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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Please be advised that this conference call is being recorded. Welcome to the North West Company Inc. Conference Call. I would now like to turn the meeting over to Mr. Edward Kennedy, President and Chief Executive Officer. Mr. Kennedy, please go ahead.
Thank you. Welcome to our Q4 conference call and also a call to discuss a couple of subsequent events that we announced this week. Apologize for the short notice, but I hope you'd appreciate in the circumstances we decided to converge these events because they're all material. And as we get into our disclosure both today and in the next couple of weeks, we're going to be adding more context to help our investors understand how we're setting the stage for the company's growth and performance in 2020 and in 2021-'22 in terms of your own forecast and expectations. So I'm going to keep coming back to that when I'm talking about how we got to where we are with some of these changes in the business and what that means for the business going forward. Of course, I'll also comment on our Q4 results and overall for the year. But as I'll just say right now, again, that though we will be providing some type of future disclosure in the next couple of weeks to just give you more context, I'll let everything settle a bit, including, of course, what's happening in the broader environment, macro environment, we all know about. Turning to the first topic, which is the Giant Tiger store. Oh, I'm sorry, I've just been reminded before I blabber on any further to introduce who's here: Alex Yeo, President of our Canadian Retail Group; John King, our CFO; Amanda Sutton is our VP, Legal Counsel. And Amanda is going to do her job, amongst others, so just to read our disclosure statement. Thanks, Amanda.
Thank you, Edward. Before we begin, I remind you that certain information presented today may constitute forward-looking statements. Such statements reflect North West's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance, and are subject to certain risks, which could cause actual performance and financial results to -- in the future to vary materially from those contemplated in the forward forward-looking statements. For additional information on these risks, please see North West's Annual Information Form and its MD&A under the heading Risk Factors. Edward?
Thanks, Amanda. So back to the Giant Tiger transaction. It's been a couple of years of disclosure, becoming more focused, certainly go back to the AGM of last June that GT wasn't a core business of North West, maybe that's a reminder as well. It had entered into the North West business umbrella 20 years ago in some ways to continue to allow us to drive scale on the food procurement side of our business as well as distribution, but also recognizing that it was a unique format, still is today and had a very good niche in the market serving convenience, discount with a fantastic assortment for shoppers who did need to travel all the way to a Walmart and get better service, better assortment in their neighborhood. So all that appeal to us, both for rural stores and in Winnipeg. And then as we built it out, we are happy with results. Cash-on-cash returns were accretive. It certainly has been a struggle as we continue to expand into Alberta. Those who followed on our quest story know that we've had some serious headwinds. And then increasingly in the last couple of years, dilution on our earnings because of our Giant Tiger underperformance. As we continue to assess that and understand the benefits are broad at the back end of the business in terms of procurement and distribution scale, we didn't want to tail to wag the dog as it turned out with the lack of earnings growth and then in fact, earnings declines in that business. It was muting the strength of our Northern Canadian business in terms of investor understanding. And I appreciate we own that because we don't segment except by country, but also our management time. We continue to see tremendous potential in our Northern Canada business. We think the fundamentals there are really, really good. But if our part of senior management time is split on a percentage basis materially towards Giant Tiger, and although they might be 60-40 in favor in Northern Canada, that simply isn't proportionate to where our strengths are and where our upside is and where we make our largest returns in our largest investment. And so all those things start to add up and they preclude you from doing is the other side of the coin which is to really optimize the Giant Tiger business. And we continue to see the gaps, but we were challenged to execute against those with the spread of our business and the focus on the North and the GT at the same time, made it harder and harder as the GT operating conditions got more challenging. We recognize that Giant Tiger, on the other hand, with that focus, with that expertise, was able to manage it. Well, they don't walk on water, but they have the expertise and capability to be leading retailers as they are. So we recognize our respective strengths. At the same time, both parties knew that we both want scale. We both want to work together in a noncompetitive in terms of geographic overlap. The separation of stores to this transaction preserves that. We continue to run and we'll run them as Giant Tiger banner stores in the north-facing markets, and those are very successful Giant Tiger stores, including one of the largest Giant Tiger store in Canada. So we're pleased with that. And then the core of the Giant Tiger business and the noncore part of ours, the Giant Tiger, is really interested in is the rest of the stores. And of course, controlling their destiny is a national chain and growing onward from there. And we're behind them all the way on that because we're invested with them in terms of food distribution, joint procurement in food and distribution. And then on the other side of it, we are going to be getting sourcing from them in general merchandise and to a lesser degree in food. But in areas of their assortment strength that are not at Giant -- are not strengths at North West, and