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Good afternoon, ladies and gentlemen, and welcome to the Empire Second Quarter 2020 Conference Call. [Operator Instructions] This call is being recorded on Thursday, December 12, 2019. And I would now like to turn the conference over to Katie Brine, Director, Investor Relations. Please go ahead.
Thank you, Joanna. Good afternoon, and thank you all for joining us for our second quarter conference call. Today, we will provide summary comments on our results and leave as much time as we can for questions. This call is being recorded, and the audio recording will be available on the company's website at empireco.ca. There is a short summary document outlining the points of our quarter available on our website as well. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer; Michael Vels, Chief Financial Officer; and Pierre St-Laurent, Chief Operating Officer, Full Service. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors. I will now turn the call over to Michael Medline.
Thanks, Katie, and good afternoon, everyone. I'm extremely proud of our team. They have transformed our company from 1 which had quarterly adjusted EPS of $0.12 3 years ago to 1 that earned $0.58, or $0.52 after you back out the impact of the Crombie transaction. That's a 333% increase in EPS in just 3 years. And most importantly, we've built our brands and improved our customer service over that period. I'm going to do this a bit differently today, and I hope to give you a bit more color on the business. Today, I want to talk about 7 topics. Our performance this quarter, what we're seeing in the market, our EBITDA margin, Voilà, Farm Boy, our store renovation program and our ownership position in Crombie. I'll leave it to Mike to take you through some of the details of our quarter, the results of Project Sunrise, the Crombie Oak Street transaction and an update on our capital spending and share repurchases. Let's start with our performance this quarter. Sales were up in all regions across all banners, despite a more competitive and promotional marketplace than we have seen in some time. Same-store sales were 2%, with both customer count and basket size up. Internal food inflation was approximately 2.4%, and our same-store sales were 2%, implying relatively flat tonnage. We also have several different data points that we use to look at market share at more granular levels. Based on these additional data points, we believe our market share held relatively steady during the quarter. We are working hard to thrill our customers with stronger execution and through our strategic initiatives. As you can see from our margins, we are not chasing empty calorie sales. Gross margin rate was up 90 basis points from our second quarter last year. Category resets continue to expand our margin as anticipated. We have not, at this point, done what some of our competitors have done when they say they try to improve the trending of their food sales with margin investments. We are working hard to earn our sales growth through better execution. However, we do intend to protect and grow our market share going forward. Perhaps I'll just take a -- make a few comments about the state of the market and what we're seeing and watching out for. We are monitoring consumer spending and promotional activity closely. Although we had positive tonnage in the last month of Q2, we have seen a slight softening in sales at the end of the quarter and into the beginning of Q3. We think that part of this could be due to the relative health of the Canadian economy, and we are closely watching key indicators like employment and the recent communications of our Canadian banks. We also saw early inclement weather that can be good for some retail, but not so much for grocery. We continue to be very proud of our margin performance, but we think that we could have been a little quicker responding to a more promotional marketplace. And so as I said, we'll be making sure we protect our sales going forward, while at the same time being smart about it. Just to be clear, we're only talking about a little fine-tuning here. Second, our EBITDA margin. This is our most closely watched number. Quarter-after-quarter, we continue to chew into the EBITDA margin gap between us and our 2 major competitors. We are extremely focused on an overarching goal to close the food EBITDA margin gap with them. We're going to finish the job. We don't believe there's any reason for us not to be able to do it so long as we continue to execute and set a strong strategy. I do say food retail gap as there are certain structural differences between the 3 companies. The most important difference is that we have a smaller pharmacy business, which historically has had a higher EBITDA margin than grocery. On an apples-to-apples basis, our [ fee ] IFRS 16 EBITDA margin is up 50 basis points over Q2 last year when you remove the impact of the Crombie REIT transaction. That's a big move. Our approach to closing our food EBITDA margin gap is 2 pronged. We are focused on improving our cost base and SG&A is pretty well there. With COGS, we had to start with category resets to get us out on the even playing field and now we need to be more efficient with our categories. Sunrise was the first step, and we have made great strides, but we still have way more upside. We're also focused on our sales productivity. We have great people and great assets in great locations across the country, and we will now optimize them. Third, I wanted to talk about Voilà, our game-changing e-commerce solution. While most players in the industry are focused on inefficient store picked models to fulfill their online orders, we are building automated warehouses powered by Ocado's world-leading grocery technology. We'll be able to provide customers with convenient, short delivery windows beginning