Loblaw Companies Limited (TSX:L.TO), in its Second Quarter 2024 earnings call on July 25, 2024, announced a revenue increase and a significant legal charge due to a class action settlement. The company reported a 1.5% rise in revenue to $13.9 billion and a 4.5% increase in adjusted EBITDA. Adjusted diluted net earnings per share grew by 10.8% to $2.15. Despite the legal settlement related to past price-fixing allegations, Loblaw remains optimistic about its financial outlook and customer momentum heading into the third quarter.
Key Takeaways
- Loblaw took a charge of $156.5 million related to a class action lawsuit settlement, with no expected impact on consumer prices or financial outlook.
- Revenue increased by 1.5% to $13.9 billion, with a 4.5% increase in adjusted EBITDA.
- Adjusted diluted net earnings per share rose by 10.8% to $2.15.
- Online sales saw a significant increase of 14.2%.
- The company anticipates improved same-store sales and positive tonnage in Q3.
- Loblaw plans to open 20 new pharmacies and expand pharmacy-led clinics nationwide.
- The company's emission targets have been approved by the Science Based Targets initiative.
Company Outlook
- Continued focus on delivering value, quality, and service to customers.
- Plans to open more stores and expand pharmacy-led clinics.
- Initiatives like low prices, throwback pricing, and aggressive flyers to drive growth.
- Introduction of new apparel brands in select stores.
- Government support for expanding pharmacy services.
- Strategic pillars include retail excellence, driving growth, and investing in the future.
Bearish Highlights
- Front store same-store sales declined by 2.4%.
- Elimination of multi-buys may slightly negatively impact sales growth.
Bullish Highlights
- Pharmacy and healthcare services drove strong growth in the drug retail business.
- Increased customer traffic in hard discount and market divisions.
- Specialty drugs and new primary care services driving top-line growth.
- Positive performance of "hit of the month" and Marvel (NASDAQ:MRVL) programs.
- Growth in the hard discount division and plans to open more No Frills stores.
- Maxi stores in Quebec gaining market share and outperforming expectations.
Misses
- Softness in food same-store sales due to late season start and tougher tonnage comparisons.
- Gross margin expected to increase in Q3 but not as much as in Q2.
Q&A Highlights
- The company is satisfied with its overall sales trend and the stronger start to Q3.
- Shrink rates have improved, contributing to a strong gross margin in Q2.
- SG&A rates are expected to be flat in Q3.
- Anticipation of growth in national brands due to increased promotional support.
- Disposal of $400 million worth of property planned for the year.
- Financial services segment saw a swing in revenue growth and margins, with ongoing benefits expected from a MasterCard contract.
- Reduced credit card spending outside of grocery stores affected the top line.
- Q3 results to be released on November 13th.
Full transcript - None (LBLCF) Q2 2024:
Operator: Good morning, ladies and gentlemen, and welcome to Loblaw Companies Limited Second Quarter 2024 Results Conference Call. [Operator Instructions]. This call is being recorded on Thursday, July 25, 2024. I would now like to turn the conference over to Mr. Roy MacDonald. Please go ahead, sir.
Roy MacDonald: Thank you, Laura, and good morning, everybody. Welcome to Loblaw Companies Limited second quarter 2024 results call. As usual I'm joined this morning by Per Bank, our President and Chief Executive Officer; and by Richard Dufresne, our Chief Financial Officer. So, before we begin the call, I'll remind you that today's discussion will include forward-looking statements, which may include, but are not limited to, statements with respect to Loblaw's anticipated future results. These statements are based on assumptions and reflect management's current expectations. As such, are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations. These risks and uncertainties are discussed in the company's materials filed with the Canadian securities regulators. Any forward-looking statements speak 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 events or otherwise, other than what's required by law. Also, certain non-GAAP financial measures may be discussed or referred to today, so please refer to our annual report and other materials filed with the Canadian securities regulators for a reconciliation of each of these measures to the most directly comparable GAAP financial measures. And with that, I'll turn the call over to Per.
Per Bank: Thank you, Roy, and good morning, everyone. Before we get to our quarterly performance, I would like to touch upon the settlement of class action lawsuits that we jointly announced with George Weston (TSX:WN) Ltd. this morning. This matter concerned our involvement in an industry wide price fixing arrangement between 2001 and 2015 on certain package based products. As a reminder, upon discovering the arrangement in 2015, we self-reported immediately to the Competition Bureau and have been cooperating ever since. We have apologized for this price fixing behavior and reinforced the rigorous action taken at the time to address the issue including overhauling how pricing is managed and significantly enhanced our compliance programs. These measures which remains in place today are industry leading and include the establishment of an independent compliance office reporting to the Loblaw Board of Directors that has oversight of day to day compliance with laws and policies including pricing practices. The settlement is subject to the finalization of a binding settlement agreement with the plaintiff lawyers and court approval. I'll now turn the call to Richard to discuss the quarter.