which we're quite excited will help drive sales and margin dollar growth in from Northern Canada and as the way we structured the arrangement, selectively some of our Northern international markets as well. So all these factors come into play. And maybe the decision and the negotiations make sense for us. And I can't speak for GTSL directly, but obviously, it made sense for them or we wouldn't be doing this. So we're pleased to announce it. We plan to close the biggest by the end of May. They've got 1,200 people to bring onboard, but they are already part of the GT system because under the model, they're actually paid through Giant Tiger. And we've got some leases to be assigned and then some transition activities as we move to the collaboration on procurement and distribution that I referred to earlier. The financial terms of the transaction are relatively clear. The $45 million, maybe not as precisely as paid over 3 years in years 2, 3 and 4. The contingent consideration is paid in year 4 and 5. We believe it's eminently attainable, being largely based on the current base year. And we know that Giant Tiger has upside potential here that -- and I know they see that as well. The other point I'm going to make is when you're assessing -- okay, so what else, like, going forward for North West, what does that liberate? Well, it's about liberating focus. But in terms of pure financial impact, the fact we didn't disclose is it's hard to back these numbers back in or put them back into the model. But as it turned out, the one quarter that we had to because of the sheer materiality is this one. Unfortunately, it's indicative of where things had gotten to for us. And we commented at the group of stores being sold and closed had an EBITDA -- a negative EBIT line. And what it doesn't tell you an EBITDA is flat. So not as in the EBITDA line, but it's the delta to what where we used to be to where we are now. And if you think about that, we're talking about material amounts of money that we eroded that we continually had to offset with our other Canadian operations. So I think the number, John, in the quarter alone, we didn't disclose, but in the overall for the year, it was $8.6 million EBIT loss for the closed stores and then the ones we're selling, many of which are great stores, but as an entire bundle of stores, that's the kind of impairment that we had to carry, and it wasn't that they lost $8.6 million the year before, they deteriorated to the point where it got to $8.6 million. They were profitable stores, and then they became negative $8.6 million. So you think the delta there over 2 years is easily in the $20 million range, and we had absorbed that quarter-by-quarter. So I'm just giving you some context here on -- when we're modeling, and we'll talk more about this in the next few weeks of what is the go-forward position of North West with the store grouping that we have now. And I think we'll -- it will be in a couple of weeks, but then in a few quarters, you'll start to see what North West looks like, with what the stores are that we're keeping. And then Giant Tiger Stores will become a part of the Giant Tiger Group and we'll be part of that reporting. So I just -- that's reasonably clear, I'm just trying to understand, on the one hand, you may say, well, EBITDA is flat, so what's the difference, having them in or out? Well, it's not that, it's what the EBITDA used to be. And the challenges that we face with the business that, for the reasons I mentioned earlier, got us to the point where we were sitting now at Giant Tiger and they were interested as well in getting these stores to their full potential. So I think that covers the GT part of the transaction. I haven't thought, so we better stop now for questions. I'm -- okay, I'm going to keep going. I just don't want to have this go too long and without one thread of thinking of what we're talking about. But okay, let's go to support office cost reduction. Here again, we have this planned, but given the materiality of it and given the Giant Tiger timing, we thought it was important to communicate, if we could, these 2 events plus Q4 so that we can start to communicate, as I said earlier, this is the full 2020 and then beyond picture for North West Company. Here again, we've looked at core to our business, what has to have priority. It's about running stores, getting product to stores. And from a plan by move sell, it's all about move and sell. And we continually see the opportunity to get more laser-sharp there. We've done a lot of things over the last 3, 5 years: convenience store, convenience assortment focus, top market focus, showing up our capital in those top markets. The people that run our stores is extremely important. The one thing that we had not -- we've not addressed to the extent that we need to is our price and cost structure. And when we look at the delta on the tonnage gains, the market share gains through convenience, through assortment planning, having better store managers in our stores, that's not done yet. The one pediment to getting real strong market share capture in the north is pricing. And it's not to discount price in a southern context, it's an inherent high-cost structure environment. Everyone should understand that. But it's to differentiate to be the lowest cost and the lowest price in an inherently high-cost operating environment. And we're not there today. We're not there definitely where we need to be in terms of giving people real choices to shop more locally, build a bigger basket with us in our store groups, another one locally or out of town. We're going to be much more positioned to do that. We want to enable it, of course, the cost structure and whether that's buying better with GT or the way we run our business. In the $17 million, about 60% is staff related, 40% are other activities, whether it's the use of consultants or travel, a whole list of streamlining and then automation enabled. We did invest in those. Who are following our story know that we've had an initiative called Project Enterprise. And as those enterprise systems have been turned on, the store systems installed that we're getting to the end of that, we now see the roles and