early in the morning and running until late in the evening. The system is more flexible than you might think. Customers can place orders at night for the next morning or morning for later that same day. This is the only e-commerce model that at scale will eventually allow us to profitably deliver an expanded assortment of groceries to over 75% of the Canadian population with only 4 CFCs. While our focus is on home delivery, we can also do click-and-collect, sourced out of the CFCs, if that's what customers want in certain areas. Although I must add, our data and experience tell us that when given the choice, customers overwhelmingly prefer delivery to home. The flexibility of the hub-and-spoke network model, where each CFC is the hub and smaller cross-dock facilities are the spokes, allows us to get closer to the customer. And we have plans to build on this best-in-class Ocado infrastructure. We will build even more flexibility over time to meet customers' needs. There is a reason that many of the best grocers in the world, including Kroger in the U.S., Casino in France, ICA in Sweden, Coles in Australia, Marks & Spencer and Morrisons in the U.K. and AEON in Japan are partners with Ocado. The reason being is that Ocado is the most advanced and continually innovative small cube e-commerce solution in the world. Frankly, any plan B is just not nearly as good. When we study what Canadians are looking for in an online grocery offer, it's quite simple. Excellent fresh product at competitive prices, no substitutions, delivered to their door exactly when they want it. Voilà will deliver on exactly that. At scale, Voilà will offer an expansive selection of up to 39,000 products, which is way more than any other grocery e-commerce business in Canada and 15,000 more than your average grocery store, including high-quality fresh produce at prices comparable to our bricks-and-mortar, Sobeys or IGA stores. An online grocery home delivery experience like Voilà does not exist in Canada. We're going to grow the market. Voilà is on track to test and soft launch in the GTA in late spring. We are so confident in the Voilà solution that we have already started building our second CFC in Montreal with our partner, Crombie REIT. This CFC will serve major cities in Québec and the Ottawa area and is expected to open in 2021. Fourth, Farm Boy, which along with Voilà is a weapon for winning share in urban markets in Ontario, where we are underpenetrated. Farm Boy has been part of the Empire family for just about a year now and continues to deliver on its industry-leading, operational and customer metrics. It is outperforming all of our expectations. The phenomenal team at Farm Boy is making progress against its plan to double the size of the business in the next 5 years. The Farm Boy store count will grow in a mix of urban and suburban communities with diverse store sizes and formats to fit the needs of local customers. We opened a new Farm Boy last week in Burlington and have announced plans to open another 6 stores in 2020 and 2 in 2021. Most of these new stores will be in the GTA, 5 in downtown Toronto, 1 in Newmarket and 1 in St. Catherines and 1 in Ottawa. The stores will range in size from a 12,000 square foot urban footprint to a 38,000 square foot signature store. This will bring Farm Boy's total announced store count to 37 stores. And this is just the beginning. Farm Boy is in different stages of development on more than 25 new stores in Ontario, a mixture of greenfield conversion and mix developments. We intend to blanket the GTA and take market share from incumbents. In a market where we have always had low market share, Farm Boy's aggressive plan for growth is being well supported by Empire's infrastructure and capabilities in real estate, sourcing and logistics. Fifth, our store renovation program. We have an ambitious store renovation program that ensures we deploy capital to most of our bricks-and-mortar stores over the next 7 years. We are investing capital at solid returns to revitalize our stores, both discount and conventional. Our renovations will range from a refresh to a full reset of the store. But at a minimum, you will see enhancements to decor, facades and modifications to our key departments to better support our strategy. So far in this fiscal year, we have touched 28 of our conventional stores, and we just finished refreshing all of our FreshCo stores in Ontario, to the FreshCo 2.0 model. We will ramp full-service renovations up as the results of our renovations are very strong. And finally, something we don't talk about often, our ownership position in Crombie. Crombie is our largest landlord. We currently own 41.5% of Crombie, and we are pleased with this level of ownership. We are working even closer with Crombie REIT's management than we have in the past to optimize the value of our partnership. Crombie REIT leads mixed-use development opportunities, provides capital to facilitate our strong renovation program and has had a history of sale-leaseback of properties, allowing Empire to effectively reallocate our capital to higher growth opportunities in other parts of our business. A great example of our partnership mutually benefiting Crombie REIT and Empire is our Davie Street store in the heart of Vancouver. Crombie REIT took ownership of our Davie Street store, closed it and developed a mixed-use property for Crombie REIT. At the end of fiscal 2020, we will be opening a brand-new 44,000 square foot store on the property which features up to 330 residential rental units that will increase traffic to our stores. We are pleased with the momentum in our business. It is a testament to the growing strength of our teams. I want to wish you all a great Christmas and holiday season. And if you want to eat really well over the holidays, shop for food at 1 of our great banners. And with that, over to Mike.
