itself would not be able provide the level of service it does without that type of support. So we certainly appreciate it.And then like the rest of our business, we forecast more growth in tonnage over 2019 for sure. So the airline will have -- we can safely say a good year that way on the cargo side, which is 80% of the business focus. And the passenger business will really depend on how the rest of the North goes in terms of mobility.On corporate developments, I've mentioned before that we were looking at acquisitions. Tuck-in acquisitions and partnerships in transportation and wholesaling, in rural retailing, vertical opportunities perhaps in the Caribbean. That's been successful for us in the BVI. It's an interesting time. I mean I read about broadly the activity in M&A. We're not doing mega size deals, but you're looking at denominators that are maybe inflated by COVID. So everyone's got to take a deep breath here and back that out and look, as you're trying to do and you're evaluating North West, of course, and what are the new normals. And I think this is still a time to do it if it comes around.And maybe back to the question about CEO transition. This is something that won't be disrupted by who's in the CEO seat. I mean these kinds of acquisitions and this kind of on-strategy growth is completely aligned between Dan and myself, and we won't miss a beat. If something is underway, if something happens, the fact that 1 person is leaving and fading to the back and one's coming to the front won't make a difference there. We are going to continue to be opportunistic, and a lot of this is, of course, about a willing buyer and seller. So I just want to put that out there because sometimes with North West, we do like to talk about things that could happen so there's no surprises. And it is part of our -- our growth mandate is to definitely do that, and Dan certainly has put on the table new store growth in Alaska, which we'd like to accelerate even more, more tuck-in acquisitions there as we find them.And the last thing I'll say on the growth side that's more organic is in telehealth. We're opening our first telehealth physical -- listen, I know that's inconsistent or oxymoron, a physical virtual health center in Iqaluit shortly. It's a new concept store that I might have described before that marries up a shoppers drug mart and a bit of a whole foods and a health and wellness focus. But we're also going to have a telehealth office and tele-optometry. So these are first for us.But the basis of our telehealth is really about a platform that we can partner with indigenous health organizations to deliver into Northern Manitoba, Saskatchewan and Ontario and counting on the billing to continue to allow for virtual physician appointment. So we're working on the platform side, on the relationship side. We'll have more to talk about there in our next quarter. And of course, it's -- that part is new. I won't give you a forecast on the impact, except that it could be material for the company if we can get our ducks in a row there.And then just to wrap up again, as I said at the beginning, the tone is -- for us, is pretty positive. You heard it from Dan and Alex. We're also realistic where we do have situations on tourist-dependent Caribbean Islands and things just uncertain on how it's going to unfold. But we believe, overall, given the -- and this is, I know, a very tough one to measure. But within the company, I mean you're -- when you think about North West, our comps are usually okay when they're good, but they're not high single digit. And so the icing on the cake has always been general merchandise. And underneath it, a very strong food, convenience focus, layering on the services, health, financial service.But what we've seen with the general merchandise piece, and I think buttressed by the deal with Giant Tiger, some of the sourcing things that international has done, that we can grow this, and maybe it will become another layer in the cake and not just the icing. I do believe that that's a realistic opportunity for North West, that we can grow some top line, hold some top line business by basically putting more of the right merchandise in front of our shoppers. Where we might not have had the same open to buy dollar approach in the past, we're now targeting higher targets for sales against 2019.And being, I think, realistic on what we can sell. And what people will buy locally if you got the right product and that they don't necessarily want to travel out of town for, i.e., for a mattress. So that cumulatively gives us confidence as well that we can hold share and also be helped by some income tailwinds that continue into '22.Okay. I think that's a lot of talking. I appreciate the patience. And operator, we'll turn the call back over to any questions.
[Operator Instructions] And the first question is from Michael Van Aelst from TD Securities.
So I guess, congratulations on the quarter and on the transition that's forthcoming. But I guess I would like to just ask or just clarify that, I guess, given that this has been a long, thoughtful transition and Dan has been around for as long as he had within the company. Is it -- would it be right to assume that the Dan's strategic vision is already kind of have been reflected in the direction of the company for the last couple of years and so we wouldn't expect things to change dramatically?
