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Good morning, ladies and gentlemen. Thank you for standing by. And welcome to the METRO INC. 2019 Fourth Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Sharon Kadoche, Senior Adviser, Investor Relations and Risk at METRO INC. Please go ahead.
Thank you, Julie. Good morning to everyone, and thank you for joining us today. Our comments will focus on the financial results of our fourth quarter, which ended September 28, 2019. With me today is Mr. Eric La Flèche, President and Chief Executive Officer; and François Thibault, Executive VP and Chief Financial Officer. During the call, we will present our fourth quarter results and comment on its highlights. We will then be happy to take your questions. Before we begin, I would like to remind you that we will use in today's discussions different statements that can be construed as forward-looking information. In general, any statement which does not constitute a historical fact may be viewed as a forward-looking statement. Expressions such as expect, intend, are confident that, will and other similar expressions are generally indicative of forward-looking statements. The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy and our annual budget as well as our 2018/'19 action plan. These forward-looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks, known and unknown, as well as uncertainties that could cause the outcome to differ materially. A description of these risks, which could have an impact on these statements, could be found under the risk management section of our 2018 annual report. We believe these statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking information, except as required by applicable law. I will now turn the call over to François.
Thank you, Sharon, and good morning, everyone. Before we begin, I would like to remind you that the acquisition of Jean Coutu closed in May of 2018 and the fourth quarter last year included the full contribution of Jean Coutu. So the fourth quarter, the result that we're reporting today are, therefore, comparable year-over-year. Turning to our results. Total sales reached $3.9 billion versus $3.7 billion last year, an increase of 3.3%. In the quarter, we booked $18 million in cost synergies related to the Jean Coutu acquisition. Our annualized run rate of synergies now stands at $65 million. Gross margins stood at 20.2% of sales in the fourth quarter compared to 19.7% for the same period last year. Operating expenses as a percent of sales came in at 11.9% versus 12.6% last year or 11.7% after excluding $31.4 million in expenses recorded for the pharmacy network closure and restructuring. The increase in operating expense is primarily due to transportation costs and expenses related to e-commerce. Adjusted EBITDA stood at $321.6 million, up $23.7 million or 8% and represented 8.3% of sales versus 8% for the same quarter last year. The income tax expense for the quarter was $62.3 million, representing an effective tax rate of 27.1% versus 24.9% in the prior year. The reduced tax rate in the fourth quarter of 2018 is related to the sale of the remaining shares of Alimentation Couche-Tard.Adjusted net earnings were $174 million compared to $161 million last year, up 8.1%. Adjusted net earnings per share were $0.68 versus $0.63 last year. And that's an increase of 7.9%. Our capital expenditures for the fourth quarter totaled $152 million, bringing the total CapEx for the year to about $400 million. We have planned a higher CapEx. But as we stated in our previous call, delays in getting city approvals and permits for the Ontario warehouse monetization project pushed some investments to fiscal 2020. We expect total CapEx for fiscal 2020 to stand at about $550 million. In September, the Board of Directors approved a dividend of $0.20 a share. That's same amount as in the previous 3 quarters, which represents a year-over-year increase of 11.1%. Under the normal course issuer bid program, we have repurchased a little under 2.2 million shares for a total consideration of $159.7 million and representing an average share price of $50.31. We remain committed in returning excess cash flows to our shareholders. And as such, we have renewed our normal course issuer bid program, giving us authority to repurchase up to 7 million shares between November 25, 2019 and November 24, 2020. Finally, we will be applying the new accounting standard IFRS 16 in fiscal 2020, which effectively abolishes the current distinction between finance leases and operating leases. As such, most leases will be recognized on the balance sheet, meaning that as a lessee, Metro will recognize assets and liabilities with respect to operating leases for property, vehicles and equipment. Depreciation expense on these new assets and interest expense on these new liabilities will replace rental expense. As stated in our press release of this morning, we expect an increase in liabilities in the range of $2.1 billion to $2.3 billion and an increase in assets in the range of $1.9 billion to $2.1 billion with a net difference recorded in retained earnings. We will be hosting a conference call within a couple of weeks to go through the provisions of IFRS 16 in more detail. That's it for me. I will now turn it over to Eric.