Thank you, Michael. Good afternoon, everyone. Project Sunrise is on track, and we continue to estimate incremental savings of about $250 million in fiscal 2020 as we progress through its final year. Incremental benefits continue to be earned at a rate of approximately a quarter every quarter of fiscal '20, with roughly 80% to gross margin and 20% to SG&A. Category resets were completed in our stores at the end of October, and the incremental benefits will continue to show in our margin line for the rest of fiscal 2020. The increase in margin of 90 basis points this quarter directly reflects those category reset initiatives. In addition, the positive effect of Farm Boy. Adjusted selling and administrative expenses as a percent of sales was 20.9% this quarter. If you exclude the impact of IFRS 16 and the inclusion of Farm Boy's higher labor cost model, SG&A as a percent of sales was essentially flat. Sunrise savings of approximately 25 basis points positively impacted the rate, largely through indirect sourcing cost reductions and continued store improvements. This was partly offset by lower impairment reversals than the prior year. Our discount expansion in the West continues as we convert underperforming Safeway and Sobeys stores to FreshCo. This has a temporary impact on sales and gross margin dollars, as the stores are closed for conversion for several months. The first wave of FreshCo stores in the West have been now reopened for a full quarter, and we're so far pleased with customers' reactions and the traffic we're seeing. 2 years ago, when we first announced the discount expansion in the West, we noted that it would be slightly dilutive to earnings in the first few years. This quarter, the impact was approximately $0.01 of dilution on earnings per share, and we continue to believe at this point that the dilution impact as we build out the strategy will be relatively immaterial. Equity earnings increased year-over-year, principally due to the sale of a 15-property portfolio by Crombie REIT that contributed an additional $15.1 million to equity earnings, plus $6.9 million in deferred gain recognition. In total, this positively impacted our share of Crombie's earnings by approximately $0.06 per share after tax, which we would consider to be an unusual effect but is not expected to recur. The effective income tax rate for the quarter was 26%, and we continue to estimate that, excluding the impact of any unusual transactions or differential tax rates on property sales, the effective tax rate for fiscal 2020 will be between 26% and 28%. Our cash flow generation continues to be strong. Year-to-date, our free cash flow of $253 million reflects the improvements in our operations and has enabled us to reinvest back into the business in a disciplined manner. One example of that reinvestment is the great success we've had retrofitting our stores with LED lighting, which will be in more than 300 stores by the end of fiscal 2020. Of course, this is better for the planet, it's also more efficient for our stores and significantly improves our customers' experience in the store. We continue to estimate that our fiscal 2020 capital spend will be approximately $600 million. Additional benefits of our improved cash flow are the ability to repurchase shares and repay debt. And in the second quarter, we repurchased approximately 930,000 shares for $33.1 million, and we remain committed to our $100 million target for fiscal 2020. In addition to that, we also repaid $250 million of our credit facilities. We're now halfway through fiscal 2020. The team has worked hard to earn this $0.52 quarter and there's a lot of excitement building as we get closer to completing Project Sunrise, launching our e-commerce Voilà platform and continue to expand FreshCo in the West and our Farm Boy banner in Ontario. With that, have a great holiday season, and I'll hand the call back to Katie for questions.
Thank you, Mike. Joanna, you may open the line for questions at this time.
[Operator Instructions] And the first question is from Mark Petrie at CIBC World Markets.
So I just want to ask you on the top line, same-store sales and your measurement of inflation both slowed modestly from Q1, though I think CPI was relatively consistent. Michael, you talked about the step-up you saw from some of your competitors and that you didn't necessarily follow right away. Was this shift in the competitive environment sort of the driver of that deceleration in the top line or modest deceleration? And could you just talk about that dynamic a little bit more, please?
Yes, I'll elaborate a little bit more, and then I'll ask Mike to talk about CPI and inflation. Look, I wouldn't overstate it. But we're watching the economy and market very carefully. We're watching whether there's been some deceleration in the economy, particularly in Alberta. We're also seeing whether we need to be more promotional in this market even as we are more efficient in driving for margins. We continue to be focused on growing our margins through improved category performance, but the top line certainly also matters, particularly going forward, when we expect the need to increase productivity in our stores. And then maybe I'll just touch on a few other things, just some stuff we expected. First of all, we talked about the number of stores we were closing in the West to convert to FreshCo. And as we execute with more velocity on that program, we have more square footage out of the market temporarily, and our store performance is also affected as the stores ramp down, which also affects our comps. These are expected impacts and the right thing for us to do. In addition, we're also having some strong comps that we are now lapping in our discount business and also in Saskatchewan, where one of our competitors was on strike last year. I think we're a company that's really pushing to close that EBITDA margin, get the margin right. And I think we were -- and in the promotional market, we kept pushing for margin, maybe a little bit too much. But that's certainly fine-tuning and something that we can adjust over time. But that's what we are seeing and kind of a sort of end of -- sort of starting in October and up till now, that's the kind of thing we're seeing in the market. So we're seeing some -- we're seeing a little bit of difference, but I don't want to overstate it, Mark. And maybe, Mike, if there's anything you want to say about inflation or if you wanted to add in.