Richard Dufresne: Thank you, Per and good morning everyone. I will just add that we are pleased to be able to put this issue behind us and both Loblaw and George Weston. It's over. In 2024, we are seeing the normalization of our retail business. The pandemic and the subsequent period of high global food inflation are now behind us. As we compare our performance this year versus last, we see our same-store performance slowing. At the start of 2023, food inflation was over 11%. It's now back to normal. Categories like cough and cold which have been running at elevated levels for a while are stabilizing. We expected this last year and as such built our 2024 plan to reflect normalization while continuing to deliver our financial framework. Our Q2 results demonstrate that. We continue to deliver steady operational and financial performance. Our performance continues to reflect our ongoing commitment to retail and excellence and our continued focus to provide value to our customers. On a consolidated basis, revenue grew by 1.5% to $13.9 billion and adjusted EBITDA increased by 4.5%. Adjusted diluted net earnings per share grew by 10.8% to $2.15 On a GAAP basis, our net earnings declined by 10% or $51 million reflecting the impact of the charge related to the class action settlement. In terms of the financial details of today's announced settlement, the incremental cash impact to the company is $156.5 million plus related legal and professional costs all of which Loblaw has taken as a charge this quarter. The remainder is comprised of $96 million, previously paid out by the company under the Loblaw Card Program. The company will fund the one-time cash cost with cash on hand. First and most important, this payment will not impact prices for consumers. At both Loblaw and George Weston, these payments will not impact the company's currently disclosed financial outlook, its capital expenditures including dividends and buybacks. Drug retail absolute sales increased 2.4% and same-store sales grew 1.5%. Pharmacy and Healthcare Services (NASDAQ:HCSG) grew same-store sales by 5.4% driven by broad strength in prescription and healthcare services. Our specialty acute and chronic prescription growth led our pharmacy numbers. Additionally, customers continue to respond very positively to the convenience and expanded level of primary care we offer through our more than 2,100 pharmacies across the country. Front store same-store sales declined by 2.4% lapping growth of 5% last year. Beauty continued to deliver strong growth in particular across the prestige category. We are seeing the normalization of the front store business after a few years of outsized growth. Remember that pre COVID, our front store same-store sales growth averaged around 3%. Headwinds from lower spending on certain food and household items and our decision to exit certain electronics categories will impact front store comp expectations for the balance of the year. That said, we remain pleased by the underlying strength and profitability of the front store and we expect improvement in same store sales in Q3 and Q4. Overall, drug retail sales growth continued to outperform food and have a positive impact on our margin mix. In food retail, we were lapping strong same store sales growth of 6.1% last year. Q2 same store sales grew an additional 0.2% with absolute sales up 1%. At Loblaw, we are committed to do our part to lower inflation. In Q2, our internal inflation on food was in line with CPI. Canada's food inflation was once again lower than overall inflation in this quarter. In fact, it's been lower every month since February. If we look at our average article price data which reflects the actual items purchased by our customers, our actual inflation rate was much lower than CPI in the quarter which aligns with our positive tonnage performance. The consumer shift to discount continues with our hard discount banners outperforming our conventional stores delivering strong results with solid tonnage growth and higher traffic. We remain very pleased with the success of our conversions and the ongoing success of our Maxi banner in Quebec. I know that many of you have visited one of our new small format No Frills in the quarter. It's still very early days but we are very pleased with customer reactions. Looking ahead to Q3, we expect that another 20 new Maxi and No Frills stores as we continue to bring more value to communities across the country. With that said, across our banners, we delivered solid market share performance and our actual food tonnage increased in food retail. Discount continues to grow market share and our conventional stores are outperforming compared to their peers. Right hand side had a negative impact on food same store sales of 87 basis points. These categories remain accretive to our gross margin and we continue to carefully manage inventory levels. Online sales in the quarter increased 14.2% and delivery continues to outperform as a channel. We are very pleased with our online sales penetration. Across food retail, our strong traffic and market share performance are a clear indication that our efforts continue to resonate with customers. More and more Canadians choose our store for value, quality and service. That said, as expected, our food retail same-store sales growth came in a little soft based on last year's performance. Looking ahead, our Q3 is off to a stronger start. We are seeing improved same-store sales performance and positive tonnage. Total retail gross margin was 32% growing 90 basis points. Continued progress in reducing shrink and higher drug retail margin due to sales mix drove our retail gross margin improvement this quarter. Food pricing was not a margin driver. We've continued our focus on reducing shrink and remain pleased with our momentum