the activities, a lot of the analytics. I think we're getting heavy in analytics and light on serving our customer, our cost effectively. So that part is starting to get shrunken. And on the desktop of the key folks who are buying and selling will be the analytics that come with the ERP that we acquired. So there's an efficiency aspect tied to technology. There are some positions that go away with the Giant Tiger transaction. Giant Tiger is acquiring the field support or not acquiring, but they're offering positions to those individuals. But there was a head office complement as well that, over time, Giant Tiger will become self-sufficient out of their Ottawa store support office. So all these factors converge to enable something that we think is really required and is ongoing for us. We consider this to be a thematic focus for the next probably 2, 3 years to continually look at our processes and how we create a bigger wedge on our go-to-market pricing to retain dollars in the community and to capture local share. So that's kind of the driving factor behind the support office reduction. And as far as the financial impact, we mentioned $17 million on an annualized basis, that -- if you're penciling in with the effective end of Q2, effective right now would be probably $12 million of that on a go-forward basis, so through Q1 and then Q2 -- end of Q2, would be $17 million. There -- the reductions are staged. There's a largest group of individuals affected are yesterday and today and then end of May and then end of July. So that's the impact. In terms of the price investment side, let's take 2 minutes to talk about that. We say that the annualized investment is $10 million. We believe that that's at the upper end of what is not self-funded to gross margin dollar growth. We also believe that we will -- as we continue to look at our costs and processes, there'll be more funding coming from the rest of our business. So that the magnitude of how far we go on price investment will depend on how we lock in on tonnage growth and market share capture. You can appreciate that, although it's -- we're -- we can be ubiquitously described as a Northern retailer, there are many, many different variants and pockets of market situations here that require tailored pricing go-to-market strategies. And we know what a lot of those should look like, but we have not done this degree of price investment, not just the 10, but what we see coming beyond that ever. So we have -- we're pretty good at looking at price elasticity. As we look at these situations and invest in them, we're going to learn and go as we go. We know that prices are going down. But how that works by market to really drive market and basket share growth could easily vary just because the market situations are so different, both by remoteness, by the size of the market, the logistics aspects, et cetera. So that all be inherent in this work over the next 12 to 18 months. Finally, on the financial highlights. I just -- I'll comment on a couple of things being mindful of the time. The airline was a disappointment in the quarter. We were flat to last year. We expected to be at least $1.5 million higher. We lost an airline -- an airplane due to an accident. We are now -- have under a spotlight, the Basler equipment that we fly as opposed to the ATR, were the second -- first incident now -- for a write-off accident with that plane class. We've made changes to the way we're using the aircraft, and we're in an assessment mode now of whether go forward. It should be such a key part of our fleet. So that's underway. The quarterly impact was tied directly to the utilization of third-party aircraft, the charter cost of that and the compression of margin, which is largely an internal margin between the North West Stores paid to the North West airline. There was some noise in January of one of the ATRs went into its C check. And since we didn't have the Basler, we continued to have third-party expense to keep our lift capacity as we required it. So not a good picture there. Certainly, it's galvanized everyone's attention. There will be some decisions made shortly if we do fleet changes. From a capital standpoint, it probably won't be material in terms of the dollar-for-dollar cost of the types of airplanes we would flying one way or the other. But that is something that will be decided very shortly, certainly by the end of Q1. In the international side, we had some higher expenses. We opened 5 stores in the quarter overall. 2 stand out, Barrow and St. Thomas, where the preopening cost or the annual opening expense run rate for the first 2 periods was higher than we wanted. St. Thomas, we hired back a lot of our staff from prehurricane. Our annual -- or pardon me, our weekly and monthly sales trends are pretty much where we expected. So this was on us, I think, in terms of overstaffing, and really putting our best foot forward into the island and welcome back with warm arms and lots of excitement and great customer loyalty, considering we're out of that market for as long as we were over 2 years. So that's all good news. But in terms of the staff cost -- and I think we're probably overcommitted to be the best and now -- and then we had to do some rightsizing of our staff and cost complement. So there -- that one, the Barrow store as well, where we had to put in another type of store to the market. There was a sort of an all-hands-on-deck. I mean we're not a big organization internationally. And we have 2 fairly significant store opening events and trying to get it right to really be the right thing for our customers. There was some expense attached to that, that's now being brought back down. Otherwise, the -- our core Northern markets were where we expected them to be, maybe a little lighter on the sales side in Alaska. We had an issue there with the timing of the PFD, we're all aware of that. It didn't come back as strong in Q4. When it got spread out, it took away the special event selling part of it, and it kind of dissipated into the marketplace. So we expect this year that they will get back to distributing that as they plan -- usually planned to, which is an entire time frame and it really becomes a