I don't think so. I think that's right. Inflation's at 2.4%. It's always below the CPI we would purchase from stores, just because those indices look at a fraction of the SKUs that we carry. We had a -- I think, a relatively modest decline from the last period. And as Michael said, we've been very focused, very consistent for the last 3 years that margins are important to us. And -- but equally, we need to be competitive in the market, and we'll ensure that we are.
Okay. And I know, obviously, improving that top line momentum is a focus, especially into the next fiscal year. And I guess I'd be interested to hear how much you think that will come from sort of more structural shifts in your business, like the rolling of FreshCo and sort of being through that noise around conversions. And then, obviously, the introduction of Voilà into Ontario, and how much of it you think will need to come from better execution, either on promotions, in-store assortment, et cetera?
It's Michael here. I think that's a great question going forward. I mean, as I said in my -- I don't know if you know, Mark, but I prepared the script beforehand, so they were prepared remarks. So I talked about the fact that you can get fake kind of false readings on sales, if you want, you can promote, you can hit your margin, you can look a little better in tonnage. Try to resist that over the last number of years because that gets you in trouble, and it's not really sustainable over the long term. I do think that we could have been a little bit more promotional in the back half of the quarter going into this quarter. But the real prize, like you just pointed out, is to be better at what you do, be better at executing, wow the customer, build your brand and in every transaction that we have to thrill the customer. I think it's clear that in Project Sunrise 2.0 that the customer is going to be even more in the forefront than it was in the last 3 years, that our plan is to build market share through very organized strategic initiatives, not just trying to buy the customer for a little while. There will be deep initiatives that we need to undertake to be able to build up our market share. And as you also pointed out, I think that the moves we're making on FreshCo, on Farm Boy and especially on Voilà, are going to allow us to take market share as we move forward. A lot of the initiatives that we have been planning now for, some of them almost 3 years, are going to be starting to bear fruit. And as we move into our next 3-year planning period that, that is -- we invested early on that, which I'm glad we did. And that's going to be -- that's going to put a little wind in our sails. So there are things we're worried about on it, but that's strategic. And that's long term. We also run for quarters. We remain a little concerned about the economy and what we're seeing cross-country, but mostly in Alberta. And what we're -- and how we're going to respond to a more promotional marketplace than we've seen, and certainly, since I've joined the company. Is that helpful?
Okay. Yes, yes, very helpful. And I guess, just since you brought it up, do you have a timeline in terms of Sunrise 2.0 and when you'll be able to share some of those additional details?
Yes. Our hope is that this spring, probably May, but we haven't committed to that. We're going to figure out the best way to communicate. We're just finishing up the plan right now, and we'll finish it up in the new year, and then we'll communicate it to you, our owners, in probably May, but it could be late April or June. We're just figuring out the timing and when we want to do that.
The next question is from Karen Short from Barclays.
This is actually Renato Basanta on the line for Karen. Was just wondering if you could flesh out some of your comments about the competitive environment. Specifically, if you can speak to where you might be seeing a step-up maybe from a geography and/or a format perspective? That would be helpful.
We're seeing it across the country. Obviously, there's different competitors in different regions, but we're seeing it everywhere.
Okay. That's helpful. And then just on SG&A. Can you help us think about the underlying growth rate? Obviously some noise with IFRS Farm Boy, the restructuring cost reversals. But what sort of the right rate we should -- growth rate we should be thinking about going forward when you sort of normalize for all of those factors?
I think looking forward, outside of those factors, which we provided quite a bit of color on in our press release, we're going to see some positive benefit as we get through the back half of the year. Lessening in impact, of course, as we annualize prior reductions. So we'll see some positive impact still from Sunrise. Our store labor does increase as our sales improves, but we do get some benefit, obviously, because there's some fixed and some variable elements in there. As Michael said, though, most of the work that we had to do on SG&A is pretty well there, it's close. So I think we -- as a company, we're going to continue to be very cost-conscious, and we're going to find ways to pare our SG&A down. But we are pretty close to a steady-state run rate on SG&A if you factor out those one-offs and accounting items, I guess, that we highlighted in our press release.
