North West Company Inc

TSX:NWC

Q1-2026 Earnings Call

[Operator]

Welcome to the North West Company Inc. First Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead.

[Daniel McConnell, executive]

Thank you very much, and good morning. Welcome to the North West Company First Quarter Conference Call. I'm joined here today by -- with John King, our Chief Financial Officer; and Alexis Cloutier, our VP, Legal and Corporate Secretary. I'm going to start the meeting by asking Alexis to read our disclosure statement.

[Alexis Cloutier, executive]

Thank you, Dan. Before we begin today, I remind you that certain information presented 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 in the future to vary materially from those contemplated in the forward-looking statements.

Any forward-looking statements are current only as of the date they're made, and the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise, other than what's required by law. For additional information on these risks, please see North West's annual information form and its MD&A under the heading Risk Factors.

[Daniel McConnell, executive]

Thanks, Alexis. I will begin with a brief overview of our consolidated results for the quarter, followed by some additional insights on our Canadian and International Operations. Finally, I'll wrap up with a few comments on our outlook, the Next 100 program and the wildfire situation in Northern Canada. Okay. So let's dive right in.

We've had a positive start to the fiscal year, especially when considering that we're comparing to a very strong first quarter last year. Consolidated sales in the quarter were up 3.9% and net earnings increased by 2.2%, which is on top of a 22.3% increase last year. These results were driven by same-store sales gains and an increase in gross profit rate, largely due to changes in sales blend and lower markdowns. These factors were partially offset by an increase in S&A expenses, largely related to an increase in share-based compensation, resulting from a higher share price and Next 100 program costs.

Let me briefly explain on the consolidated results. So both Canadian and International Operations contributed to strong top line performance, which was driven by solid same-store food sales gains of 4%. Gross profit dollars were up 7.2% for the quarter due to sales gains and 103 basis point increase in the gross profit rate, largely due to changes in sales blend, including a lower blend of wholesale sales and a decrease in markdowns, including the positive impact of more effective data-driven promotions as a part of our Next 100 work.

Expenses were up 8.7% for the quarter or 120 basis points as a rate to sales, primarily due to higher staff and technology costs to support the Next 100 work. Combined with an increase in depreciation and the impact of foreign exchange on the translation of international expenses, this increase in expenses includes a $2.1 million in onetime costs for professional fees related to the execution of our Next 100 program.

These onetime costs were offset by the financial benefits from our Next 100 initiatives, including more effective promotions, a reduction in print media and other cost savings initiatives. We are also seeing store labor productivity gains, which is lowering store staff costs as a percentage of sales.

The net impact of all these factors resulted in solid bottom line results with net earnings increasing 2.2% in the quarter, which is on top of a 22.3% increase in net earnings in the first quarter last year. Adjusted net earnings, which excludes the impact of share-based compensation and Next 100 related onetime costs, increased 14.2% compared to last year.

With that overview, I will unpack these results, beginning with our Canadian Operations. Overall, we're pleased with the results in our Canadian Operations, particularly when you consider the impact of Next 100 onetime costs and higher share-based compensation expenses and the fact that we are comparing to very strong results in the first quarter of last year.

From a top line perspective, total sales in Canada were up 2%, led by same-store sales gains and the impact of new stores. Breaking this down further, food sales increased 1.9% as a 5.1% increase in the same-store sales was partially offset by lower wholesale food sales. One of the key factors contributing to the increase in same-store food sales in the quarter was increased consumer demand from the Inuit Child First Initiative that provides greater access to nutritious foods that began to ramp up in the second quarter last year. I'll come back to that in the context of our outlook.

General merchandise and other sales increased 2.2% compared to last year as higher pharmacy and retail fuel sales more than offset softer general merchandise same-store sales. Payments to individuals from the First Nations Drinking Water Settlement continued in the quarter, which was largely comparable to last year.

In terms of gross profit dollars, Canadian operations increased 5.1%, and this was in the quarter due to higher sales and changes in the sales blend, including the impact of lower wholesale food sales. Similar to Q4 last year, the change in sales blend also included higher sales from foodservice and our fresh departments.

Improvements in markdowns, including more effective data-driven promotional activity as part of our Next 100 initiatives were also factors. The impact of these sales gains and increase in gross profit rate were more than offset by higher expenses due to the Next 100 and share-based compensation costs and other factors that I mentioned.

