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Good morning. At this time, I would like to welcome everyone to Alcanna Inc.'s Fourth Quarter 2018 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 risks -- 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 with the exception of U.S. same-store sales, which are quoted in U.S. dollars. I'll now turn this call over to Mr. James Burns, Alcanna's Chief Executive Officer. Please go ahead, sir.
Thank you, operator. Good morning, everyone. I'm joined here at our Edmonton Head Office by David Gordey, our CFO; and Paul Reid, President and COO of our liquor business. We appreciate your calling in and your interest in our company. Less than a year ago, Alcanna began our transformation from being a declining business anchored in the past to a dynamic growth-oriented organization. I'd like to provide a brief update on our progress against our objectives. First and foremost, we set out to not only recapture lost market share, but keep increasing sales at the expense of our competition, get customers back into our stores and out from our competitive stores. We had exceeded all our expectations on that front. In the fourth quarter, our same-store sales growth was 7.4% systemwide, numbers we haven't seen since in 6 years, that the numbers achieved in the face of a declining overall liquor retail sector in Alberta and soft Alberta economy. EBITDA was lower than we had hoped, but a large factor in that was the fact that we are carrying the overhead for 2 distinct businesses alcohol and cannabis. And cannabis, as everyone knows, was stalled almost in the outset by supply shortages and the freeze on new licenses. Second, establish a leading position in cannabis retail. Our 5 NOVA cannabis stores that opened on October 17 came out of the gate fast and have stayed that way with industry-leading numbers. The supply shortage has halted new licenses in Alberta, but we know from our sales versus those being reported by our competitors that our best-in-class real estate locations will ensure NOVA cannabis stays in a leading sales position in the industry once licenses are again available. In the meantime, we continue to refine our operating model and build out the rest of our 37 Grade A real estate cannabis leases to be ready when licenses are again opened up. Subject to final government approval, we expect the NOVA cannabis store to be open for business on time, the morning of April 1 at 499 Queen Street West in Toronto. Third, enter the discount segment of the liquor retail market. In the fourth quarter, we announced our new Canadian Liquor Retailers Alliance with Ace Discount Liquor. That transaction closed in early January and the Alliance is now the largest discount retailer in our province with market share gains ahead of expectations even after only 2 months. We anticipate having over 60 stores renovated and operating under the East liquor banner by Easter. Fourth, open new Wine and Beyond locations. We have 2 opening in the second quarter of this year, May and June, with a further 2 likely by year-end and up to 6 more in 2020, and those are just in Alberta. We are closing in on our first BC location and ready to launch a significant number in Ontario. If the government's alcohol retail reforms expected to be announced this spring permit us to do so. We also invested in people and processes to drive our business going forward, reset our preferred label program to adapt it better to the markets where we operate and continue the implementation of our ERP. In short, we did exactly what we said we would do, and we are going to keep doing it in 2019. In the first and second quarters, we will enhance efforts to win even more market share and expand the alliance with more partners. But by the third and fourth quarters, we expect to be in a position to start translating footsteps through the doors into growing and sustainable margin dollars. By 2020, our liquor business will be in full swing, renewed and supercharged. Our strong balance sheet will have created a strong income statement, as we have said it would. And with that, I'd like to turn back to the operator for questions. Thank you.
[Operator Instructions] And your first question is from George Doumet from Scotiabank.
I'd like to spend a little bit time on the gross margins. So maybe we can start with the liquor business. Just wondering how we should think of the, I guess, the level of promotion activities for the remainder of the year? And do you guys expect a reversion to more normalized levels thereafter, is that kind of the right way to think about it? Any color you can share there?