Got you. That's helpful. And then last 1 for me. I was just wondering if you could provide a little bit, little bit of a preview on Sunrise 2.0. Obviously, you're working through the plan. But if you could give us some color maybe directionally on the potential size of the program? And then maybe just some teasers on what the focus will be with respect to sales productivity and gross margins, that would be helpful.
I like you, nice try. But I will -- because you were so nice, I will say that, as Mike just said, we think we're in -- we're always watching our SG&A and anybody who knows Mike Vels know he's watching it all the time, and which is good, and we feel like we're in the region of where it's right. I think you can expect far more going after cost of goods sold. And especially in early years of the plan and where there's still so much room to improve that. And also going after sales productivity in our store where we think there's some real opportunities. But I think that, that takes a tiny bit more time so that you'll see us going hard at cost of goods sold in the new plan while improving our sales per square feet across the country. And we've got the room to do that. As I said, there's not -- absolutely no reason we're not going to close that EBITDA margin gap to -- as far as we can to our competitors. We do, we couldn't do it in the first 3 years. But we're going to finish the job.
The next question is from Michael Van Aelst from TD Securities.
Just on the category resets. So now that you're pretty much done, and you've put them all in as of the end of October, I think you said. When you look back at them now, how would you rank them on a scale of, say, 1 to 10 as to -- and what kind of things do you think you can circle back to in Sunrise 2.0 to take out additional COGS?
Sure. Scale of 1 to 10, I'm going to leave Pierre to give you that score, seeing as he was accountable for it, and I don't want to create any ill feeling here. But I think we've said pretty consistently we're comfortable with it. In terms of the next phase, and as Michael said, and what can we do next? And he will provide some color in a second. But we did this very quickly if you think about it. And in the midst of a very major reorganization for the company. And even without knowing our company but knowing those facts, you'd think there's got to be a lot of more upside when you fine-tune that category of management. And as our analytics get better, and as our merchandises get better. So that's really what we're referring to when we say there's still some tailwinds that we intend to recapture in those areas. But maybe for some color Pierre, why don't you give us the score and tell us what you think.
It's probably the best initiative that company executed over, I would say, many, many years. Big benefit is -- I think our assortment has never been updated and relevant like it is now from coast-to-coast, more simpler to manage for our team. Much simpler to shop for our customer. We gave more space to more efficient SKUs. So I think the productivity on shelf is much better. We revisit -- we cleaned up, I would say, the data and everything. So there's a lot of benefit internally for us that we will leverage because the team will spend more time to drive sales over time. And probably more, we were less complex to deal with for our supplier partners. So there's a lot of soft benefit over and above all the hard benefit we generated through that initiative. So very proud of our team. So pretty tough with my team. But on this one, not giving 10 on 10 won't be fair.
Yes. I wasn't trying to say whether you did a good job at it. I was just trying to get a sense as to how much was left to improve upon in the second round, as you go back and do what Mike said in terms of going back and trying to optimize or perfect the initiative.
Customer trend always changing. So we have robust data. We're revisiting our data on a regular basis. So I think the next -- going forward, it will be tweaks in every categories with suppliers. So we just need to adjust our assortment based on customer trends.
Yes, the COGS improvement I'm talking about will likely, very little of that will come from the supplier partners. A lot of that's going to come from our own processes. And disciplines and taking cost out, being far more efficient, which I've seen done before, and we have plenty of room to be able to do that.
Okay. And then on the CapEx, you said $600 million for fiscal '20. With the CFCs or Voilà spending next year or fiscal '21 and the intention to start renovating your stores maybe more aggressively, do we see that number go higher beyond 2020?
So we are going to provide explicit guidance on that as we start to close out our year and look at the next one. As we always -- as we've made a habit of doing over the last couple of years. So I don't want to lead into that. But just specifically answer your question, Michael, yes, it will be higher, but not excessively higher. As Michael and I've said very consistently, believe that we do need to reinvest in the company, but we need to do it in a disciplined way, and we're going to balance that with our cash flow generation. So yes, you can see it, I think it's just logical to conclude that it will be higher. But I wouldn't be looking for a major change in our approach or a very significant variation in our investment program.
The next question is from Vishal Shreedhar from National Bank.
Just back to the competitive environment and management's desire to stimulate sales amid that environment. So is it simple enough to think that when management says, we want to stimulate our sales line maybe a little bit more, is it just simple to say -- simple enough to say that means gross margin investment? Or are there merchandising tactics that a management can employ to protect that? Maybe some color on that?