The net impact of these factors was a 6.2% decrease in Canadian Operations EBIT for the quarter compared to a 20.9% increase for the first quarter last year. That said, adjusted EBITDA, which excludes the impact of one -- next one -- sorry, of the onetime Next 100 costs and share-based compensation expenses increased 5.8%, which is on top of an 11.3% increase in the first quarter of last year.

Moving on to our International Operations. Our International Operations delivered very strong results this quarter with both sales and earnings gains. Same-store sales increased 2.8% in total driven by same-store sales gains of 2.6% in food and 5.2% in general merchandise. Favorable economic conditions in certain Caribbean markets driven by an improved tourism season, more than offset headwinds on wholesale sales in Alaska as well as soft economic conditions in certain South Pacific markets.

Gross profit increased 5.4% due to higher sales and an increase in gross profit rate, mainly related to the change in sales blend, including the impact of lower wholesale sales in Alaska and higher market-driven gross profit rates in certain Caribbean locations aligned with improved economic conditions.

The impact of higher sales and an increase in gross profit rate were partially offset by higher expenses. But overall, these factors resulted in an 11% increase in EBIT for the quarter.

With that overview of our first quarter results, I'll now briefly talk about the outlook, provide a few comments on the Next 100 program, and then we'll finish off with some commentary around the wildfire situation in Northern Canada.

We provided commentary on key factors that we expect to impact our outlook in the first quarter report to shareholders. So I'll briefly highlight only a few of the items.

With respect to tariffs, we have started to see some increases, but overall, the impact has not been significant. However, this is a very fluid situation, and there continues to be uncertainty related to the economy and the impact of tariffs on the cost of merchandise and inflation in the countries in which we operate.

As we previously commented, we expect consumer demand to continue to be positively impacted by the distribution of First Nations Drinking Water Settlement payments through the remainder of 2025, but to a lesser degree as we are comparing to the payments issued in 2024. Another factor I want to touch on briefly is the Inuit Child First Initiative, which began to ramp up in the second quarter of last year. The Inuit Child First Initiative, or ICFI food voucher program provided broad access to nutritious food for Inuit children.

As we noted in our outlook, on March 21, 2025, the government of Canada announced that it would extend the funding for the Inuit Child First Initiative until March 31, 2026, to support continuation of the program, while Canada and Inuit partners work together on the development of a long-term approach for supporting Inuit children to get access to nutritious foods.

However, beginning in late April '25, funding under the ICFI has been limited to individual child-specific claims. This change is expected to result in a reduction in the distribution of funding to individuals compared to the ICFI food voucher program in 2024, which provided much broader access to nutritious food for Inuit children. There's uncertainty currently regarding how long this change in distribution of funding to individuals will last or if the ICFI food voucher program that was available in 2024 will resume.

As noted in our report to shareholders, we continue to focus on driving operational excellence and cost efficiencies across our business and deliver further value for our customers, our employees and our shareholders through our Next 100 program. As part of the Next 100, we continue to refine our product assortment and have begun rolling out an expanded private label offering in our Canadian operations.

We also continue to implement our store-based inventory forecasting and replenishment technology to improve on-shelf availability as well as enhance labor optimization processes that are resulting in cost savings and improved efficiencies. We are pleased with the progress to date on the operational improvements to our business and the financial results for our Next 100 program. However, there is still a lot of work to do as we embedded operational excellence in every aspect of our business.

As these Next 100 initiatives mature, we expect to continue to incur onetime costs for professional fees through the remainder of 2025 and into 2026, which we will highlight in our quarterly reports as we have done in the past. These onetime costs are expected to be fully offset by the annualized incremental EBIT from the initiatives.

Before I open the call for questions, I would like to comment on the wildfires that are having a devastating impact on Northern Canada. Our thoughts are with all those who are impacted, and I want to take a moment to thank the firefighters, community leaders, and all those working tirelessly to protect residents and ensure their safety. I also want to recognize and thank the North Wester who remain in the communities to keep stores open and ensure food and supplies are available. Their passion and commitment to the communities we serve demonstrates the core values of our company.

With that, operator, I would now like to open up the call for any questions.