Yes. I would -- it's Paul, George. I would suggest that we're going to see similar performance in Q1 and Q2 aggressively going after market share that we saw in later parts of the year. However, with that said, we started down this road of a very aggressive marketing campaign as a result of our discount stores and the performance we saw at the discount stores to take this to our larger chains in both the Liquor Depot brand and the Wine and Beyond brand. We saw the improvements in overall business in discount and applied those to the existing banners to grow our business. We've learned a lot in the last 4, 5 months of doing thematic marketing efforts. And I would suggest that there is efficiencies and opportunities to improve the margin rates from where we saw in Q4, while at the same time being able to achieve similar sales results to what we saw in Q4. So while, yes, we plan on continuing to be aggressive in our marketing plan and gain market share, there are opportunities to enhance margin rates, but in a modest way. And at the same time, the intent here is to grow market share and grow same-store sales.
The other thing that's going to impact gross margin rate on at least for Q1 and into Q2 as we transition 50 of our Alcanna stores into the Alliance and rebrand them to Ace. We are going to launch those stores with a very aggressive gross margin rate. No different than how we launched Deep Discount Liquor. We're going to go and get market share and then we will slowly move up gross margin.
Okay. That's helpful, guys. And maybe just shifting over to cannabis side of the business. I think we're running 30% gross margin there. I recall you guys had a strategy there to kind of compete with the black market kind of price of that range. I'm just wondering, if we look at that margin number, is there other mix considerations in there as well? Or is that kind of -- is that margin representative kind of our strategy to compete with black market?
That margin, George, is really based on competing with government online business in that we set our prices more or less around where theirs are give or take. We could have used the severe supply shortage situation as we understand some other retailers may have done and charge excessive margins, which are not sustainable in the long run in our opinion, but we chose not to do so and to build customer loyalty with healthy margins, but ones in keeping with where the government's priced.
Okay. That's helpful. And just one last one, if I may. Some pretty significant investments expected this year, I guess, from a CapEx and working capital standpoint. Can you maybe provide us with an update, I guess, as it relates to maybe securing some additional balance sheet capacity?
Yes. So we are well on our way, and we talk about it a bit in our MD&A and our financial statements. We're well on our way with our lenders to renegotiate a new credit facility, and we anticipate having that in place here in the next few weeks. So no concerns on that at all at the point and we disclosed in there that we think we should have upwards of borrowing capacity around $50 million to $60 million between the Alliance and Alcanna going forward.
[Operator Instructions] And the next question is from John Zamparo from CIBC World Markets.
Maybe we could start with the ERP system. It looks like you pushed this back to mid-2020. I think, previously the goal was mid-'19. I would've thought given the challenges in the industry this is something you would want to prioritize to try to improve results. So can you just walk us through your thinking on delaying that project?
Yes. So we had to shift our resources in the third and fourth quarter completely to launching cannabis. And maybe in retrospect, that wasn't the right thing to do given that we only ended up with 5 stores. We were planning to open up many more stores and -- but that's what we did and we probably wouldn't have changed that decision at that point in time if we were back then. So now we are really pushing on the liquor side. We actually have in the last couple of weeks pushed out the implementation to a number of new stores, and we have an aggressive rollout plan for this year. And so our hope is Alberta is on that system this year with BC and Alaska coming online next year. So our goal is Alberta, that's where our business is and we are aggressive on our rollout starting now.
Okay. That's helpful. Maybe we can move to preferred label. So we've been talking about this for a few years. I guess, you laid out some detail in the MD&A, but what makes you confident that this next-generation can really drive results and are there examples you can point to of early success? And maybe if you can share just a percent of total sales on any of the product lines you have private label on?
So I think -- it's Paul. I think on the preferred label side, we entered into the back half of the year in a lighter inventory position than we have previously as a result of trimming down some products that really the market did not want to buy. And we reinvested money into growing that preferred label program into particular products and categories and regions that customers are responding to. We did see a significant increase in business and performance as we increased our inventory position, both through in-store promotional activities, bundling activities and incenting individuals as they buy single items in our stores to buy more than 1 item. We've seen basket sizes increasing significantly, as a result of these promotions. But really the opportunity is in driving margin rates in the preferred label with significant inventory and assortment in that particular area. A lot of work is going to be done on bringing more labels into market and continuing to tie into trends that we're seeing out of national brands to take advantage of the higher margin rates we see out of preferred label products. We'll also see preferred label products moving into the alliance stores as we expand out this program and take advantage of our scale.