Yes. I mean -- so it's Michael. First of all, I'm not going to answer because I think I've said enough on that, but -- we have competitors. Secondly, I think you should also hear from us that we like having a good gross margin. And not moving that around, flipping it around like we did, we worked 3 years to improve our gross margin, our EBITDA margin. We're not going to just flip everything on its head. But at the same time, obviously, competitors across the country have been seeking sales. And we've been maybe a little slower to react to that, which I'm okay with, but that we can continue to look for ways to execute across the country to a full market share like we have in over the last couple of years. So this is -- I mean, we're talking fine-tuning here, like I said, this is a fine dance in merchandising and in any retail, especially grocery in terms of balancing sales and margin and doing it a smart way and making it really attractive for our customers, which is really the smartest thing we can do. But seeking empty calorie sales is a short-term investment that does not pay off in the long term. So we're going to do things the right way.
Okay. And maybe -- and maybe you already alluded to this, but the -- you noticed that the consumer backdrop is getting a little bit tougher. Maybe you can just give us your context on -- is this very incremental at this stage? Or are you seeing a meaningful change quarter-to-quarter?
It's -- in a short period of time, it's so difficult to read and unfortunately, nobody around this table I don't think is trained as an economist. But we did see some changes. I don't want to overemphasize them, but we did see some changes cross-country, but especially in Alberta. We watch with interest and listen to the -- our large banks and what they had to say in terms of consumer sentiment. And I think like everyone else out there, we are watching it and concerned. But there's nothing to panic about right now, but we're concerned.
Okay. And maybe just changing topics here a little bit. You mentioned that your Ocado partners are getting a lot of interest in their e-commerce solution. Wondering if there's such a thing as too much interest and if you perceive that Ocado -- the Ocado support team is maybe stretched a bit thin? And if you can, in fact, achieve your goals, given that they have so much more to do?
Yes. No, I don't think they're stretched too thin. And because it's all in an order, one of the reasons that we moved to tie up exclusivity in Canada, one was because we wanted the best e-commerce solution, we didn't want our competitors to have it, but we also knew if we move fast, we would be higher and we knew everyone around the globe was looking at this solution. And I think at that time, Monoprix was the only 1 who had announced before we did. And it was only a couple of months before us. So we were in negotiations, and we felt that the way that Ocado was organizing themselves, which I think is very good, would be that if we were too late to the game, that it would put us off by a couple of years because they would have different partners across the globe. But they're very well organized. And so I don't have that -- obviously, we don't have that feeling.
Next question is from Irene Nattel from RBC Capital Markets.
Not to beat this horse to death, but just really on the consumer behavior piece, obviously there is something going on out there. And you mentioned your robust data and analytics capabilities. When you scrub sort of the customer purchasing behavior, are you seeing the kind of signs that we -- sometimes, they seem like trade down? Are you seeing an uptick in private label? Kind of -- are you seeing anything out there that points to shifting consumer buying patterns, sort of independent of we're buying a little bit more on promotion? And are they buying more in promotion [indiscernible] what else you're experiencing?
I mean, it's such a short period of time that this is all occurring in, that it's tough to see across country, there's too many other things going on. Like we had bad weather, and we had some things that we were doing and were coming off, that we were doing in terms of closing stores and so much other action. So like on that, that's a great question, but I think we're going to have to see a little bit more time to see if any of that is playing out. We didn't see any big move away from -- we don't see any move away from full-service into discount or anything like that. Pierre, are you seeing any indicators on the -- more of a category level or a private label?
No, not at this time. And as we said, we saw that in every format, every region. So it's everywhere. So there's nothing specific to some customer segments. So we're still looking at it and -- but it's too early. Like Michael said, we need a longer period of time to have conclusion around that.
Appreciate that. And then I also want to come back to something that you said around closing the margin gap. So on a pre-IFRS basis, up about 50 basis points to 4.8%, on a reported basis, closer to 6.8%. How -- like how -- if, in fact, we focus on that 4.8%, it would suggest that there's still a nice chunk that we can look forward to. Would you agree with that commentary?
Certainly would. I think you've got to test adjust, and we've done the math, and we'll share with you. We've got to adjust for some structural things like pharmacy, a little bit on the real estate, a little bit on the fuel. But there's -- as far as we've come, and we've come a long way, there is still a huge prize out there. So I would totally agree with you.
And it's your determination, Michael, to actually get at that prize?
Yes, I'm not going to commit today whether we're going to get all of it 3 years or more of it or right on because we're still doing the work on that. But always knew it was a 6-year job to be able to close that food retail gap. I think we've performed better. I think our team has been better than I could even have imagined at this point. So I'm more confident and we're structured right. I mean, we couldn't have done any of this if we were still a regional company. And that's only been just over a year, we've been a national company. So now having all the structure in place, the people in place, the initiatives in place. And by the way, we don't wait to announce. We're already underway on a few things here. But I think we got a longer running start into the new strategy. And close the gap. I've always said that we have a long -- we had a long way to go. But on the positive side, we have the most upside of anyone, and we intend to outperform the market. And I think people forget how much room we -- thanks for reminding everyone. We have a long -- we have a ways to go to be able to close that, and the upside is very, very large.