big event for retailers to get sales. The last thing I'll say is on COVID-19. We're on top of, by the hour, as it turns out, the change in developments that are occurring. And the way we are focused today as an essential service provider, especially into northern regions, which are 80% of our business with the ex GT. And within our whole business, we're now going to be even a higher percentage of food, well north of 80%. The key here is safety for our people and service for our customers, continuity of service and supply through ongoing discussions with local, regional and national government authorities, ensuring that there's recognition that as well as health is an essential service, so is the provision of everyday food and other essential needs, many of which flow through our stores. So ensuring that through whether it's a cargo on our own airliner or someone else's is shipped unimpeded to the communities that security of supply so far, it's been fine, but all the key volume items that are on those essential lists that were not short-shipped, and we are looking for some special treatment because of where we're serving and the customer reliance on us and a few other local retailers when it comes to those essentials. Those are the kind of things that we're looking at when we talk to regulators and people who are trying to figure out what to do to respond to needs if there's a serious transmission outbreak. We have all the other protocols you might expect. You've heard from other retailers. We're not terribly different in that regard. One big area for us, though, is redundancy planning. We want to make sure that our redundancy for our pilots and our store managers if there's -- if they're required to self-isolate or they can track COVID-19. So that's all in our mind. In terms of external demand, so we've seen spikes because of people stocking up. As people start to level set what's really happening, we think we're going to see more stable, but normal, almost, demand in our Northern markets, Alaska and Northern Canada. Conditional on what kind of transmission risk is in those communities, isolation is an advantage and could be a disadvantage. So it's really, really important, and we're stressing this emphatically that communities self-isolate and quarantine. It could be binary that way. Where it's more conventionally a risk, I suppose, would be in the Caribbean where the tourism is coming to a stop. For now, it's ahead of the normal downturn of tourism. We aren't seeing directly that effect. I think we're still getting a lot of the stock up in people in preparedness spending, but we fully anticipate that as we get through the next month and things really slow down, that there'll be some impact on our business. To put into context, the Northern businesses I just talked about would be 80% of our EBIT and EBITDA. So the 20% that's more at risk is tied to the Caribbean tourism economy. And underneath that is the fact that we're still an essential needs retailer with the stores that we operate, given their large percentage of food sales, Costco format and supermarket formats. So we're concerned, but we're -- it's not the thing that we worry most about, namely our top line or whether we're going to have customers, it's whether we're keeping the stores open, getting product to the communities, the islands and ensuring that we're working hand-in-glove with all the government -- relevant government authorities, so that we can really do our best. And we have done that before when there's been emergencies, the hurricanes, we were relied on heavily in BVI. I think we came through with flying colors in the circumstances. And we want to be that type of service provider. People know that we're going to get the product through and that they can count on us. So that's our entire focus right now in COVID. People want what we sell, they're going to want it even more, and we have to be there for them. So that's kind of in a nutshell where we are there. Operator, I think with that, I know I missed some things, but we'll -- there's a lot to cover here yet, but we'll open the call for questions. Thanks.
[Operator Instructions] Our first question is from Michael Van Aelst from TD Securities.
Okay. So a few questions, first on Giant Tiger, just so we know how to model it. I know you're going to give us some more details, hopefully, but to start, can you give us an idea of the revenue split for Giant Tiger between food and general merchandise?
On the go-forward, or the take out -- yes, either way.
The part that you're getting rid of?
Yes, it's $290 million, that would be split 55% food, 45% general merchandise.
Okay. All right. And then is there much seasonality to that business?
No. It's more -- the monthly spike, like June is a big month and December is a big month, back-to-school is a big month. If you went quarter-by-quarter, I'd say the biggest would be December when we would make -- if we're making money, it'd be December, which, again, unfortunately, was the biggest negative delta of the year for us this year. So yes, Q4 would be the positive one.
Okay. And the gross margins, were they below your average then, I guess?
Significantly.
Okay. All right. And the EBITDA that you provided of $0.3 million for the last 12 months, was that under IFRS 16?
Yes.
Okay, great. So what has to happen for you guys to get to that extra $22.5 million in contingency payments?
Well, GT has to, with our support as a distributor supplier of food for that half of the business, they need to hold or improve what those stores are doing today.
So if they're doing the same amount of profits in years 4 and 5?
We wouldn't max out, but we wouldget -- we may get 70%, 75% of the $22.5 million.
Okay. And the peak profits for this business, was it a few years ago?
Yes.
And you're saying that was at least $20 million higher a couple of years ago?
Yes.
Yes? Okay. The -- you mentioned excess cost in St. Thomas and Barrow. Can you give us a sense as to how much extra you were spending? And whether that was rightsized by the end of the quarter?
It was rightsized, it would be less than $1 million between all the store I would call costs, it would be in the $0.5 million range.
Per store or total?