with both food and drug demonstrating strong improvements. That said, improving shrink remains a major focus and opportunity for us. Turning to SG&A. Our spend rate as a percentage of sales increased 60 basis points driven by lower operating leverage, year-over-year impact of certain real estate activities and labor costs and costs related to network optimization. Our teams continue to do a great job managing costs. Second quarter retail EBITDA increased by $62 million yielding a margin of 12.1%. We delivered strong performance at the bank. PC Financials revenue increased 5.5% driven by growth in the credit card portfolio and strong services growth at our mobile shop. The bank's adjusted earnings before tax increased by $13 million with higher interest income and lower operating cost offsetting higher credit losses. We remain very comfortable with the risk profile of the bank's portfolio. We continue to take a conservative position in our provisioning with a strong and well capitalized balance sheet. On a consolidated basis, adjusted EBITDA increased by 4.5% to $1.7 billion. Our retail free cash flow was $475 million and we repurchased $482 million worth of common shares. Our balance sheet remains strong and we continue to improve our key return metrics. In the quarter, Loblaw's credit rating was upgraded to BBB plus with S&P citing the diversity and resilience of our operating performance. Our return on equity sits at 23.1% and our return on capital at 11.6%. As we look ahead to the second half of the year and specifically Q3, we remain confident in our ability to deliver our financial framework and our EPS targets. Q3 is off to a good start on both sales and market share and gross margin should continue to benefit from our shrink improvements. Our focus on new stores is gaining traction, more are coming soon and we are already hard at work on our plans for 2025. I will now turn the call back over to Per.
Per Bank: Thank you, Richard. We began this year with strong momentum in our food and drug business. In the Q1, we delivered higher customer visits and growth in total units sold. Customer visits continued to grow across our business in the Q2 as our commitment to provide value, quality and service continue to be recognized by our customers. Canadians remain focused on value. The shift to discount continued as sales growth in our hard discount banners again outperformed our conventional banners. We're pleased to see our internal inflation decline for the sixth consecutive quarter. This is helping lower food inflation for Canadians. While this is great news, we know that it is little consolation to families still struggling to meet their household needs. To address this, we're always working to deliver even greater value and affordability across our store network. For example, in our hard discount division, our team opened 14 new Maxi and No Frills stores in the quarter introducing exciting new programs aligned with our commitment to providing everyday low prices. We introduced and expanded programs like throwback pricing, more aggressive flyers and more everyday low prices. Also in the quarter we eliminated multi-buys in all our Maxi and No Frills stores. This change means that our customers can now get great value from purchasing only one item instead of having to purchase several items to get the same savings. This was an issue for many discount customers. It is regular feedback that I receive as I talk to customers in our stores. We replaced this program with everyday low prices on individual items. This decision is absolutely the right decision for our hard discount customers, but it will be a slight headwind on our sales growth this year. Where counter most customer traffic and tonnage were both up as we continue to gain market share in the quarter. Across our super and market banners, we continue to provide a very strong full service grocery offering. Retail excellence plays an important role in our operational and financial success and differentiate our conventional grocery business. The team has been busy improving our offering and providing more value for full service customers. We have lowered prices and enhanced our assortment in key areas like multicultural, prepared meals, fresh and natural foods. I talked before about our plans to reenergize the merchandise of our right hand side of our stores. We have started to trial some of our new initiatives to create more excitement in this area. In a few of our stores we now offer new apparel brands like Puma, Hurley and Fortnite. We're still very early in this journey, but are pleased with the initial results. I'm pleased to report that our traffic was up in the quarter in both our had discount and market division. This is a testament to the positive customer response to all the things we're doing to deliver great value to Canadians. As expected our sales in grocery were a little soft mostly based on last year's strong performance of 6.1% growth. Aside from this, it's hard to isolate one specific factor for the softness. As we begin Q3 with a stronger start, I want to highlight our new promotion. Last quarter I talked about the success of our Hit of the Month promotion program. That success continues in Q2 with unbeatable offers on nine popular grocery items. Today, I'm super excited to announce our new Marvel program coming to all stores in August. So if you're not a big Marvel fan, be prepared that someone behind you at the checkout will be tapping you on your shoulder asking if they can bring your trading cards home to their kids of course only if you don't want them. So who says you shouldn't have fun shopping? Turning now to our drug retail business, as Richard highlighted, we were lapping a very strong quarter last year. The growth also reflects long-term trends that continue