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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good morning. We would like to welcome everyone to Alcanna Inc.'s Second Quarter 2021 Earnings Results Call. [Operator Instructions]A copy of the company's earnings press release and management's discussion and analysis is available on their website and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to the discussion during today's conference call. All amounts discussed on today's call are quoted in Canadian dollars.I will now turn this call over to Mr. James Burns, Alcanna's Chief Executive Officer. Please go ahead, sir.
Thanks, Laurie. Good morning, everyone, and I appreciate your taking the time to listen in on our results in the middle of the summer. Needless to say, if we'd have known that the first -- second quarter of this year we would actually be flat to the second quarter of last year, we would have been extremely surprised and never guessed that. So we're very encouraged by what's happened and continues to happen in the marketplace despite smoky weather and so on.It's -- sales have been robust. I think we've seen that even though lockdowns are over in Alberta, the fact that there's no lockdown doesn't mean that people aren't necessarily comfortable, yet, or -- and even if they are, are up going out to the same degree as before. And even when they do become so, there'll be just the economics and lifestyle changes of eating at home and entertaining at home have become somewhat more entrenched than they were prior to March 2020, which is all things that we see as a very positive tailwinds for our business going forward.We're particularly pleased on being able to retain margins. Even though it's a competitive marketplace, again, where we're the best in institute marketing and promotional pricing on occasion margins have largely stayed the same, within a range of where they were before. So again, that's encouraging.The company is on track as we have announced before to build its 4 Wine and Beyonds. They're -- once just finishing construction, they should all be open within a couple of months, which will contribute significantly to 2022 EBITDA.And with that, I will turn it over to you, Laurie, to check for questions, please.
[Operator Instructions] And the first question is from John Zamparo from CIBC.
I wanted to start on the liquor margins, please. These were flat on a continuing basis, and you've made significant improvements on this metric over the past couple of years. So I'm just wondering, is there still room to grow it meaningfully? And if so, what would the drivers be that remain that would help you get more traction on that line item?
We have made a lot of progress over the last couple of years, John. It's been encouraging for what we've done, what the team has done to be able to bring the margins up to where they are and continue to keep the customer traffic in all of our stores. It's been a very positive sign that we've been able to accomplish over the last couple of years.Where they go from here? I think we're probably in a state where you won't see material growth from this point forward. There's continued improvements that we can always do with private label, which has been a good part of the increases that we've realized and will continue to be part of the increases as we go forward. But you're not going to see a material jump from here at this point in time.
Yes. Yes. We'll continue with -- as private label continues to grow, that helps margins as LTO purchasing and taking advantage of onetime price reductions in the market and using our balance sheet and our warehouse to that. We can always -- it will still have a room to go up a little bit, but incrementally no, not big -- that big prices.The prices may have to come up in the marketplace for -- to the consumer, but that will be driven by cost. It's manufacturing prices. And the prices that we get charged -- that the vendors charge. Their costs are going up, everything from shipping to glass to packaging as we all know. So -- but that's a little different.
Okay. That's helpful. That leads to my next question was on inflation. Are you willing to share like a percent increase when you roll in all of those costs together? Or at the very least, how would you characterize it versus prior years? And do you think you can offset all of it with pricing?
It's early days for pricing. We haven't really seen. It's just starting to come from the vendors right now, John, to be honest. They are -- had -- going through their own challenges they had, even though retail liquor was -- continues to be very high during this pandemic era.Overall, a lot of them had declines in production as they lost their on-premise, and therefore, their overall. So the increases are just starting now. So I don't think we'll know for 6, 9 months. And I -- we'd anticipate that we would -- that we'll pass them on to the customer as well the competition. We're not going to use it as an excuse to take margin when the prices are going up anyway. But most likely, as you say, it's inflation, it's system-wide, and we think it'll just inevitably be passed on as is going to happen in groceries and food and almost every other product is well documented.
Yes. Understood. Okay. And then one more for me, please. On the Wine and Beyonds banner, is it fair to say that results from that banner continue to outperform the overall network? And any other comments you can give on performance within Wine and Beyond versus the discount space would be helpful.
Yes. The Wine and Beyonds continue to do very well. A ton of customers have discovered that brand or rediscovered that brand through the pandemic, and they've stuck with us. And so we're seeing relatively good results in that banner. The other banners are doing very well as well, but we're very encouraged with how the Wine and Beyonds are doing. The team has done a terrific job of servicing the customers out there and finding ways to make more and more money as we go through the last 18 months.
The next question is from Graeme Kreindler from Eight Capital.
I wanted to ask about some of the moving parts within the same-store sales growth when we're looking at versus the prior year and 2 years ago. What does that look like in this quarter in terms of basket sizes and number of transactions? I know things held in flat, lapping the peak pandemic. But has there been any marketable change there within those components?
When we compare against 2020, Graeme, there is significant changes. Last year at the beginning of the pandemic as it happened in grocery and other -- in other retail environments, the customer count dropped significantly in the early days and the basket size increased substantially as people were looking to leave their house far less frequently and stock up when they did go out.So when we go fast forward to 2021, what we've seen is very comparable customer flow and customer traffic to 2019 and comparable basket size, still elevated basket sizes compared to 2019. So people are back in the habit out here in Alberta, at least, with how frequently they visit retailers and liquor, in particular.