That's great. And one final one, if I will -- if I may. So you talk about excitement and thrilling the customer. And again, this -- you've got an awful lot on the go, and this is clearly a journey. But wondering if you could just talk about some of the initiatives that you may already have rolled out and what we should be looking for?
You saw a couple of things that we announced with the caper cards stuff, which is good things to thrill the customer. But I think over the last 3 years, we spent most of our time to organize ourselves internally and structurally. It's behind us, most of it now, and we will put our focus on the stores, the customers. We have great assets across the country, a lot of square footage so the team is working now together on the plan to be -- to focus on that. So I think that's where the fun is in retail, and the team is very excited to bring new things, enhance the food offering. We have a great partner with us in this company now. We made very good strategic acquisition that we'll leverage, so there's a lot of good initiatives in place now.
I think the other thing I'm really proud of is, when I first joined I would have said to this group that I didn't think that we differentiated our banners, felt that our brands didn't have that brand promise that I really like, and that we didn't differentiate between the banners enough. I think that the work that marketing with merchandising and ops are doing that you're starting to see if you walk through our stores today, on the Christmas season and you look at some of the ways that we're differentiating our banners and really bringing those to life. And a lot of the things we're doing around our banners and appealing to our customers. We're not all the way there yet, but we've made big inroads, especially over the last 6, 12 months.
The next question is from Peter Sklar from BMO Capital Markets.
As you talk about your e-commerce business, you talk in the context of having 4 fulfillment centers. So do you have any -- can you give us a time line of when you think you would be building number 3 and number 4?
No, we're going to open up Toronto, all our attention is on opening up Toronto and getting -- and we're moving the dirt in Montréal. We're going to be open soon. The opportunity here, we're going to have such a strategic opportunity and such a weapon in Voilà, that we're going to have to -- have the last 3 open up in Toronto, see how it's going and then decide on the timing. We've got a pretty full plate. We have a lot of opportunities as well. And these store renovations, I was talking about, very excited about the returns on store renovations in a short period of time. So we'll have to look at that and see what the timing is like. But that will give us a big headstart in 2 of the major markets. And then we've got at least 2 to go, right?
Yes, but Michael, are you committed to number 3 and 4 with your agreement with Ocado?
No, we're not -- we're committed to -- we're not committed to anything other than having exclusive rights in Canada and to grow at a certain pace. And we're not -- I mean, we're growing much faster than the pace, in fact, that we had talked to Ocado about growing that. So there's no issue in that, about -- there's no hurry or -- but the thing that's bothering me, and why we think about it a lot is if you got the greatest weapon and it takes 2 years to get it up and put it in the market, that's a bit of a delay. And also to be able to exploit it through the -- exploit it through spokes and micro fulfillment and all the other things we want to do to be able to own the whole market in e-commerce. So those are all the things we're balancing. But my hope would be to get the other CFCs open in a timely manner. But we're not committed. We would tell you if we were, and I want to have all of our attention on this GTA opening. It is really important to our company.
Okay. On another topic, with the FreshCo rollout out west. I'm sure you have some -- you do consumer market research. And I'm just wondering what you're seeing in terms of development of the brand. As you know, there was no brand identity for FreshCo really out west. And so I'm just wondering how you're doing when you undertake your market research and other measures.
We're doing -- we're probably doing more market research than I've ever seen in terms of opening up a banner, and we're doing really well on that. And -- but you're right, you have to consider this is a new banner to this market. So we make -- we have to make a big splash when we open, and we've got to continue that for a while. Our competitors do not enjoy it when we open, and we reopen because they've had 6 months or whatever it is in some of the locations to be able to take some market share, which we then take back. They resist, we fight, we get it back. And -- but considering there's a new banner in this market, which we knew, I think that the work by, first of all, the FreshCo team led by Mike Venton and the work by Sandra and the marketing team working together has been superb. So we look at this very, very closely, as you can imagine, in terms of the customer data and the sales data for just opening and where we are, and albeit early days, very, very pleased. Just want to get more open. But you did see some of that -- as I said before, you see in some of our same-store sales and our sales numbers that we had some closed stores, and that will all work its way through the system as we are opening and closing and doing things like that. But there's some granular level of effect to our comps as we do that and we wear off inventory and close down stores.
Okay. And then just lastly, can you comment how your internal inflation was trending as you exited the quarter and as you got into the third fiscal quarter?