Thank you, François, and good morning, everyone. We are very pleased with our fourth quarter results to close an outstanding fiscal 2019. We achieved strong comparable sales in food and pharmacy in Q4 while delivering solid margins and improved customer metrics. Food same-store sales were up 4.1% on top of 2.1% in the same quarter last year for a 2-year stack of 6.2%. Performance was strong across our banners as we saw increased customer count, basket size and tonnage. Our internal food basket was at 2.8%, a slight increase versus the 2.5% reported in the previous 2 quarters. However, we're experiencing lower food inflation since October as produce prices have stabilized. Pharmacy same-store sales, prescription sales and front store sales all grew by 3.4%, marked by strong growth in OTC, HABA and seasonal products. The integration with Jean Coutu is progressing well. As François mentioned, we realized $18 million in cost synergies in the quarter and $65 million on an annualized basis. Work in the Varennes warehouse to increase automated capacity is ongoing and the Jean Coutu retail systems are being deployed in the Brunet pharmacies. The next step is the renewal of the Varennes collective bargaining agreement, which expires in December. As previously mentioned, we expect to capture the remaining synergies starting in the latter part of this fiscal year. So I think we can say that our first full year with the Jean Coutu Group was successful and that we're on track to meet our $75 million synergy target after 3 years. Our warehouse modernization project in Toronto is underway. We received the permits to build the first phase of our semi-automated fresh distribution center in August. And I'm happy to report that the steel structure is up. We expect to start operations at the end of next summer. On the e-commerce side, sales in Québec are growing at a good pace, and our model is delivering a good customer experience. In the GTA, demand is ramping up faster out of the gate than it did in Québec. That said, we have the required capacity, and the team is working hard to learn the processes and become more efficient. Online sales still represent a very small proportion of our food sales. And our model allows us to remain agile and add capacity as needed with more stores. We continue to invest in our food retail network during fiscal '19 with 8 new food stores, including 2 relocations as well as 2 conversions and 20 remodels. 9 stores were closed such that our total net square footage remained flat. In the pipeline for fiscal 2020, we are budgeting 10 new stores, including 3 relocations plus 2 conversions and 27 renovation projects. Investments in technology at retail are on plan. More than 100 stores now have self-checkouts, and we're planning on adding another 100 stores this fiscal year. Also we now have 37 stores equipped with electronic shelf labels, and we're targeting a total of close to 100 by year-end. To conclude, I want to thank all members of the Metro team for their contribution to our solid performance. Despite a highly competitive environment, we are confident that we continue to grow by staying focused on our customers, investing in our store network and infrastructure and executing well on our business plans. That concludes my comments, and we'll be happy to take your questions.
[Operator Instructions] Your first question comes from the line of Irene Nattel with RBC Capital Markets.
Eric, I was wondering if you could just comment on the competitive environment. And I know that you generally don't talk about performance of discount versus conventional. But as you know, last week, Loblaw talked about a step-up in competitive intensity in the discount segment. And I was wondering if you could add your thoughts, please.
Well, we don't comment on performance by banner. But I repeat my opening comment that our performance was strong across markets and across banners. Very, very happy with that. The environment, we say it every quarter that it's very competitive because it's true. It remains very promotional, highly promotional, and the competition is always strong. So has there been a pickup in intensity recently? It ebbs and flows. To me, it's always competitive and we always try to be competitive. I can't say that discount, in particular, that we saw something more than usual. It's always competitive.
That's great. And just on the e-commerce side, in your commentary, you said that it was -- it's sort of out of the gate stronger, sort of growth is stronger in Ontario than what you saw in Québec. Are there any other differences in terms of, say, basket size or frequency of shopper? Are you noticing any meaningful differences?