Okay. Understood there. David, then as a follow-up, is there any commentary about how that same-store sales growth trended through the quarter? And what that looked like exiting June just given how the landscape might have changed, COVID cases, and potentially, some of the weather impacts?
Yes. Alberta started lifting restrictions in June. And so up until June, we were seeing some small increases. And then when the restrictions lifted, we saw some small decreases, but nothing material like a barbell on either side of that spectrum.
No. No. And again, it's very -- we're very cautious comparing to 2020, especially when you start to -- getting in-time increment less than the whole quarter because 2020 was a roller coaster. Panic for the first 2 weeks, panic buying and stocking, then everybody stayed at home, figuring this thing was going to last a month and went through everything they bought in the panic buy. And so sales were -- so it's been almost on a weekly basis.You can just go back to whatever front page story there was a year ago on the week, and either it changed or we had good sales or poor sales last year. So -- and it just flipped this year. So it's much more of a normal just like '18 or '19 for us as -- rather than we're well, well up, almost 11% over what '19 was, which we'd take all day long. It's exceptional.
We're back to monitoring weather. Weather is what's driving our business or the smoke or what is not, it's been happening in the province. Those are much bigger drivers these days.
And in summertime. Yes. Yes.
Understood there. That's actually a good segue to my last question. With respect to the weather there, there will be the typical weather patterns that impacts business. Can you comment on, particularly, the wildfires and the smoke, how that's had any impact so far? Or whether that's changing behavior? Or what that might look like in terms of Q3?
I think just anecdotally, just everyone knows from just the people around the office and our teams in the stores. People want to -- when the index gets way up to 8 or 9 out of 10, people tend to not be out in the backyard so much or be out and about so much. It's just -- it's brought on comfortably. You cough and eyes water.And if we still own stores in British Columbia, we had a very, very big business in the interior BC, which we no longer own, I think the situation would be pretty dire on many fronts. But for us in Alberta, it comes and goes and lasts for a few days in certain parts of the province and gets blown away again with the weather. So it probably has an impact.But on the other hand, we've had a very, very dry summer and very much hotter and sunnier than normal. So the weather has been very cooperative for us on that basis after -- the last year was just last year. It's just its own little weird world, but after '18 and '19 where the summer was wet and cold here. So the weather has probably been between smoke on the one hand and a nice, great, normal weather, if you want to call it that, on the other hand, it's kind of a wash for us, the year so far, which is good.
[Operator Instructions] The next question is from -- sorry, the next question is from Kyle McPhee from Cormark Securities.
Maybe just to start, a follow-up on the Wine and Beyond. So you gave a good color on what we can expect for openings the rest of this year. Can you remind us on plans and targets for the next couple of years?
Yes. Well, we anticipate -- we're trying to do 4 or 5 for next year. We're looking at sites right now. And we don't want to jump into it willy-nilly, but we've got the targets identified. I'd say we have 1 finished, 2 at the landlord negotiation stage. And I think as we've mentioned before, Kyle, and we've discussed, since COVID kind of decimated the retail environment for -- not for us, but for a lot of other retailers, the deals we're able to get from landlords and landlords' willingness to work with us on derisked rent structures for new sites is -- it's just night and day difference than prior.So leases are a little more complicated to negotiate because we not just have to take whatever user is rent that he want to charge us, but we can negotiate and are -- have been successful in negotiating more participation rents where it derisks the capital investment on Alcanna's part, which we're very pleased to do.So we're looking at -- that's -- hopefully, we'll have the 4 for next year. And hopefully, city halls across this country will get back to work and start processing, building permits in anything like normal time again. It's all very well to have leases and sites. But if your building permit is sitting on an empty desk for a month-after-month, it doesn't do you much good.So -- but again, as this thing turns to its next phase, pandemic, hopefully, that will start to mitigate. The backlogs that are there will get caught up, and we'll be able to get our permits on time. And then for the year after, for 2023, again, we're looking at 4 to 5 locations. That's more theoretical right now. We know the general trade areas we would go and geographies, but early days for those yet. So we're really concentrating on finishing up for next year, this year done.
Got it. And then in terms of the ones opening up this year, can you -- I mean, how long does it take to typically ramp up a Wine and Beyond when it opens? Or in other words, how long does it take to get to that mature sales target per store that you'd be wanting to get to?
By the end of the first year, we're probably 85%, 90% of the way there. Customers love these stores. We love these stores. And so they flock to them pretty quickly after a strong marketing launch campaign. And then it takes -- they have good growth, much higher than inflationary growth for a couple of years thereafter.