It was pretty consistent through the quarter, a little bit of a -- probably a fall-off towards the end, but really not sufficiently material to take note of.
The next question is from Chris Li from Desjardins.
Just had one question there for me. Just wondering, what is your outlook on transportation cost for next year? The IMO last week mentioned shipping rates are going up because IMO 2020? I'm not sure if this -- that would impact you guys the same way that impacts other retailers?
I think the best way to answer it is that, at this point, we don't see that as being a material impact on our company in the next 12 months or so. We may be -- I may be wrong on that, but that's not a cost pressure that we have in the front end of our radar here.
Your next question is from Patricia Baker from Scotia Capital.
Thank you very much for letting me on at the last. And I have a couple of, 2 questions or 2 topics for you, Michael, of your 7. So the first one is Farm Boy. And I don't remember if it was you or it was Mike, who said that you're at various stages of development or negotiation with, I think, was it 25 properties for locations for Farm Boy? And I'm just curious whether if you look back to a year ago, just after you closed on the deal, being at that level of transactions for Farm Boy, is that further ahead than you thought you'd be at this time?
That's a difficult one to answer because here, it would be easy to say that we -- yes, we're further ahead than we thought we would be. But part of our thinking and part of J-L and Jeff's thinking when we combined our 2 companies was that we could take their rate of expansion that they had in their plans and accelerate them by using the power and the capability and the scale of our real estate group and our access to properties. So really, what we're seeing is the successful execution of that belief or that hope. And so I think -- well, I know the -- where we are is accelerated from what the Farm Boy plan was without Sobeys, but it's meeting our expectations about what we thought the 2 companies could do together.
Okay. That makes a lot of sense, Mike. And then maybe that's a good segue to my second question. Michael, you included Crombie as 1 of your 7 topics for discussion on the call and sort of talked about Crombie more than you have on other calls. You opened by saying that you currently have a 41.5% position, and you're happy with that. So I'm assuming what you're saying there is that, that for the foreseeable future, there will be no sell-down in Crombie, and that's an appropriate level for you to own. And I'm just wondering if you could expand a little bit further on some of the -- you talked about working with Crombie differently. So can you talk about -- just give us a little more information about how that makes Empire stronger as a grocery operator going forward?
Yes. I mean, I'll say a few things, then I'm going to send it over to Mike. But I mean, I come from a background where the real estate department worked so well with the REIT at a previous company I was with. It was really a great relationship. And so when I came over and Donnie Clow and I, and then when Mike joined, Mike and Glenn and some of the others over there, and now Clinton, who's over there. There's just such a great opportunity to work together cooperatively for the best -- obviously, for the fiduciary duty of each of the different entities. And I would say that, and Donnie would probably say the same, that the relationship between our REIT and our real estate group has been phenomenal, just phenomenal. It's working like -- I'm told -- in a way that it's never worked together before. And it's -- it reminds me a lot of my previous experience when that was working so, so well. And that just creates so much opportunity. I think we -- because we've been so busy turning around our results here at Empire, we forget sometimes the power of that REIT, and we don't talk about it a lot, and that we're very pleased with their performance. We're very pleased with the developments. We really like how it returns capital to us and that we can have better locations for our stores. And they like us in many ways, too. So it's a symbiotic relationship, and you'd think "well, that's always great." I would say that the way it's working, and I would give a lot of credit to our real estate group and to Mike and to the people over there. This is a big upside for us, and we're very pleased with the ownership and very pleased with how that's going over there. Mike, do you have anything -- I mean, you spend a lot of time as well on that.
I'm [indiscernible] responsible for ensuring that it works. So I'm going to just say it's going great. But on a more serious note, the 2 companies exist for their respective shareholders, clearly. So as Crombie has a strategy, so do we. But we're heavily linked because of the grocery property factor and they are a -- there's just a long list of opportunities and collaboration that you would -- if you're managing it properly, you'd expect to see. So most of the work is about clarifying expectations, installing process, being transparent with each others' strategies and where we could take 1 and 1 and make it equal 3. So that's a -- I think that's just smart business. And ensuring that we have the right people properly incentivized and motivated to get that done, really was how Michael and I had it and how we make sure that it was as good as it could be.
Okay. I really appreciate that. And I like the notion that you're working on making 1 plus 1 equal 3, Mike.
I never heard Mike say that before, I was excited.
That was 42%.
Thank you. There are no further questions at this time. I will now turn it back over for closing comments.
Thank you, Joanna. Ladies and gentlemen, we appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by phone or e-mail. We look forward to having you join us for our third quarter fiscal 2020 conference call on March 12. Happy holidays.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.