There are some differences, but it's still too early to comment. And for competitive reasons, I can't really comment. The comment on the speed of the ramping-up, it's -- we expected it to be a bit stronger and it is. Ontario is a more mature market on the e-commerce side. There's been a grocery e-commerce offer out there for quite a while. So people are familiar with the service and are trying our service. So again, a good start in terms of volume, challenging for the teams at first, but we'll get around to it. And I think we have a model that will serve the customer well.
That's great. And just one more if I may. You did have that nice pickup in gross margin in the quarter. If you could just talk a little bit about sort of what went into that gross margin gain and how we should be thinking about the evolution.
Yes. We're happy with that number. Some of it comes from the synergies with Jean Coutu, the procurement synergies. Clearly, we target some synergies, so we'd like to see it flow to the bottom line. And that's a contributing factor. I think also the effect of merchandising done by our teams, we're very focused in all of our food banners on fresh. And that has a higher gross margin, as you know. So that's also a contributing factor. We're also pleased with the performance of our private labels, increased penetration from them, which also contributes. So it's a combination of factors, but those are the 3 main ones.
Your next question comes from the line of Michael Van Aelst with TD Securities.
Just, I guess, to follow up on that a little bit because you did mention that competitive environment is intense, yet your same-store sales are very strong and your gross margins are up 56 basis points. So is there -- apart from those 3 items that you mentioned in terms of helping the gross margin, is there anything else that you think you could point to that would be -- that would help us understand where you're outperforming the rest of the market without feeling the effect on the margins?
So there are factors helping the gross pickup -- gross margin pickup. I mentioned the 3 main ones. I think it all sums up to effective merchandising. So we try to be the right product at the right time. I think our loyalty strategy and some personalization helps also. So again, effective merchandising, shrink at store level is under control, so good store conditions. So in overall, good, strong performance is delivering a number, it's not one thing.
Okay. With respect to the OpEx growth of 5%, most of it is in that others line. You talked about transportation and e-commerce. Are both of those in that others line?
Yes.
And what else would be in there? I think advertising, if I'm not mistaken?
There's a whole bunch of things, advertising, publicity, a whole range of typical costs that go into [ the and then ], other than the 4 main lines -- 3 main lines you see on top.
So the big drivers of that line were the transportation and the e-commerce delivery?
That's right.
That's right.
So are you willing to kind of weight the 2?
No.
No.
Okay, good. And there's no onetime kind of -- or temporary costs tied to like the DC switchover, a brand or anything like that?
Sure. Transport is the main culprit. We said that we would start comping that by the end of Q1. So it's still going to be with us for a while. And the rest of it is a bunch of little things. But the wages, the benefits, the rent that was under control.
So just to add to that, Michael, the transportation contracts, we renewed a bunch of contracts with our carriers starting at the end of Q1 into Q2 and Q3. A big -- the Wilson contract in Ontario was in Q2 with large unusual increases. So we have -- we are living with those right now. And we'll continue to be affected by those increases until the end of Q1. So that's the main one.
And finally on synergies, are you able to split it up at all between COGS and OpEx?
Well, we surely can, but we don't disclose that.
Yes. I meant to us, obviously.
But you're right, it's a combination. There's procurement, which goes into gross margin. And then there's some SG&A reduction, like salaries, cost -- corporate costs that are no longer there. There's a whole bunch of admin reductions that are part of the operating expenses. But it's in both lines.
Okay. So when I take the -- when I do the simple math and I take the $18 million divided by 12 weeks and multiply it times 52 to get an annualized number, it would come out to about $78 million, I think. And you talked about a $65 million run rate. So is the difference retroactive benefits that are kind of temporary and...