Yes. No, we launch aggressively and make sure you -- people come and use pricing to launch for a few months. So they will not contribute materially to EBITDA for 2021 nor would we want them to. We want to get market share, introduce them to -- we'll have such 3 more for Calgary that only has 1 now and 1 in the extreme north of the city. I mean extreme north. So a lot of people have maybe visited it once or never.So there's a lot of trial and error and people coming out, and we will price and market accordingly to get people to really make it worth their while to come and see. Once we get them in those doors, I think we've brought them as we've shown during the pandemic with increases of -- I guess, we haven't really been announcing it, but I mean, staggering percentages from the year before, same store, and staying that way.So we anticipate these were great locations. We've been working on some of them for a very long time and weren't able to get rents that made sense until now with, as I mentioned, just a little earlier. So we're very excited about that.I have one in Kelowna. I was supposed to open right around now, which I think there's some kind of -- in hindsight, it sort of dodged a bullet that it didn't because it's -- things are not doing very well there right now with the smoke and so on in Kelowna, but it will be opening later in September, hopefully, that fires issues -- some rains come and cooler weather calm that down by then. And we're expecting that one to do extremely, extremely well. That could probably contribute this year. I mean -- I think that's going to be a whole run in that sort of year.
Okay. I appreciate that color. Shifting gears a bit, I just wanted to dig in a bit more on the COVID tailwind driving that consumer behavior change that's benefiting you, at least, temporarily. So on this, you've mentioned your same-store sales are up 10.6%, first off, normalized world back in Q2 of '19. Do you think that entire 10.6% is the COVID lift? Or is some of that coming from market share gains as you shifted your store mix more towards the discount model since then? So curious what your thoughts are there, given the portion that may be from market share gains, if that...
Yes. I don't know if we could probably quantify it. But there's -- yes, I agree, Kyle. There's a significant amount comes from continued conversions of Liquor Depot to Ace. The Ace banner is really resonating out here, and it's, by far, our majority banner right now.And Wine and Beyond, even though there's only a handful of stores, I mean, the volumes are so high, and especially, compared to what they were in -- even in '19. I mean close to double in some of them that it will materially affect our overall company results, even if it may be 6 or 7 stores. So we're really -- and that trend continues as we open more Wine and Beyonds, which take market share across the board. And as we continue some conversions from Liquor Depot to Ace in selected stores.
Got it. Okay. So you can't quantify it, but it sounds like some is market share gains. So all these same-store sales that we've seen through COVID shouldn't 100% be reverting in the future?
We would certainly be surprised, you never know, but who can predict anything anymore. And anyone that says they can is crazy. But all things equal, no, we think a lot of it is just how the business has been restructured and repositioned. It fits the times very well. So we're confident that it's -- we're -- we have -- the first half of the year is far better than we would have had the hopes to guess for the -- in the last year. So it positions us very well for the last half of the year.And especially Q4, we were always -- we always sort of expected that, that -- of all the quarters, that would be the one that we might be able to even match last year, never expect in Q2, it would, just because there was the hard lockdown in Alberta for most of Q4 and no family gatherings, no meeting in houses. So there was no Christmas events. That whole fourth quarter sales what we get in our industry just was not there at all. No Thanksgiving, no nothing.So that's obviously now all over with -- and I can't really foresee even if restrictions are put back on here in Alberta that it would go that far again. So Q4 is always a little good for us. And then this Q2 coming in so well, we're very optimistic for the year.
Okay. Appreciate that color. I just wanted to check in on the theft issues that you had before COVID. With food service channels now reopening, which I think was the end market for the stolen product. Is the theft issue coming back for you at all?
Yes. Yes. None of the restaurants and the bars are open. And again, they're ordering stolen liquor. It's unconscionable. And the things I can't talk about, that we're working very closely with the police and -- to try to get to the root of the main bad actors here.But the measures we've taken at Alcanna, Patronscan, and the high -- like a controlled access ID in high pet stores and so on, both for our staff protection and -- as well as, obviously, just the product loss is making a difference. And in some ways, we have a lot of extra private security that we put on in stores, and I suppose, it's just chasing the problem to some other stores. But that's kind of -- we just have to look after our own team and our own stores. And we've mitigated it to as a greater degree as you possibly can. More to do, though.
Got it. Okay. And then I guess a related follow-up on your corporate OpEx, or I guess, even your store OpEx, is there anything abnormal in there? Or are we at a pretty normalized run rate? And I guess that relates to the theft issue and maybe you have to start spending more on that.
Yes, definitely, in the store OpEx, our selling and distribution is elevated with all of the private securities, as Jamie mentioned. It's -- on an annual run rate, it's not an insignificant amount of money for us. On the corporate side, we're getting back to more normalized levels after being elevated there in Q1. But they're still -- we've been busy. So there's still transaction costs, et cetera, that flowed through into that number during Q2 again.
Yes. I mean we should apologize again. You do this every quarter for the -- these statements are almost incomprehensible, but we don't make the accounting rules. So they are the way they -- the rules tell them we have to present them like -- they're pretty meaningless.
Yes. Okay. And David, just a quick follow-up on the store OpEx. So the theft spending would have been in the Q2 numbers, though. Is that correct?
Absolutely. Yes. Yes. So it's just elevated for that issue.
Yes.
There are no further questions registered at this time. I'll turn the meeting back over to Mr. Burns.
Thanks, Laurie. Appreciate everyone. Have a great rest of your summer, and we'll talk to you again in November. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.