No, total. The other comment I should have mentioned there would be an equal amount of bottom line impact in the quarter, maybe slightly more. Actually, I should have raised that in Guam. We have 3 stores in Guam and the Korean tourism market there even before COVID, that's already before COVID was tied to political uncertainty, it had fallen off. So we were challenged in that market year-over-year. So that would be probably the other half of the shortfall actually in our Caribbean business with sales and profit performance in Guam. I should have mentioned that.
Okay. Now I wanted to talk about NSA because -- is this the second or the third accident for Basler, Basler brands?
It's the third -- it's a third incident. So the first one was the -- 3 months before we bought the company. They had an emergency landing. And then last June, they had another emergency landing. And then this was an actual -- again, emergency landing, but one that totaled the plane. The other 2, the planes were damaged and repaired. The second one that was the per costs were quite significant. And with insurance implications, and this one was a write-off. All covered by insurance...
But are these pilot issues or are these equipment issues?
The second one, I'll come back to the next. The second one is still being reviewed of what happened with Transport Canada -- Transportation Safety Board, pardon me, it could take another year. We think it was a pilot issue, but we don't know for sure. The other 2, weather conditions played a factor. And our -- it's something that we're still assessing, that these are utilitarian planes, but to run them on a commercial sched the way we do, we're trying to assess whether that's one of the inherent risks that we're not -- that we need to recognize that they're often used for exploration, special duty, really tough work Antarctic-type stuff, and we're using them on many, many cycle times. We realize that there's going to have -- we have, obviously, made some changes in the standard operating procedures to mitigate any risk totally, or totally as best we can. So every time they happens like this, you learn from it. And the nature of the 2 -- the first one -- sorry, I talked about the second. The first one was an icing issue. It appeared to be a de-ice protocol that exist in Canada today that -- so our product couldn't have default it, but we learned afterwards that, yes, that is the de-ice protocol that should exist. And as I understand, they've rewritten the protocols for all airlines, which often happens after an incident, they learn and then they rewrite SOPs for everybody. The last one was weather conditions as well and the type of procedure, the banking procedure that's allowed to take place with the Basler compared to an ATR. They fly under slightly different operating procedures because of the nature of the planes. So the landing approach requirements are less for Basler. The banking requirements, if you have to abort landing, are less for a Basler. We've basically taken the Basler up to the ATR protocols, which aren't required. But that based on what's happened this year, looks like that's the least we should be doing in addition to looking at the fleet itself. So what I'm trying to say is the Basler flies a different way. It seems to work until it doesn't. And now we're in this in between stage of saying, "Okay, if we have to fly like an ATR, maybe we should be finding ATRs instead of Baslers, if that's the requirement."
So how many Baslers and ATRs do you have right now?
4 or pardon me 5 and 3. The 3 ATRs, one is under a medium-term charter. We have a fourth Basler that we've acquired that will be in service. So we'll have 3 owned Baslers and 1 chartered one. That third one will, I think it's in service early June. And now we have 12 lattices that are largely passenger planes, and 1-8 is a passenger plane.
Okay. So the Baslers, could they be -- like the functions you use it for, could they be replaced by the third ATR?
The third ATR will replace some of the Basler fleet lift. It will be -- yes, the short answer. But it will be more going to an ATR 42 as opposed to 72 configuration because the Baslers are being used for smaller payloads. They are in the 12,000-, 13,000-pound payload versus the ATRs at 18. So the smaller stores are served by Baslers, it obviously has to flip, it would flip to an ATR 42.
Okay. So where do you stand now in terms of these extra leases for the airplanes? Are you almost like...
We're done there. I mean it's converged with the lower end of our demand from customers, including North West because in winter road season, there's a lot more product coming in by winter road and not being flown. So the lift requirements drop off. So we're past that. And now we're into more the normal flow of our capacity needs. And we were -- so far, we're fine with that. So it's stabilized.
Okay. I'm sorry, I don't remember, did you say how much the extra leases cost during the quarter?
No. But I did say at the beginning that we should have been $1.5 million higher. And I think the lease component of that combined with the maintenance would add up to that amount and without breaking it out.
Our following question is from Stephen MacLeod from BMO Capital Markets.
I just had a couple of questions about the GT sale. Most -- just maybe firstly, can you just talk a little bit about how the sale was precipitated? How's it coming about? I mean, obviously, I understand that you haven't been happy with the performance recently, but was it something where they came to you? Or was it something where you went to the buyer and sort of tried to negotiate a deal that way?