Well, I think you're going to have to give Dan some time to get in the seat. But yes, this is an evolution. And from the Board's perspective, we expect to build on the strengths of the company and build on the -- in the directions that we've been working with over the last 5 to 10 years. But business has evolved, and this business will evolve as it has in the past.
Right. And I guess a lot of new CEOs coming in like to put their stamp on it early on or at least in the first 6 months, and I'm just -- I guess what I was trying to understand is whether Dan would feel the need to do that if he was already involved in a lot of the strategic decision-making in the last couple of years?
Dan is going to speak in a second, but I would say this, he's not becoming CEO until August. One of the reasons that we have staged the process this way is to give him some time to spend time with Edward, getting a full download of debrief on all the areas that he hasn't been as intimately involved in as he has been, for example, in the international operations. And he will undoubtedly be asked this question at his first call in, I believe, it will be September, and he'll have to have an answer for you at that stage.
Okay. Great. And just a comment, I hope, Dan, is as open and thoughtful in providing his answers to our questions on the conference calls over the next few years, similar to the way Ed has been. I don't think there's too many -- many CEO that I've dealt with that has spent as much time talking about the negatives or the positives in the company. And it is very helpful in understanding the story. So I appreciate that.
Thank you for that feedback. And it's -- you're echoing something that we, on the Board, have known for a long time, that Edward is -- looks at things square on with both the positives and the negatives.
The next question is from Mark Petrie from CIBC Capital Markets.
And I will echo Michael's. Congratulations to you Edward on a fantastic career and a ton of accomplishments. So congratulations to you. I guess my only -- Michael covered almost all my questions, but my only other question was just with regard to a backfill plan for Dan. And then also, would Dan be relocating to Winnipeg? Or is he going to -- is the operation -- is he going to be continuing to operate out of the U.S.?
Well, I'm going to let Dan talk about the backfill, but he -- I mean that's something we've been thinking about, obviously, as part of this transition. He is coming to Winnipeg. This is a Winnipeg-based company, and Dan, who is from Winnipeg originally, will be coming back to Winnipeg.
And I can maybe jump in as -- since Dan is still reporting to me that we worked on a backfill plan as part of the decentralized approach, we are going to move to the President structure for both CUL and AC separately. That was in the works so we can pull the trigger on that, and we'll have individuals in those roles before Dan takes the helm in August, and at least one of those will be an internal promotion.
There are no further questions registered at this time. I'll turn the meeting back over to you, Mr. Kennedy.
[Operator Instructions] The first question is from Michael Van Aelst from TD Securities.
So first question is, in the press release, you talked about enhanced customer and community relations that will enable new partnership opportunities in a post pandemic environment. Can you elaborate as to what you're talking about in this post?
Sure. I want to give Dan and Alex a bit of the answer here. Dan, perhaps you could start -- I mean there is the Food Box program, and then Alex can talk about our B2B, and I think that will address it.
Sure. Okay. So as a part of our approach to COVID, basically, as you recall from my discussions with you, it was really -- it was the health and safety, it was supply chain optimization and then reach out the community. In our reach out to community, we started unfolding different needs within the kind of government sector, whether it be the USDA contracts that we've now been awarded, and it's really getting food out to underserviced communities, fresh food. We're now in the business of distributing boxes of produce and meat to communities that weren't able to get this before.So this was really in the nature of -- there were some CARES money, that they wanted to be able to be effective and efficient with it. And given our infrastructure, we were the ones -- the only ones in Alaska, for example, they were able to kind of deliver this product to all the different recipients from the different communities throughout rural Alaska effectively. So that's 1 example. And I think probably I'll pass it over to Alex to probably talk about some of his B2B examples, all under the same kind of tone.