to position us very well for the future. This is why our plan includes opening 20 new pharmacies this year and continuing to expand our pharmacy led clinics across the country. In front store, our perceived beauty is still delivering very good numbers. However, I expect to see our sales growth normalizing this year as we will be impacted by lower sales of electronics and household products. Pharmacy and healthcare services continued its momentum from last quarter and with specialty drops and new primary care services leading our top line growth. There seems to be a steady stream of announcement across the country showcasing the impact of pharmacies providing care for patients. The Nova Scotia government reported that pharmacy clinics have contributed to a nearly 10% decline in emergency room visits for non-urgent or less urgent cases. Quebec Table Bill 67 giving pharmacists more power to serve as one stop shop for people with minor health problems or common illness including prescribing certain drugs and extending prescriptions, and yesterday, Ontario announced that it's looking to expand the ability of pharmacy to provide patient care by treating additional common ailments, administering more vaccines and performing more point of care testing. This quarter we are proud to announce that the Science Base Targets initiative or SBTi has approved Loblaw’s emission targets around the reduction of Scope 1 and 2 emissions 50% by 2030 and our commitment that suppliers representing 70% of our total spend will have Science Base Targets by 2027. This is important as you recognize that our plans and ambitions are the highest global gold standards. Looking ahead, our focus remains on our strategic pillars of retail excellence, driving growth and investing in the future, while at the same time embedding ESG into everything we do. Our success allows us to make important investments into growth areas, operational efficiencies and in protecting our planet. These in turn allows us to offer Canadians the best value and service. We do remain confident in the strength of our assets and are encouraged by the customer momentum we're seeing into the Q3. We'll now open the call for questions. Thank you.
Operator: Thank you. [Operator Instructions]. Our first question comes from the line of Michael Van Aelst from TD (TSX:TD) Cowen. Go ahead please.
Michael Van Aelst: Hi. Thank you. I wanted to actually start on the drug side of the business. You commented on some of the front store weakness. Beauty still seems to be growing strong, and I'm wondering is the beauty category still growing holding in strong or is it shoppers just gaining market share or both?
Per Bank: So, yeah, the front store is down 2.4 and we are lapping strong sales from last year over 2024 and we will be normalizing over the year. We have seen it mostly being impacted by electronics and household product which of course is low margin, and to your question about prestige beauty, we are delivering over and above the market and are seeing some really, really strong numbers there, while at the same time our pharmacy business continues to be very strong, and it's going to be normalizing during next quarter. We probably won't be positive, but it's going to be better than you saw in Q2 but the high margin categories as the prestige beauty is growing and we are really happy with the numbers we're seeing now.
Richard Dufresne: Yeah, Mike, beauty is very, very strong. Like if you were to isolate one category that always surprises us is men's fragrance is the one that's always growing really high, but yes, so that continues.
Michael Van Aelst: Okay. And then can you update us on your market share in some of the key beauty categories?
Per Bank: We don't have exactly market share in the key beauty categories. But I think it's important to say that these prestige beauty is growing over and above the food sales growth. So the market in total is actually growing with low double digit growth. That's at least what we're seeing. So it's a good place to be and we don't have the market -- the specific market for that and if we have, I'm sure will come back to you.
Michael Van Aelst: Okay, All right. Then on the pharmacy services, obviously, looks like the services are growing pretty rapidly. How is Loblaw's progressing in the rollout of its clinics? And based on some of the new announcements out of Ontario and other provinces, what’s your outlook for the pharmacy services side over the next few years?
Per Bank: We will continue to be as bullish on the new clinics as we were last time we spoke and actually yesterday we opened a new superstore and we opened it with clinics and we saw some really good traction there even the first day without talking about it, and which you are alluding to like the development on in Ontario is really, really great news for the people of Ontario and we do believe that it will provide significant benefits in reducing the pressure in the healthcare system and being better for patients. So we stay confident and at the end of next year we will probably be at around 250 clinics.
Michael Van Aelst: At the end of next year?
Per Bank: Yes.
Michael Van Aelst: Okay, perfect. Thank you.
Operator: Thank you. Our next question comes from the line of Irene Nattel from RBC (TSX:RY) Capital Markets. Go ahead please.
Irene Nattel: Thanks and good morning everyone. Now that Mike's covered off the pharmacy piece, can we please drill down on this food same store sales number? I think fair to say it was weaker than most of us expected. I think we understand consumer trade down, inflation. You mentioned multi-buy right hand side of the store, but there was also the boycott. Can you talk about the puts and takes and where you saw the most pressure and I guess maybe where you're seeing some nice gains?