[Operator]

[Operator Instructions] Our first question is from Michael Van Aelst is from TD Cowen.

[Michael Van Aelst, analyst]

A few questions for you. First of all, regarding the wildfires, you noted 4 communities have been evacuated, 10 semi-evacuated. How many communities does North West operate in Northern Canada or in Canada in general?

[Daniel McConnell, executive]

About 140, Michael.

[Michael Van Aelst, analyst]

140. Okay. So this is roughly affecting 10% of your sites?

[Daniel McConnell, executive]

Yes.

[Michael Van Aelst, analyst]

Okay. And should we just assume that sales at these locations are next to 0 for the short term?

[Daniel McConnell, executive]

Minimized for sure. But obviously, the 10 stores that are open are servicing other -- some of the emergency workers and the few people that are still in community. So I would say, yes, it will be significantly reduced, but then also keeping in mind that a lot of the people that are in community go over to adjacent communities or other communities within a certain radius, and those stores would be positively impacted. But at the most part, it's definitely got a negative impact on our sales, and it would be significantly less than what would be the normal case.

[Michael Van Aelst, analyst]

Okay. And then with respect to the water settlement payments, I just want to clarify the way you've termed it or worded it. So are the payments to individuals less in 2025 than in 2024? Or is the growth rate you're seeing from those payments less?

[Daniel McConnell, executive]

Correct. The growth rate. So I'd say it's about on par, but we anticipate, if you were to model it out for the year, that it would be probably -- we anticipate it will be slightly less than last year.

[Michael Van Aelst, analyst]

The growth rate or the revenues?

[Daniel McConnell, executive]

The revenues.

[Michael Van Aelst, analyst]

Okay. So the actual payments to individuals is down year-over-year when it comes to this water settlement?

[Daniel McConnell, executive]

We're anticipating that for the remainder of the year. Like once you annualize it, yes, we expect it to be less than it was last year. The revenue, the payments.

[Michael Van Aelst, analyst]

Okay. So when you take into consideration the water sale payments being lower, the food voucher program somewhat on pause or limited for now and some of these wildfires, how -- the comps look like they get easier the next few quarters, but do they actually given these year-over-year changes?

[Daniel McConnell, executive]

Well, you've raised a good point because there's a number of unknowns there. However, we continue to remain optimistic and the things that we can control, we're definitely building momentum on. But particularly towards the ICFI payments, I know there's a lot of talk and a lot of escalations from the community that are unsatisfied with the way that things are sitting currently. So as it's not -- they believe and we would agree that it's not reaching and having the impact that I think they would like it to have. So we're hopeful that, that will work its way out to be more similar to 2024 than where it sits currently.

As far as the wildfires, it's anybody's guess as to what's going to happen there, and we'll just continue to stay on guard and hope for the best. But the things that are within our control are moving in the right direction. And yes, so we're remaining optimistic.

[Michael Van Aelst, analyst]

Okay. So would it be -- given the amount of variables that are out there right now, is it -- could you comment on what you're seeing quarter-to-date in Q2 so far in terms of your sales -- same-store sales and whether they remain positive or in Canada?

[Daniel McConnell, executive]

You know what -- so we don't typically do that, but I will say that, obviously, you know that as per your first question, the wildfires are having a negative impact on sales, particularly in Manitoba. It's impacting up to 10% of our stores. Excluding that, it's still pretty early in the quarter. But like I said, we're continuing to drive forward, and we'll remain optimistic until the -- and we'll report obviously more as we know it. And if anything material happens, then we would obviously report that as well.

[Operator]

The following question is from Stephen MacLeod from BMO Capital Markets.

[Stephen MacLeod, analyst]

I had some questions along the same lines as Michael had. But just wanted to ask about the Inuit Child First Initiative. So if I understand it correctly, is it meaningfully paring back the programs that provide access to nutritious foods? And are there any kind of stop gap measures in the interim? I mean, how should we think about the impact of that to food same-store sales growth, which was quite strong in the quarter?

[Daniel McConnell, executive]

No. No. Nothing currently. But we -- yes, it has slowed down, and it's taken a significant turn to where it was last year. However, like I said earlier, I know there's a lot of energy that's being put towards getting it more back to a state that has the impact that it has current -- in the past as they see it as there's a significant gap in the availability of it for people that need it.