Yes, building -- thanks, Dan. Building on Dan's example. So what we've seen during COVID is that we've developed -- we built the service community's needs on different kinds of business-to-business requirements. As a result, increased funding, increased needs from the community. So examples would be -- and so that's been a huge sales driver for us. And what we found is that we have a value proposition that's really strong because, again, because of our integrated logistics and our ability to pick and pack, right?So the ability to package the product, do all the work and get it there to communities that need it in record time in the format and packaging that they want, that's been really a big driver for us. And we've seen repeat business, improved community relations, as well as, I would say, much new customers and new types of SKUs that we've never really serviced before. So it's given us a lot of confidence that this is something we can build on and maintain going forward and tap into almost a different stream of income in the communities that we serve.
What type of SKUs are you talking about?
What kind of SKUs are we talking about?
Yes. So traditionally, we've done a lot -- sorry, go ahead. Edward, do you want me to answer that?
Yes, sorry.
Yes. So traditionally, we see -- we've generally been servicing more food, more big furniture, big ticket items. But what we found now is that we've really diversified. Like, in recent orders, we've diversified other kinds of GM product, school supplies, things like motorized parts, so a much wider variety of different kinds of SKUs that we serviced than we have in the past.
I could actually jump in there as well, Alex. If you can believe it, well, PPE is the obvious, right? We started getting into masks, cleaning equipment. But we actually -- even -- because of our infrastructure, and we understand how to get things into remote locations, we delivered 75 hospital beds up to some of our communities throughout rural Alaska.So there was really no stoppage. Whatever we could use our infrastructure for to support our communities, we took it. So that's an example. Not that I think we're going to be getting into that distributor of hospital beds in the future, but at least our community members who have capital spending budgets that have needs and might not have the outreach that we do, given the type of business we have, we've created these partnerships where they come to us and ask us to source some of these different items that we can get.
So put in context, I guess, between both groups. I mean we went from doing a few million dollars in these areas. There's a lot of local contract B2B done by Star managers. But to put our arms around bigger contracts -- and some of this is COVID-enabled, some of this is the stimulus-enabled, Alaska has $1 billion allocated tribal governments by the Biden administration over the next 2 years. It's going to be spent on it's kind of a communal consumer purchase. They could buy fridges for all the houses. They can be doing a furniture mega buy. It could be institutional like for a seniors home. It could be buying out in the land harvesting equipment for indigenous hunters and trappers.So all these things have been spent in the past, some we've gotten, but we really haven't systematically gone after it. Now we're building actually a contract sales group to do it. And top line, we could hit $50 million in 2021 from the low millions. The delta was very large in '20, and we could probably double it again in '21 now that we're -- we understand how it works. A lot of relationships, back to the initial question about community. And at the state level, having C-level folks now in the state of Alaska is making those connections. We would have never gotten the USDA contracts, which are multimillion-dollar contracts, into this year without that. And so it seems to be a good circle. One of those virtuous circles or flywheels that we can get going. And we'll see where it leads.
Okay, great. And then your COVID costs were a little higher-than-expected in the quarter. Can you give us an idea of where you think they're going to be going forward?
Well, I mean when you talk about the COVID cost, we did decide to do some things at year-end that might have bumped it up. Like, we paid a bonus to non -- actually non-bonus eligible, but hourly paid staff, non-store staff. Will we do that again in 2021? I wouldn't want to say no. But I'd say that that was very unusual. The store, ones were -- there were some retroactive stores things done as well. We charted the 2 things up there.So I think if that's what you're talking about. And if we go forward and look at the situation, the guideline we've used internally is where there's being community spread and really at risk or more stressful working conditions, we've put it in place. But to give you some context there, I think right now, we don't have it in place anywhere internationally, and in how many communities in Canada, Alex, we have it in place right now?
Above 10 to 20 on average during the quarter.
10 to 20. So it's going to ramp down significantly in 2021. And supplies will also ramp down because we've got an overhang of stock up PPE for our staff. I can't give you more guidance than that, except that it -- the number's going to come down quite a bit. It's a positive variance, I guess, if you want to call it that in our expense forecast for 2021.