Richard Dufresne: Yes, Irene. So yes, same store sales look softer than they actually are because of the year-over-year comps, and I think it's worth talking about Q1 and Q2. So Q1, we delivered 3% same store sales but and the year before it was 3%. So it's 6%. So in Q2, we delivered last year 6% and we're 0.2%. So we're essentially flat. So the trend, the sales trend from Q1 to Q2 is pretty much the same. Having said that, there were a couple of factors that impacted sales like in particular, I would call it like, I don't know the wet spring or if you remember May. May of last year, which I do remember vividly was extremely hot and our garden center sales were through the roof, sun care, allergies like were like beating records and so this year, we had made was very rainy and cold and so those categories suffered significantly. So therefore, that was definitely a factor and regarding what you just mentioned in the last part of your question, we did notice a bit of an impact in certain stores in specific markets, but that said at the end of the quarter, things have returned to normal.
Per Bank: Yeah, and I would add that while the overall financial impact was minor, for us every single customer is important to us and one customer loss is one too many and I have spent a lot of time speaking to customers and different stakeholders and I do listen to them because their feedback is really, really helpful and we welcome it, it makes us better. So multi-buys is just one of the pieces of feedback that I have gotten since I came to Canada and it's actually because customers told me that they didn't like the multi-buy. That's why we have removed them. It was the biggest irritant to customers and also therefore we continue to work hard every day to win the trust and loyalty of our customers and I would say that our stores they are in a great shape. Our promotions are better than ever and our prices are really, really competitive at the moment. So I'm pleased that the customers are recognizing that more and more week by week and as we said before both traffic and tonnage is up quarter-over-quarter.
Richard Dufresne: Yeah, Irene, just to give a little bit of clarification. Us removing multi-buys is actually hurting us on sale at first and so but we expect that over time we're going to recover that as customers buy more stuff other than what they were buying.
Per Bank: Yes, think about it, if you have to buy two ketchups and then there will be a time where you have used these two bottles of ketchup and then when that's over then you go back and buy again. So that will just be a time before that sales will come bac, but what is important here is that when you're on a tight budget, we don't force you to buy two bottles ketchup then you can actually afford to buy the mustard because we're seeing a trend in more and more customers, they only have $30, $40, $50 to spend and we want them to be able to spend it on the products that they want to buy. So I think that's why it seems like a little thing, but it's actually a really, really good thing for our customers in our hard discount division.
Operator: Thank you. Our next question comes from the line of Mark Petrie from CIBC (TSX:CM) Capital Markets. Go ahead please.
Mark Petrie: Yes, thanks. Good morning. Just following up on that topic. Appreciate the comment about the stronger trends in Q3 to date for both food and front store. I'm just curious what you would attribute that to, I guess, most specifically on the food side. Is it just a matter of maybe lapping some easier numbers? Or do you think there's something different in how you're presenting to the customer, shifts in competitive environments, that type of thing?
Richard Dufresne: I think to me, it's our strategies are working. You look at hits of the month, which we started in February, like we're starting to get better at it. We're still learning the ropes, but that's definitely resonating with customers, but obviously, last year's performance will also be a factor. If I remember correctly, I think our same store sales in Q3 was 4.5, so lower than six, so that's definitely a factor that's going to drive same store sales in Q3.
Per Bank: And I agree with you that it is a competitive market in Canada. It is really competitive. It has been for the last year and it still is. I just believe that the initiative that we are deploying, have deployed with hit of the moth so far, but also our Marvel program. I'm sure that will excite skill and scale of the entire group also by doing some enterprise promotions. We haven't done that in the past. So Marvel, remember that's across all our stores including Shoppers, and when we do something with our entire store portfolio, we can make something that's better for customers because just promoting like banner by banner instead of doing it altogether, we get more value for our money. So I stay really confident in our strategy going forward and the initiatives that we have. So I believe we have a strong trade plan for the second half of 2024 and stay really, really confident in our strategy and as we have discussed before, it is about growing with our hard discount business, it's growing with Shoppers, 20 new stores and it's keeping our absolute market share with our market and Superstores and we are deploying a lot of initiative in each single part of our business. So growing and keeping cost low and thereby also being confident in delivering our financial framework. So I'm quite excited about the things that we have in the pipeline.
Mark Petrie: Yes, understood. Okay, thank you. And then if I could just follow-up, I wanted to ask about sort of the competitive dynamics specifically in Quebec. Obviously, it's a market where your asset mix in food has been shifting to discount very materially and curious if you're seeing the market dynamics adjust at all, and if there are any different in Quebec versus other parts of the country?