We went through -- John, we went through a significant transition in that program this year. We have about 200 items -- we started the year with about 200 items, and we delisted 100 of them. All those -- a good chunk of the Old World wines and then relisted slowly. It takes a while to build the program up. It takes months to organize, getting wine from the wineries into here and so I was really impressed when we got back to 200 SKUs by late fall this year. Our stores got right back up to the same percentage of wine sales as we were last year. And so to go through a huge transition in the program like that and to get back to our levels where we were earlier was a tremendous feat, and it's growing from there. So there's no doubt we see this program growing aggressively. And our goals are to almost double the program as a percentage of our categories in the next year or 2.
Yes. Our senior team has been in close contact developing new partnerships with American buying groups and large retailers, which we think will significantly enhance our product list. And we have a team of I believe 5 people over in Germany right now at the ProWein Annual Wine Industry, alcohol industry buying conference, which is the biggest in the world by far with the checkbooks ready to, again, greatly enhance our products. But things that get ordered now, we get in the fall. It's -- there is a lag time. So -- but that's the nature of the business but we're really ready to do it and are extremely focused on now which product sell in the markets we operate.
Okay. That's great color. On the renovations, can you talk about the return so far that you've seen on these stores either on a sales lift or just an ROIC basis? Just trying to get a sense of these are very additive to the bottom line? Or are they more defensive in nature?
We've been actually really happy with the performance out of the renovating stores contributing almost 35% gains in same-store sales out of those reno locations. I think the opportunity in these renovated stores is not just the spike that we're seeing on top of last year's numbers, it's the increased customer count and footsteps that we are seeing as a result of brighter stores, better looking stores and just a more enjoyable shopping experience.
As I noted in the MD&A, this is the first quarter where Liquor Depot has seen positive same-store sales. And part of that was due to the promotions that Paul and his team were running, but also the renovations. We got a lot of those done between spring and summer and they really started to pay off. So we're happy with the returns, and we're still ensuring we get maximum return as we go through the next few quarters on those stores.
Okay, great. And last one from me. I know there's tons up in the air, but are you able to share your latest conversations with the AGLC? And what's your current expectation on when you might be able to add new stores on the cannabis side in Alberta?
We don't have expectations, is the best way to -- it will be when it will be. The AGLC will have to decide and balance between increasing demand from retailers small and large, who have leases that they're paying, including us, ones they rent on and can't open. On the other hand, the supply shortage here is getting worse not better in terms of products that customers want to buy high THC flour, CBD oil, CBD capsules. Those are in extremely short supply. Our best store on -- off Whyte Avenue in Edmonton, which is our highest volume store. And I think, probably one of the highest volumes in the country just looking at other comparables. We get product delivered once a week on a Thursday and the customers know that that's the day. And it's almost always -- the bulk of the product that people want is gone by that afternoon. Sometimes by 2 or 3 in the afternoon and then we have nothing for 6.5 days. So we are a long way from any stable, sustainable and reliable supply in cannabis. How the AGLC chooses to deal with that with the equally great pressure for new licenses from people, that's really their decision and we will support them whichever way. There is not right way to do it. So we support them whichever way they choose to go. In the long run, there will be lots of licenses and lots of supply. So this is teething pains, and I think we're ready to deal with it.
There are no further questions registered at this time. I'd like to turn the meeting back over to you, Mr. Burns.
Thanks, operator, and thank you for your interest. I would just note in closing that several stand-alone retail cannabis companies have achieved market caps within the range of our entire company based on a handful of stores in a very tight market. And we believe those valuations are justified and commend those businesses because it reflects the tremendous opportunity in the cannabis retail business in the future of which we are and will be a significant part. But if you just do the simple arithmetic, that says that essentially our entire liquor business is valued very little to 0 at current share prices, and we find it very interesting and encouraging for the future. That's it. Thank you very much.
Thank you, Mr. Burns. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.