Okay. And then finally on the insurance cost, you called it out as a higher cost in Q4, but you didn't mention it in Q3. So I'm wondering if this is a new cost and if so, do we expect it's going to continue to rise during 2021?
I think, Michael, there's a bit of a catch-up there in terms of how the timing of our policy renewals. So that would be the factor that, I think, in my mind, tipped a mention in Q4 versus Q3. Our insurance costs have trended up, I would say, probably the last 3 years, certainly, to hurricane claims and some fire insurance claims and so on. We do expect that those increases to moderate as we get into 2021. I say expect because it's a very difficult insurance market. And so as our policies renew, we'll see how that plays out going forward.
The next question is from Mark Petrie from CIBC Capital Markets.
Yes. Just to clarify on the B2B opportunity. So these are products that you're not just -- this isn't just a sort of a supply chain shipping opportunity but you're also not taking inventory on these -- or you're taking inventory, but you don't have an expanding inventory on these products. You're basically getting an order and going and sourcing them. Is that -- do I have that right?
Yes. I mean there's -- as we get better at this, I think there's some B2B that we actually will put up ahead of time and seen them on the road. My favorite are the -- those long plastic tables that you see, that's a top seller in Cost-U-Less, we do sell it in the North, but we could sell more. We'd probably ship those ahead of time and take a forward buy. But the rest of what you're talking about is our contracts that are RFP-ed or through relationships, we just find out about them and they may not be fully tendered, but they got to be shipped by air.
Okay. And then I wanted to just ask and hoping you can kind of elaborate on some of the opportunities you see in your assortment to capture a greater share of wallet in Northern Canada, not B2B, but in the consumer business. Is that mostly in big ticket? Or I don't know, any commentary you can provide would be great.
I'm going to turn it to Alex, and I'll set it up a bit, Alex, to maybe -- it might be a good way to circle back to the price investing in food and some of the things that we've learned from seeing where there's been hyper sales growth in certain items and categories, what that's told us about opportunities, and we could give some of those examples. Alex?
Yes. So I'll give some more color. It's a bit -- the story is a bit different in food versus GM. In food, what we've really discovered is, as Edward has mentioned, is the full market share we're losing to out shopping on the different modes, right? So Winter Road, for example, we've seen beverage sales increase a lot this year because Winter Roads are no longer open or not open. And so that told us there was a lot more market share to be grabbed through in beverages, for example. So what that then tees up is we want to be more aggressive, either into the promotional levers on the pricing investment to really go after the market share we're losing to some of those out shop categories. So with food, it's a lot more around pricing, promotion, a little bit around assortment, right? In general merchandise, I think just by short nature of trying to meet demand, we've, number one, built new programs and new sourcing partnerships. And also gone after new items at different price points that we never had the courage to do in the past, and we've seen great traction and great sell-through. I wouldn't mention mattresses, but we've also built -- gone through new programs in hardware, new items in gaming and electronics. So it's not just big ticket. It's really -- we've seen significant lift and traction in new items and new subcategories and assortments across a broad range of general merchandise products.So -- and nice things that's really coming well together with GT, right? Because GT now gives us this great new merchandise we can layer in, along with our other categories that go after some more opportunities. So in summary, I would say, we have food, it's about going after out shopping, pricing promotion, a little bit of assortment. In general merchandise, it's about the confidence to really build and go after new categories and programs more aggressively because now we've got confidence that we'll be able to do it and hold on to that market share.
Okay, operator. Next question.
Sorry, I was just on mute. You mind if I keep going?
Yes, go ahead. Go ahead, Mark.
Okay. Yes, sorry about that. I was on mute, but -- sorry, just a follow-up on that -- on the general merchandise specifically. I think you've, in the past, had strategies to sort of broaden the assortment and tried to sort of attack different opportunities that you've seen. This one clearly is different because it's sort of catalyzed by the pandemic. But are there sort of learnings from some of those past experiences and previous initiatives that you might shape or change your approach this time around?