Per Bank: I think on specific on Quebec, I think I'll be guessing too much if I try to answer that question. So let's come back to you on that one.
Mark Petrie: All right, fair enough. Thanks and all the best.
Operator: Thank you. Our next question comes from the line of Vishal Shreedhar from National Bank from National Bank. Go ahead please.
Vishal Shreedhar: Hi. Thanks for taking my questions. Per, I just I want to ask you just to, you know, to get your perspective, now that, you've been at Loblaw for some time. Obviously, you've made a lot of changes at the grocery side of the business, some of them fairly significant. On the Shopper side, not as much. Shopper's is a little bit of a unique Canadian business with the high low proposition and the strong beauty. Wondering if that's something that it just takes more time for you to familiarize yourself with the offer or is that more of an endorsement of the model and you think that Shoppers as it is and the drivers that it has?
Per Bank: No, that's a very, very good question. Because when I came to Canada a year ago, I was really looking deeply into the Shoppers model and I was like a little bit suspicious in the beginning because how good was the model, and the more and more I dig into the Shoppers model, the more excited I became and the less I wanted really to change. So we have a strong plan, we have a strong strategy in Shoppers and that's also really, really important for me why change a winning model. So I don't want to change just for the sake of the change. So that's why we stay true to the model that we have, but Richard and I, we did do one change. So I think we discussed with Jeff from Shoppers that we want to do more clinics. So I think on the last call that we said okay, go ahead, fill as many clinics as we can cope with because we are seeing that, that does help Canadians. So that's one of the changes that we have made. Then also Shoppers, they're now engaging in our enterprise different promotions. So yeah, we have not changed as lot, but that's more a testament to the model that we have is working, and I would say the same that yes, we made a lot of changes to the business but the business I took over was in a very good shape. So there were lots of places where we are world class just to talk about our control brands, our supply chain, the way we run our stores, the financial rigor we have around controlling our inventory. So lots of things that works better. I'm more being focused on what can we do even more to give customers value and that's where we focus going forward.
Vishal Shreedhar: Okay, thank you for that perspective, and just another Richard, once upon a time, there was a perception that the Shoppers side of the business was had an ability to hit its targets more consistently perhaps because of more consistency across the store formats and other reasons. As these businesses, Loblaw and Shoppers, get more integrated, have you noticed the performance gap, call it, if that's a fair word, term to use? Has that has that tightened up or are the businesses still performing good?
Richard Dufresne: Good question. Like I'd say I'd see our ability to forecast and manage has overall gotten better throughout the organization. So that's benefiting both Shoppers and Loblaw, but each business has different dynamics. Those dynamics remain. So the dynamics that are sort of linked to Shoppers remain like when we talk about don't know, expanded scope of care or specialty drugs and the growing population that's getting older, those are sort of tailwind that Shoppers have that's not the same in the food side. So those things continue.
Vishal Shreedhar: Okay and maybe if you can give us an update on the smaller No Frill stores and how those are performing versus expectation?
Per Bank: Yeah, they are. They're doing really, really well. It's early days, but the two stores that we have down on Toronto, we visited those with our Board this week and they're doing so well and I spoke to a few customers in the stores. So one customer I spoke to, she told me that she was really, really worried that this store will be congested. I said why? Yes, because I'm speaking to everyone I know about how great this store is. We needed a small hard discount in this part of the town because we want access to lower prices and this is exactly why we're doing it. We are giving more Canadians access to lower prices and we're doing it by getting into sites that we wouldn't have considered before because we're going down to even down to 8000 square feet and even going down to 8000 square feet to 10,000 square feet, 12,000 square feet, we managed to get 5000, 6000, 7000 of products into those stores so customers can do a full shopping trip, and if we compare this because what is 5000, 6000, 7000 products, if you compare that to the General retailer, they would have about 3000 products in their stores. So it's a great offer to customers and this is exactly what we want to hold down on and top down on and do more over the next years and in the next quarter as Richard is talking about, this quarter we're opening almost 20 new No Frills and in the Q4 another 17.
Vishal Shreedhar: Thank you.
Operator: Thank you. Our next question comes from the line of Tamy Chen from BMO (TSX:BMO) Capital Markets. Go ahead, please.