So really, that's all that we really know right now, but it's -- there's nothing that we're aware of that's -- that we could report really other than that. And I wish I had more for you, Stephen, and you can appreciate that our ears are close to it. And obviously, we think it's the right thing to do. But it's just not something that we've been able to give any more insights on other than what we've shared with you currently.

[Stephen MacLeod, analyst]

Yes. Okay. Okay. No, that's fair and understandable. Just with respect to the larger First Nations Child and Family Services program payments or program that's coming through. You mentioned in the press release that you expect kind of payments to be distributed into Q1 of '26. Previously, the wording was kind of late 2025. Do you have very good visibility into that? Has there something changed with the program or the application process just to give you insight into those payments beginning to flow through in early 2026?

[Daniel McConnell, executive]

No, other than the fact that we think it seems to be executed a lot better than the drinking water settlement. There's a lot more visibility. There's a lot more commercials, for example. I think there's a lot more structure and transparency to it. And I don't think it's quite as complicated as the drinking water settlement payments. So I think we're still on the same track as far as when we think it's going to hit the markets, but we don't have any other insights to tell us that it would be any sooner.

But from what we see, we don't think it should be delayed any further based on what we see. But again, as you know, with these government programs, they're not always as transparent as we'd like. But however, everything we've seen so far looks like they're doing things right.

[Stephen MacLeod, analyst]

Yes. Okay. Okay. That's helpful. Thanks, Dan. And then maybe just finally, just in terms of North Star Air, I was just wondering if you could give a little bit of commentary on the performance of the airline in the quarter? And then are routes being impacted by the wildfires as well?

[Daniel McConnell, executive]

No. In fact, yes, North Star Air had a good quarter. It was on expectation. And yes, we don't -- there's been no negative impacts as a result of the fires so far. If anything, it's allowed us a little more flexibility to help people and communities out given the flexibility, given the flexibility -- obviously, the fact that we control the metal that is under North Star Air. So no, nothing -- I would say it's a status quo. It's delivering what we anticipate and expect.

[Operator]

[Operator Instructions]. Our following question is from Nishant Rathi from CIBC.

[Nishant Rathi, analyst]

This is Nishant on behalf of Ty Colin. I'm very sorry to hear about the communities affected by the wildfire, and we hope that everyone is staying safe. I just wanted to circle back on the wildfire because I wanted to ask if you're seeing any other financial impacts from the wildfire such as physical damage to the store or inventory as a result of the fire?

[Daniel McConnell, executive]

Great question. I think if I heard you properly, you said, is there other financial impacts as a result of the stores through asset damage or inventory? I'd say slightly, we -- obviously, we -- the stores that are evacuated, we donated a lot of the product, of all the product that was perishable to ensure that people had food and nutrition at the point in time.

Thankfully, there's been no damage to any of our assets at this point in time. So we're staying again optimistic on that. And really, there's been no major impacts on any of the assets, yes, financially or other financial implications other than the loss of sales, obviously, in some of the inventories that we had to donate.

[Nishant Rathi, analyst]

Got it. My next question is regarding -- you mentioned that you are seeing better promotional tactics under the Next 100 strategy as one of the primary drivers of margin improvement this quarter. Could you provide a little more detail on some of the changes that were made? And is there still more room for improvement from a promotion perspective?

[Daniel McConnell, executive]

Yes, absolutely. We've adjusted the guardrails as far as how we value the promotions, taking a different more of a financial lens to say these promotions are the customers finding them beneficial? So in other words, are they moving the needle? So we've done a lot of analytics to understand what people like, what makes a positive impact, obviously, for our customers and what fills the baskets as a result of some of these promotions.

So we've done away with promotions that are maybe not sizable and that don't have a financial upside for North West. And just playing around with different algorithms, we've been able to kind of come into a more productive manner where we have more green promotions than red. And obviously, once we identify the red ones, we're discontinuing them.

And it's really just about how we -- how the amount of investment and the amount of response from the customers and just having more insights to analyze that and then replicate the good behaviors and basically terminate the bad. I know that's pretty high level, but it gives you a bit of insights as just to how we're viewing the business and what's -- how we're drawing conclusions as to what is a good promotion and bad and how we're repeating good behavior and stopping bad behavior.