It's a combination of that without getting into the blow by blow. I mean we -- I guess, our signal to investors in the market was that -- going back again, I said not just June, but before that, we were -- we had no -- we didn't try to distance ourselves from Giant Tiger as a group of stores we owned and ran, but we were getting more and more directed and that includes [ doing ] acquisition on getting our entire value chain, especially to move and to sell really buttoned down for our Northern businesses. So anyway, we're talking about that, and then it's kind of a conversion of GTs being interested and ready and us being ready to sit down with them. And even then, it took a fair amount of time to understand how this would work given the other intricacies of how they would build out their stores with our support, how we could plug into their other areas of expertise. So I think the -- I think both group companies for a year have been aligned in principle with this idea -- over a year, actually. But we've always had our other businesses to run, GT as much as the west is important, and again, not speaking into the details of their own strategy, but I think, there's a lot of stores that they're building and growing out in Eastern Canada. So it was -- even though we are both aligned with having serious discussions about this, it just -- it started to pick up its own momentum, I'd say, of urgency that we're going to do this. Let's get it done in a way that works for both parties, and that really started -- well, not that long ago, actually. There is a lot of back and forth.
Right. Okay. And did I understand correctly that you'll be supplying -- you're still using to have a food supply agreement with Giant Tiger and then they also be supplying general merchandise to you?
Yes. So to be like at -- the $290 million I mentioned in revenue, so half of that roughly in cost, $125 million of purchases that we sell for Barrow with Giant Tiger will have to be replaced. I mean a large percentage will go through our distribution center in Winnipeg and will be flow to the stores and will be recorded as a revenue of North West to Giant Tiger as a supplier to Giant Tiger. When we sit down with Giant Tiger post closing, we'll actually start right away. We're going to be looking at strategically our vendor management and how we leverage each other. But we -- our buying team here at Winnipeg will, out of the gate, be managing those relationships, and then we'll look at how we can collaborate to make them superefficient on the buy side. So that's on us with collaborating with Giant Tiger. What I want to talk more on the other side is general merchandise, because that's where we have the lion's share of opportunity. If you walk to a Giant Tiger stores, there's very strong assortments in, what I would say, medium-ticket hardlines, housewares, home, home fashions, fitting window coverings, bath and bedding, will completely replace our sourced assortments. And in apparel, although that's not a big business for us in terms of the fashion that GT is really good at, we have stores that will leverage the fashion side, and all of our stores will leverage their basic apparel program in terms of foundations head and hand wear, et cetera. And the fact that Giant Tiger -- we like 2 parts about this. We like the fact that they're strong and are moving more to be more opportunistic. And special deal buyers, but just kind of going back to their roots, but they also, in the meantime, have built some very strong basic programs. They've got some very good house brands, brands they've picked up, like Proctor Silex and [ echelle ], they own those brands in Canada. And their own other created brands that we can now tap into. And again, go-to-market with better assortments and better pricing. In context, it's in that 20% of our business that's nonfood in the north. But these are all additive things to our value prop to the customers that we think are going to be very positive, and we're providing volumes to Giant Tiger. So when they -- on the buy side, and they're importing, wherever they're buying, they've got that additional leverage and scale as well as leveraging their very -- their new and increasingly efficient robotic distribution center in Ontario.
Right. Okay. And just to clarify, and I know you'll be providing maybe some more disclosure down the road around how to model this, but did I understand correctly, so if you lose sales of $295 million, are you gaining back $125 million of sales that you'll be supplying to Giant Tiger?
Yes. The margin there will be insignificant in the sense that it will absorb. The big thing there is absorption because we've got DC, distribution center in Winnipeg that we didn't want to lose half of volume from, and we won't. So it's -- that's not so much a profit play. It isn't actually as an absorption play and scale play because we want to continue on the procurement side to have that scale as well. And now we've actually picked up more through collaboration with Giant Tiger. So -- but yes, from an accounting standpoint, it will show up on the revenue line to replace the $290 million.
Okay, okay. That's helpful. And then when you think about the Giant Tiger business, and you talked a little bit about taking away management tension from Northern Canada, what part of the Northern Canada business would you characterize as suffering or as having suffered?