Tamy Chen: Hi. Good morning. Thanks for the question. Going back to food same-store sales for one second here. I guess, I'm just surprised that weather was material enough for you to call out. I don't know if call last Q2, the very hot May was talked about. So, the tonnage performance here, the bit of softness, I mean, there was, I guess, you would call it no other factor. It was it was really just the weather dynamic and if I think about your true tonnage in this quarter, Q2, versus Q1 of this year, sorry, Per, I think I heard you say it was up sequentially, but it seems at least on our end, it might have been a bit down sequentially. So can you just confirm that?
Per Bank: No, yes, that was quarter-on-quarter like last year, so Q2 last year I was talking about we were not I didn't compare it to Q1 this year and it is really hard to single out one factor. So yes, Richard mentioned that the season started later than it did last year, that's one impact, but it is a lot of different reasons why our sales is a little bit softer, but on a two-year comp basis, we are still running strong about six like we were in the Q1 and we're also lapping a bit of easier comps in the Q1 on market share. So overall, we are pleased. Would we have liked a little bit of more and more sales? Yes, but still we are happy with what we have and even more pleased with the stronger start into Q3.
Richard Dufresne: Yeah, the point that Per mentioned is actually relevant, like our tonnage performance in Q1 was particularly strong, but it benefited from our activities, but also benefited from the fact that Q1 of last year was weak. So we had an easier comp from a tonnage perspective, which we sort of fixed in Q2 of last year. So it made this quarter a little bit tougher to cycle from a tonnage perspective, but we still were able to grow it. So we're pleased with that. So for us, like sales trend is heading in the right direction year-to-date and that's what we're focused on and that's what we're saying that when we enter Q3, we feel good about hitting our framework.
Tamy Chen: Okay. Thank you for the clarification there. I'd like to try out Quebec as well is, the Maxi, can you talk about, clearly, you benefited from share gains there from doing that. Can you talk about the locations you're converting now? What the uplift is like versus the previous ones? And, the first Maxi that were converted, have they been still trending like they were when you had first done the conversions? And do you see any material competitive response to all of this?
Richard Dufresne: So yes, the new stores continue to perform really well, still way ahead of sort of prototype expectation for a normal conversion, but yes, also we're getting to the tail end of the conversion. So the lift we're getting is not as strong as the first one, but the first ones we're getting was like crazy number, north of like 100% plus per store, but the numbers that we're getting are really good. We're gaining significant market share in the products. We're not talking basis points here, we're talking percentage points and so we're going to be coming to the end of the conversion program or close to by the end of this year and now we're starting to supplement it with new stores. So we have also new Maxi's that are going to be opening this year that's going to further solidify our presence in the province.
Tamy Chen: Okay. And the last question I've got is on gross margin. It's so strong this quarter. I mean, I mean, aren't you -- haven't you, covered basically the headwinds from shrink just by that magnitude? So I'm trying to remember last year.
Richard Dufresne: Yes, that's a great question. So our shrink in Q2 of last year was the worst, okay. So therefore it was an easier comp from a shrink perspective, but our teams have been working hard and they've made significant progress on shrink. So that's why we got such a big lift in gross margin in the quarter. Having said that, like that -- those shrink-led numbers now are running at lower rate than last year. So you're going to still see that in Q3, but albeit not to the same extent. So gross margin is going to be up in Q3 quite nicely, but not to the same extent as we saw in Q2. That together with our improved same-store sales that we talked about and I've also said in the past that our second half from an SG&A perspective is going to be better. So stronger SG&A performance, stronger gross margin and stronger same store sales that will allow us to hit our framework.
Tamy Chen: Thank you.
Operator: Thank you. Our next question comes from the line of Chris Li from Desjardins. Please go ahead.
Chris Li: Good morning, everyone. So I wish I think you answered a lot of the question I was going to ask you. Just maybe follow-up on the SG&A rates. I think previously you have said that you expect the rate to be more or less flat, for the full year. So based on the first half result so far, I mean, this would imply your SG&A rate will likely be down a little bit, maybe 10 to 20 basis points just based on my math. Is that kind of what directionally you're referring to?
Richard Dufresne: Yes. But like I don't have visibility in Q4 yet to that level of specificity, but I think I can confidently say that at least for Q3 it should be flat.
Chris Li: Okay. And I think you mentioned last time that you do have some levers you can pull in the second half to achieve that. So it sounds like you have .
Richard Dufresne: Yes.
Chris Li: Okay. No, that's helpful and then maybe just going back to the gross margin again. So it sounds like Q3 is gonna be up, but not as strong as Q2. Is that what you're saying?
Richard Dufresne: That's exactly what I said.