[Nishant Rathi, analyst]

Got it. And another question I wanted to ask was regarding the general merchandise. It looks like general merchandise sales in Canada decelerated compared to recent quarters. So what drove that change? And is there anything to call out there in terms of consumer behavior?

[Daniel McConnell, executive]

Yes. Could you -- sorry, could you repeat that question, if I...

[Nishant Rathi, analyst]

Sorry, I just wanted to know...

[Daniel McConnell, executive]

No. That's okay. There's a bit of an echo in my room. That's the only reason why. Say that again, sorry?

[Nishant Rathi, analyst]

Yes. So I wanted to know...

[Daniel McConnell, executive]

I think you said what is the reason for the general merchandise swing from last year this quarter to this year. Is that right?

[Nishant Rathi, analyst]

Yes, anything particular to call about that and in terms of consumer behavior? Anything to call on those 2 fronts?

[Daniel McConnell, executive]

Okay. No problem. In fact, yes, like I said, there was a considerable pickup in the perishable programs like our foodservice and our fresh, which is actually encouraging because it's where we put a lot of focus, especially with our labor programs, just reallocating labor to more areas just being smarter. When I talk about our kind of data-driven approaches, it's really understanding where our efforts are within the store and how we can reallocate dollars to the more productive areas. And so that's been great because it's been allowed us to drive a lot more fresh and perishable product. Obviously, it requires more direct labor, and we've been able to kind of capture some of those activities that have allowed us to drive that business.

On the GM side, you're right, it was not as strong, obviously, as last year. Last year, we had a pretty sizable pickup. And we think it's probably a result of us just a shift of dollars with the food drawing in more, maybe not having some of the other monies in market that we anticipated or that was there last year potentially that, that probably has an impact. We don't see it as concerning, though, and it could just be a shift within the season. People have stocked up. We had some strong general merchandise sales in the previous quarter. So it's -- we don't think it's anything material. It's just a matter of consumer choices and its -- and seasonality, the weather.

[Operator]

Our following question is from Michael Van Aelst from TD Cowen.

[Michael Van Aelst, analyst]

Just one follow-up question. On your Next 100 program, I'm curious how we should expect to see the benefits of that program ramp up and when we start to see a full run rate?

[Daniel McConnell, executive]

2026 is where we think it's -- the maturity of the program is going to be -- John, I'm looking at the financial 75% there...

[John King, executive]

Yes.

[Daniel McConnell, executive]

Yes. So '26 should be where we can be a lot more a lot more clear on what that run rate is. So let's say, 2026, we'll be able to kind of give you direction, okay, this is the trend. This is the trajectory. We're on track, and this is what we can expect on a forward-looking basis. And again, speaking the pilots -- sorry, go ahead.

[Michael Van Aelst, analyst]

Sorry, are you saying that as we enter 2026, you'll be able to give us an idea of how significant or how material the incremental savings can be? Or do you think that by the time we enter 2026, you'll be at that run rate and you can point to it?

[Daniel McConnell, executive]

The prior. I mean there'll be both, but I think the prior will be a lot smarter. We're running a number of pilots. We have 70 stores, for example, right now under a certain pilot and as well as another -- a number of other tests that we're doing, and we're seeing and experiencing some benefit. But I'd say by, yes, 2026, we'll be able to give a lot more latter end of 2026, we'll be able to give more definitive outlook as far as how this program has matured.

[Michael Van Aelst, analyst]

So do you expect to see like you saw some benefits in this quarter from Next 100. Do you see that ramping up steadily through the year and then also at some point as you go through 2026 until you get to your peak run rate?

[Daniel McConnell, executive]

Yes. Yes.

[Operator]

Thank you. [Operator Instructions] And we have no further questions registered at this time. I would now like to turn the meeting back over to Mr. McConnell.

[Daniel McConnell, executive]

Okay. Yes. Before I close up, actually, I just wanted to remind the shareholders of our virtual Annual General Meeting, and that's going to be later this morning. So love for you to attend that, you'll have -- you'll get to see a little bit more real time or real exposure to some of the impacts of the Next 100 on the employees. Other than that, I appreciate your attending today, and hope you have a great summer, and we'll speak to you again in September. Thank you very much, operator.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.