Well, first of all, I won't say it's suffered, but the CAGRs are not what they should be. It's grown and it's generated free cash flow. And the delta or the DV, it's a very low downstroke business. It doesn't tend to drop. It just grows steadily. But given the population growth, given the income growth, we should be doing better. We should be grabbing more market share. We've lost some market share. So it's not awful, it's not suffering. But as I'm going to speak to the staff because we've just gone through this downside in the 15 minutes, the first group of staff, it had to be done to grow the business at the rate that we need to. So I would call that long-term sustainability. And when you start to open that up and you present yourself to the customers where you've got the best run stores consistency wise, your management team is superior, some of your competition may be community-owned co-op stores, but you've got great community relations in the context. You have people out shopping, getting on the road or getting out of town when they go power shopping, tied to medical. But when they look at our prices now and they say, "Was that really worth it buying us? I don't really want to go to town and buy stuff, I want to go to town and experience things."North West has got a cost price position here that is very compelling. Not discount, like I said, but it's -- that's not what you'd say about North West today. And what I'm describing, by the way, is very, very qualitative because it's not an index that says like GT will index and it's a discount price. It's a -- you know you're getting a deal. Our deals are relative deal, relative to where they shop in town and relative to the time expense of going out of town, and we have to shore that up to drive our top line. That's what it really comes down to. It's this other leg of the stool that we've left now. We've, as I said, focused on convenience, focused on top markets, focused on our people, really important, doesn't stop. But we haven't come to grips with the cost price. And that's a strength for us as we have relative scale in the north. We have the ability through our airline integration to get to a cost structure as we're getting to now that would pass on real noticeable savings to our customers. What you're going to expect from that and what you're going to want to start to think about it and how is the model is well, what kind of comps are we talking about. Like if I told -- if the CAGR was 3%, I think, well, that's not good enough. Like we expect it to be 6%. We expect to be driven through, like this is going to drive more GT dollars and unit sales through our stores. So it's about that kind Of a growth projection for our business in the north on a comp store basis, spending our depreciation to replace our capital, before we even think about opening new stores or complementary business growth in the north, which will have its time in place as we let -- as the dust settles here, we'll be looking more, okay, what kind of a tuck-in area, either -- consumer facing, we look at in our Northern business. But first, we've got to exploit and really deliver for our customers the pricing that they're going to want from us.
Our following question is from Sabahat Khan from RBC Capital Markets.
Just, I guess, the thought process. You've talked a little bit about it already, but just around going a bit more lower priced. I guess, with the rising, I guess, investment in Northern Canada over the last little while, are you just seeing more competition? Are you seeing people being a little bit more careful with the spend? Or is it just directionally you think that's better for your longer-term positioning in that market?
It's the latter. I mean people aren't more -- I mean, more income means more spend, not probably be more careful necessarily. No big wave of competitive openings. It's more what's your price, your go-to-market price position with the -- it's not enough to just say we're more reliable, we have our store managers, our assortment, you want to over-deliver to win. And I think Giant Tiger is a good example of that, where they've got a lot of great things going on, and then you get it out of the final sort of check-off mark on the value prop is you don't have to pay Shoppers Drug Mart prices, you get Shoppers Drug Mart convenience, but you get to play Walmart prices, and you get great merchandise. We want to see more of that, that our customers will say, "Well, GT -- I mean, North West does all these things for me, and they do it at a price that's better than x, y and z." It's not just about matching. Certainly, that's a foolish thing to do because you're matching prices that are already too high, and so what's the good of that. You just -- so now both people are in town or all 3 stores in town only have 10% share of something when we should have 30%, 40% at least. I'm talking about a high out shopping category and that type of milk. So -- and we've learned a lot through price investments, some of them be through Nutrition North, that was a government price investment. We see what happens when price goes down. There is elasticity, only so much milk can be drunk, but people will spend more locally and will consume more of what's lower priced. So that's our goal.
And then are you seeing any changes in shopping patterns with regards to e-commerce? I think you mentioned a while back was something you might think about. But are you seeing any other players kind of getting any online market share? And are you thinking about it right now?
Well, we have. We have platforms throughout our business and whether it's BVI where ships can -- charters of boats and customers can order online, and we deliver to their dock to the house. We have an online platform in Alaska, and we've got one that we were -- semi have launched in Canada, well might get accelerated with the COVID to give more home delivery options, the store pickup options. That's us. We've seen on the -- it's come and gone from the other side. Yes, Amazon ships up to Calgary without having to pay the freight, that's kind of crazy. Everywhere else, it's gone more the other way, where people like Walmart have added real, so they're serious shipping costs or are not shipping to markets because they -- you turn on a postal code or a ZIP code up north and it's fun and games for a while until someone cost account, you've heard me say this before, wakes up and then who's paying these freight bills. So there's a limit to how much you can absorb, unless you don't want to make money is shipping to the north. And that's where I think there's a natural cap on e-comm. And in our case, though, it still may be the right alternative tool for extended range, and that's where our focus is. And to give more broad range through e-comm, but likely still have most of our key volume items in the store. The penetration is not high for essentials on e-comm in the north.
Okay, great. And then you kind of alluded to this in a response to your question earlier, but apart from Giant Tiger, did you also potentially consider other options for the sale, maybe selling to a third-party? Or any other options beyond maybe just dealing with the franchisor?