That's right, Michael. That's exactly it. So when you book, when you negotiate your agreements, there's always -- there's sometimes amounts that go back to previous months or to the closing, which you weren't -- you didn't have in place in previous quarters. So there's that portion. So that's why we give you the annualized run rate so that you don't think that we're at $78 million. So the true number, if everything stops today and we don't get $1 more of synergies, you will expect to see $65 million flow through our P&L on an annual basis.
Okay. And most of that retroactive, would that -- would I be right to assume that, that's in the COGS?
Yes.
[Operator Instructions] Your next question comes from the line of Karen Short with Barclays.
This is actually Renato Basanta on the line for Karen. So I just wanted to just follow up on your e-commerce business. Can you talk about what you're seeing with respect to average ticket in e-commerce versus in-store purchases? And I suppose related to that, what you're really seeing with respect to incrementality. In other words, is it a new customer that's shopping your stores? From all your banners, from an e-commerce perspective, are existing customers shopping more? Any color there would be helpful.
So as we've said on previous calls, the e-commerce average ticket is quite a bit higher than the average basket in our stores. It's a bigger shop, it's a convenience -- no, just a bigger shop. We were -- we said before and we remain pleased with the mix in the basket, the gross margin that it gives us. So it's a good, healthy basket. I'll just leave it at that. On the incrementality, so our data and with our metro&moi program in Québec, we can track the behavior of our loyal Metro customers. So I think the data shows that we're getting more dollars from existing loyal customers and we're attracting some new customers to the Metro banner that weren't shopping with us before as well as cannibalizing some of our existing Metro sales. But net-net, we see in Québec incremental sales. In Ontario, I'll reserve my comments, it's too early to give you any color.
Okay, that's helpful. And then just on your, I guess, inflation expectations, you talked a little bit about a slowdown. And then it also looks like your internal inflation came in below the Ontario and Québec CPI by, it looks like, about 100 basis points. Can you talk a little bit about your expectations going forward for inflation and why your inflation continues to come in below the industry figures?
Well, the reported -- the number we report is what we sell in our stores. So it reflects what the customers pays at the till for what they buy versus last year. So it's effectively what we sell. Typically, that's what we see in our market that our observed inflation is typically, not always, but typically lower than the reported CPI. So that's not really big news. As far as expectations, we don't have a crystal ball. I mentioned that October, we're seeing lower inflation. That can remain, that can change, it fluctuates. Last year, at this time, inflation was increasing. So as we are cycling higher levels of inflation, it will be interesting to see what happens this year. Commodities are in play and FX is in play. So it's very hard to give you guidance. We typically budget for a 2% type of inflation lift. We'll see if we -- if it's there or not as the year goes along. The meat situation, right now we're seeing some inflation in meat. The China situation with protein, now that they've reopened the market, could have inflationary impact. We'll have to see. It's really week-by-week. So we'll keep you posted.
Okay, that's helpful. And then just last one for me. You talked about the self-checkout and electronic shelf labeling programs, seemed like they're progressing nicely. Can you talk about what you're seeing there from a labor savings perspective and also any feedback you're getting from customers on the in-store experience? And then how do you expect to continue to ramp those programs to additional stores going forward?
Okay. So yes, we're installing the self-checkouts to improve the customer experience by improving speed at checkout. So that, especially in stores with smaller average baskets, higher customer counts, those self-checkouts have been there, are being added and are very welcomed by the customers. So I think it's a plus for customer experience. And on the productivity side, if we manage our hours well, if it's monitored well, which we try to do, we're seeing some labor savings as expected to provide the return on investments. So, so far, so good, and that's why we are actively rolling them out. And we measure it store-by-store, what penetration we get, do we get the labor savings. It varies, it's not the same everywhere. So it won't be installed in every store, but we see a good opportunity to continue. So as I said, we have over 100 done and we'll do 100 more this fiscal year. It's a significant investment, but one that will provide returns for us. And we expect to give a plus to customer experience. Electronic shelf labels, I think customers -- getting very few comments, they hardly see it. The shelf labels are electronic, but they look almost like paper. So people hardly see that, but that's the difference. We see the difference in terms of labor savings and price accuracy and better layouts in terms of if you're out of stock or if there's a hole, the ticket remains there, so you have to fill. So it's been a positive experience for us so far. So again, we'll keep you posted, but we're on a plan to roll them out.