Chris Li: Okay. Perfect. And then just so okay. And then maybe just on the I'm just going back for the food, same store sales one last time. So, yeah, you made a good point, like, on a two-year stack basis, you know, Q2 was 6% which is same as Q1. So that's good. You mentioned Q3 today, it's better than Q2, but if you look on a two-year stack basis, you seeing kind of running about the same rate like 6% in Q3 as you've seen in Q2 and Q1?
Richard Dufresne: Sure. Hope so.
Chris Li: Okay. That's helpful and then maybe, Per, just, again, a couple of follow ups on the pharmacy clinics. I mean, overall, how are they performing relative to your expectation? I'm thinking in terms of both the frequency of patient visits, per day and also, you know, sales lift that you might be seeing from just incremental traffic to the stores. How are those metrics trending versus your expectations so far?
Per Bank: No, they're continuing to deliver exactly as expected. So of course we set out some criteria when we improve these new clinics and when we go into our capital meeting and improve them. So they're living up to it and some better than others, but in average they're actually doing better than our expectation. Also helped by the prescribing is up by 40% to last year. So very good, we're pleased, we're going to continue to build new clinics and of course what is underway in Ontario is also going to support this.
Chris Li: Okay, and again, that was my other question is, as you continue to get expanded school of practice from the provinces. Just from a capacity perspective, like, at on the ground level for the pharmacist, overall, like, do they have sufficient capacity to take on additional responsibilities? I know you guys have been making some investments in centralization, and etcetera. So just, yeah, I wanna see, like, from a capacity perspective, are you guys in a good position to take on more responsibility?
Per Bank: We are in an okay position, but of course if things change then we're also going to build up capacity, but at the moment, we don't have a capacity problem and we don't expect to have one going forward.
Chris Li: Okay and just a couple of last ones, if I were to switch back to food, just wondering as inflation continues to moderate a little bit, have you been able to get more promotional support from some of your vendors since I'm sure they're also motivated to drive volume growth?
Per Bank: Yes. It's a really good question because what we are seeing that the big CPGs, they're really looking for sales and that's also why that we are expecting that the tonnage and the growth of our national brands will grow in line with our control brand this year. So even if we're seeing that our own name is growing a lot, then the national brands will grow a lot because it's going to be supported by some promotional support. That's also why we can do it ahead of the month as we can because we're selling so, so cheap and they just want the volume and I think you know that if you're looking at some of the big players out there.
Chris Li: Okay, that's helpful. And Richard maybe last one for you. If I'm reading your financial statements correctly, it looks like you guys have sold about $59 million of properties with another $33 million, held for sale at the end of Q2. I think in your statement, you mentioned you're still on track to dispose about $400 million, of property this year. Is that so you do expect a step up in the second half in terms of property sales. Is that correct?
Richard Dufresne: That's correct.
Chris Li: Okay. Great. Thanks very much.
Operator: Thank you. [Operator Instructions]. We have a follow-up question coming from the line of Michael Van Aelst from TD Cowen. Go ahead, please.
Michael Van Aelst: Yeah. Thank you. So just a question on the financial service side. Can you explain that swing in the Financial Services revenue growth and margins when you look at Q1 versus Q2? Q1 seemed quite a bit stronger.
Richard Dufresne: Yes. So like we signed a MasterCard contract, Mike and so we got significant benefits in Q1. Now what we're seeing going forward is the ongoing benefits. So the runway to see now should be the one that continues. Having said that, Michael, like the key driver of profitability of the bank is the ECL, which is a black box thing and so we never know how ECL is going to move quarter-over-quarter, but in a more, I guess, softer economic environment like it should trend slowly. So if that continues, you should see the same trajectory going forward. I hope that's helpful.
Michael Van Aelst: Yes, and was ECLs higher in Q2 than in Q1?
Richard Dufresne: No, it's in line. It's growing on plan like we have a plan for ECL and so far it's growing on plan.
Michael Van Aelst: Okay. And how about on the top line?
Richard Dufresne: On top line, there's a bit of noise, but like the big picture point I'd like to spend share with you is like that our growth in spend in the credit card is not growing as fast as we'd like and it's a testament to the economy. People are spending less outside grocery stores, so that's affecting the top line, but other than that, it's just noise between Q1 and Q2.
Michael Van Aelst: Thank you, Richard.
Operator: Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. MacDonald for final closing comments.
Roy MacDonald: Great. Thank you very much. So thanks everybody for your time this morning. Any follow-up questions, drop me an email or give me a call, and if you have your calendar out mark Wednesday, November 13th, when we'll be releasing our Q3 results. Thanks everybody and have a fantastic day.
Operator: Thank you, sir. [Operator Closing Remarks].
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