I think conceptually, you have to put everything on the table on your head and then you have to then look at the reality of who's the best natural partner for this. And uniquely, since they're the master franchisors, we have a 20-year relationship. And they've got a vision for their stores, that's national. We've got a vision for our core competency, which is more rural, remote, worldwide or where we do business. So in theory, yes, what you're saying, can -- yes, you could -- but it's not like we put out an auction or a quota process. It wasn't like that. There are other people interested in sites like the Giant Tiger sites, who -- or who like to work with North West. I'm not saying there's no other interest in these stores or wasn't. But Giant Tiger is the natural partner for us longer-term and the buyer for the stores. That's kind of the end of the story.
Okay. And then just one last one for me. I guess, with the stuff that's happened with COVID and the potential impact in the Caribbean market, is there any potential to pick up some business interruption coverage from reinsurance side at all? Or with this kind of the current environment, not qualify for that?
No. Sorry, Sabahat, you were asking whether insurance would cover some of the COVID impact?
Yes. Like if they just don't shut down the stuff, yes.
Yes. No, that's not something that would be covered under insurance.
[Operator Instructions] Our following question is from Michael Van Aelst from TD Securities.
On Alaska, why were the general merchandise sales not stronger given that the PFD, 2/3 of the PFD got pushed into the fourth quarter?
I'm not sure, except it seems that they were pushed, but they were -- it was spread out over the entire quarter. So we're still getting checks come in, some even after Christmas. But it's not -- it helped Q1 a little bit, believe it or not. So my point is, I said earlier, is that before you would get an all drop, we have this big PFD event, we'd say you bring in your PFD, you get this money back or additional, we pop it up, and it's a big sales event. It's a big spending event for people. Now it's like, "Well, did you get your check yet?" "Yes, I've got mine. Did you get yours?" "No, not yet." So it just dribbled in. And that might not be a good enough answer, but that's the only one I've got on why the whole nature of selling event. We try to capture it again with -- through Christmas sales, but I think it all got converged with Christmas and it just dissipated.
Okay. So I guess, if this were to happen again, will you adjust your promotional strategy?
We'll adjust our promotional strategy and we'll take it from there. I mean we -- broad strokes, we still want to get more of the PFDs. And I think we -- this is something we've got to be better at as we plan into next season. No matter what happens, are we aggressive enough to go get the business? I think we also -- I mean, you heard me talk about this at the last quarter that we just expected, I don't know why, now in hindsight that this money would just come in back to us just late, and it didn't work that way. So...
Okay. And just to clarify some of your earlier comments, the $17 million of cost savings, did you say you'd get $12 million run rate in Q1 or by the end of Q1?
Now.
So you're getting that now and then the other $17 million -- and then you'll be at the $17 million...
The other $5 million -- if you're modeling, the other $5 million, would start August 1. So $17 million, August 1.
August 1? Okay. All right. And then the $10 million that you're going to reinvest in price, that's more gradual?
'It is. And that's why, I'm trying -- we're trying to give directional guidance there. And I -- whenever we disclose in the next week, that I've referred to earlier, won't probably be more precise, but will -- we want to fund this, as I said, through other cost streamlining. So it's not taking the $17 million, we're saying $10 million of that we can put on the table. But as we go through it, we're looking to see market share growth and basically prove the point that I've been trying to make is that there's share to grab or earn. And will the $10 million go anyways? I'm going to say, yes, that's why it's there. The $10 million is going to get invested because just to put this out, it's not going to be like put it -- let's try $20 first or let's do a $200,000. If it really sticks, we're going to roll up to $20 million. We know enough that it's going to take $10 million, but over the next year on an annualized basis. And as -- if we ramp it up, then it's going to be through other cost efficiencies are self-funded. Okay. So tough to model because we're also saying that if that -- let's say, the first $5 million, you got to put something into the market, but we want to see more green shoots from that to say as we put the next $5 million in, we're modeling as well some GT growth and some EBITDA growth that's higher than the 3% I mentioned earlier. So I don't know if I take the whole $10 million off, you might take part of it off, but the rest is -- the company is saying they're going to self-fund or fund through the other ways I mentioned.
Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to you, Mr. Kennedy.
Thanks, operator, and thanks, everyone, for your patience and going through all the material. And I know with all your other demands this week and stresses in the broader markets, this required some of your attention on short notice. I hope you appreciate the circumstances of why we did the convergence of the 3 events. I hope it helps as you're modeling, and it will be part again, will -- probably not next but the week after, there'll be some posting of material that would give a little more remarks. I think you have the financial ingredients to start to say, okay, what is North West like 2020, but we'll do more to help to make sure that we've got as much as we can say out with our disclosure. We're very happy right now with this full disclosure, but just more giving more context and ensuring that we can figuratively or schematically show that in ways that help you. Okay. With that, we'll wrap up our call. Thanks very much, and we look forward to you on our next quarter call. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.