Your next question comes from the line of Mark Petrie with CIBC.
This is Krishna Ruthnum on the line for Mark. I was wondering if you could give us some color on the performance of the HMR category in the quarter.
Well, it's mostly on the Metro banner in both Quebec and Ontario. It's a growing category. And that also contributes to the gross margin slightly. But yes, it's a growing category. So I think we're doing a better job improving the quality and providing a good customer experience. The renovated stores, the new stores have expanded HMR, hot foods, cold offerings also, self-serve with some sit-downs. Most of our stores don't have enough space for sit-down areas. But yes, it's a customer need and a growing customer need that we're trying to meet as best we can and it's a growth category for us and a big focus for our Metro teams in both Québec and Ontario to grow that category.
Okay. And just a follow-up on that, can you talk about your performance to date with food aggregators and whether or not it's met your expectations? And just looking ahead, do you see MissFresh fitting into your aggregator partnerships as well?
I'm sorry, I'm not sure I know what you mean by food aggregators.
By food aggregators like SkipTheDishes, partners that you're working with on the HMR side.
Yes. Okay. Sorry, I didn't get that term. Yes, we have done -- we're doing some tests or small partnerships with Uber and SkipTheDishes. Again, too early to comment, something that's in trial and growing a little bit and from a 0 base. So we'll just have to wait and see. That's one more convenience offer that we try to offer for the customer that wants that type of service. But it's not a material factor, let's leave it at that.
Your next question comes from the line of Keith Howlett with Desjardins Securities.
Can I just add some questions on store formats? Specifically, I was wondering on Adonis, how that's doing. You've put one of your senior executives in charge of that. I was wondering what that specifically means and whether Adonis is meeting expectation or what's going on there. Any comments you had on your smaller, newer format Super C in Metro stores?
Yes. So Adonis is a growth engine for us. We want to grow that banner. Christian Bourbonnière, who is a longtime Metro executive, wanted to not slow down because it's not a slowdown type of job, but move on to something else and pass the baton, if you will, to Marc Giroux, the Head of Québec, as planned as part of our succession plan. And Christian will be the perfect candidate to structure Adonis to be able to grow. So Adonis is a great format. It's a differentiated offer but needs some, I'll just say, structure and processes to be on a more solid foundation to grow more rapidly. So Christian is going to be taking care of that with the Adonis-Phoenicia team. So same team, new leader, I think, for bigger and better things. So we opened a third store in Toronto this summer in Mississauga, ramping up nicely. And we're opening a new store in Ottawa tomorrow for Adonis, expecting good things over there. And we have opened 1 last year in Gatineau on the other side of the river. So we'll have 2 in that region. So yes, we see a few more opportunities in Québec and hopefully more in Ontario down the road to grow that format. The smaller Super C, we have a few small Super Cs. We're opening a new one in a couple of weeks in downtown Montréal under -- around 20,000 square foot. It will be the full Super C offer with limited, I should say, limited linear footage for grocery. But we will have a Super C program in that store. Different format in the sense that it doesn't have the typical large box and large parking. But we think there's a good market to serve in discount in that part of the center of Montréal, and we'll see where that goes. Smaller Metro stores, we have a few. We opened 1 in Metro at Bathurst in Ontario at Metro -- sorry, Bathurst and Steeles. Off to a good start, 20,000-foot, very fresh-focused, very HMR-focused. And I think we'll do well in that community. So really, same for us, same strategy, market-by-market, what's the best format, what's the size, and we try to make an investment that will pay off and that will generate enough sales and profit to justify the investment. So we have a few in the pipeline, and we will keep growing that way.