Maybe I'll weigh in a little bit because I've been through a lot of those cycles, although Alex and Dan could both answer. You still have to align with income. A lot of our customers -- the customers that we serve are lower income, and there's a necessity -- a little bit of impulse, but a necessity aspect to what they buy. And some of these big ticket items that we referred to may sound, like, discretionary. But really, it's about replenishment of household inventory of couches and TVs and even boats and motors that are used or ATVs for everyday livelihood.So there's tremendous demand for that. There's a -- when you look at the inventory, the personal household infrastructure in the North. So it's got to be tied to income. If there's a wage economy like happens with construction projects, and that's why we're kind of bullish on this news of both federal governments, U.S. and Canada. Because we know where that goes. It goes into -- to spending in our store, if we've got the product. So that's the first lesson learned. I mean you can only -- you can only promote so much sales.Now having said that, there's also credit capacity. And I think there is a similarity here to -- if there's one, I can think of it in urban markets. We all know people have kind of taken care of their personal balance sheets more over the last year. And in the North, it's not so much becoming net savers, but they're not at the same level of borrowing. And they're open to buy, open to borrow, they've got is -- much is available. So we've talked about this, too, and whether that happens in the back half of this year or into '22, we do have that offer in our sort of our toolkit, which is credit.And we think that both ways, both from a wage economy, income transfer and then financing, that that is supported by clean personal balance sheets that we can put product in front of our customers that they can afford to buy and they want to buy. So that's huge. And what I'm talking about here is very granular by region, by community. Although some of the income influxes that we're seeing are going to be broad. The other one is -- the other key lesson for us is there is a saturation. I hate to use that word, John will use it as the CFO, he's thinking about open to buy and how many more snow machines can you sell kind of thing.So we do look at per capita. I mean we're selling to -- into small communities so we know how many people live there and how many snow machines are bought and how many would probably be needed to be bought the next year. So there's a bit of that as well.And the final learning we have, which is more on the upside to really get aggressive, is to look at where we're getting a high, high per capita penetration. It could be mattresses, it could be something like trampolines. It doesn't sound very -- it's an up and down business. But it's -- we sell a lot of trampolines in communities, say, 100. And in the same size community, we might sell 4. Well, that's not good. I mean we're obviously -- we should be selling 100 in all communities.So we're -- our analysis of -- when we start to see these kind of sales increases and we look at patterns and the way people buy and shop, all things being equal, then we kind of start to triangulate or close those gaps. But we also are -- I'm encouraging open to buy on -- I'll use the mattresses and the trampolines because I don't think we're going to go long on those. If we had to carry some over to the next season, there's no tech obsolescence. Our turns might go down a bit, but we have the product in stock to sell.We've got to be more careful on fashion and fad with GT, I mean they do a lot of that. They do tent and they do treasure hunt. We'll be looking for their best sellers to offset that risk. So we know that part. They're small -- the flip side is because they are small communities, apart from Cost-U-Less, you can't just stack and let it fly. There's only so many communities. If you get it wrong, you can't efficiently mark it down. So we do -- I think we have a long lesson there learned that we're not going to take risk to chase sales. But there, we -- I can't say it better than I think Alex and Dan already have, that we do have a lot of confidence based on what we know we'll sell from what people bought in the last year and continue to buy into '21.
There are no further questions registered at this time. I'll turn the meeting back over to Mr. Kennedy.
Okay. Thanks, operator, and thanks to everyone on the call and everyone at the North West end. It's probably the last time I'll say, see you on the next conference call because that will be the last time I'm on the next conference call. It will be our annual meeting. So do we do a conference call after the annual meeting?
Yes.
We do. Of course, we do. In my dotage, I'm forgetting this. It is time to go.
You have one more.
Anyway, we'll look forward to reporting on another very interesting year for those in our sector, of course, how is it all going to turn out? And Q1 will give us another big window into how we're doing, and we'll look forward to talking about it then. Thanks very much.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.