And then I had a question on loyalty in Québec. Are you able to marry the metro&moi data with the AIR MILES data by customer? Or is it sort of 2 separate pillars?
No. We do not. They are 2 separate programs.
And then just a question on the discount versus conventional banner. When it comes to things like shelf tags and automated checkout, are you putting them in both discount and conventional? Or is it skewed to conventional?
We're putting them into both. The self-checkouts, it was more in conventional. We're adding some in discount as we go along. Self-checkout has started -- electronic shelf labels, it started in discount -- more in discount, I would say, and we're adding some to Metro. So it depends, really it's store-by-store, market-by-market with the opportunity and where does it make sense. So we don't have a one size fits all. But we will make the right decision for the right store with the right technology to improve customer experience when we can and get better productivity to address labor shortages, which remains a challenge in our business.
And when it comes to online, you've got 2 major competitors in discount that are doing either pick up at store or delivered at home perhaps, I guess, in certain regions. What's your view on online in the discount channel?
I'll reserve my comments. We're really focused on our model with the Metro banner in both of our markets. The plate is full. We see online as convenience, additional service for the Metro customer for now. Never say never, but we have no plans to bring it to discount for now.
And then just finally on the Jean Coutu cost synergies, would your intention be that once you go over $75 million that you would cease talking about it? Or is there any possibility you may revise the number upwards before you stop talking about it?
No, I think that once we've achieved the $75 million, we will stop reporting it.
Your next question comes from the line of Peter Sklar with BMO Capital Markets.
Just one question for you. With the tight labor markets that we're seeing, particularly in Québec, I think it's almost record levels of unemployment. I'm just wondering, is that impacting store operations or in any way that would impact results? Or are you managing your way through that?
So the answer is it's a challenge. I suspect it's a challenge for everybody in retail and it's a challenge for us to staff stores. We are managing through it, but it does have an effect because if employees don't show up or if you have vacant positions, at a certain point, conditions reflect that. So we're not perfect, but I think we manage well and -- but it's a big challenge. And that's why technology, like self-checkout or shelf labels, helps in making the job simpler for our store people because there are challenges to find labor. So we manage through it, it's manageable, but it's a challenge that we face for sure.
Eric, do you think you, like Metro or any of your franchisees, have had to cut back store hours from what they would otherwise like them to be because of the labor issue?
No. We have not gone to that level. So we don't see that any time, short term, mid-term, we don't want to get there. We have to find ways to find staff, retain staff, motivate them to keep them onboard. And so it's a joint challenge for our operations people with our HR people to attract the right talent and be able to be in a position to keep them with the company. So yes, the short answer is no, we don't want to cut hours. We want to maintain our hours.
Your next question comes from the line of Michael Van Aelst with TD Securities.
Just a quick follow-up on MissFresh. I know it's a small part of your business, but can you give us some color as to your experience so far with MissFresh and growth and profitability?
So MissFresh is a small part of the business. And it's a small market. It's growing somewhat. Marketing expenses are significant in the meal kit industry, so somewhat challenging economics. But it's a good service with good quality that loyal customers appreciate. The experience in-store for us selling meal kits is we did some tests and we're trying to do something different because it's not been great so far. But we're looking for more performance from them. But again, a minor -- how should I say, it's a small part of our business and it's a startup. So we'll leave it at that.
Yes. I mean do you -- it's clear that it's a startup, high expenses upfront, things like that. But long term, do you actually see a business model that can actually be profitable? Or is this something that you're just doing to test out and as a defensive measure?
Well, for us, it's a test. It's a lab. It's a small business. It's online. It's run separately. As I said, the economics are challenging at first and we'll see where it goes. So it's, for me, a bit too early to comment on the future, the long-term business model, if you -- to answer your question. I'll just leave my comments to that.
There are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Thank you all for your interest in Metro, and we'll speak again soon to discuss our first quarter results on January 28. Thank you.
This concludes today's conference call. You may now disconnect.