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Q2-2026 Earnings Call
AI Summary
Earnings Call on Sep 9, 2025
Top Line Pressure: Sales were flat overall, with same-store sales declining 1.1% due to Canadian wildfires, reduced child and family service funding, and a weaker international economy.
Bottom Line Growth: Net earnings increased 1.9%, supported by expense savings and a lower effective tax rate.
Wildfire Impact: Sixteen stores were affected by evacuations, hurting Canadian sales, though stores not impacted by wildfires grew same-store sales by 1%.
Program Funding Headwind: Reductions and uncertainty in government child and family services, including the ICFI food voucher program, weighed on food sales.
General Merchandise Divergence: General merchandise and other sales rose 5.6% overall, aided by strong airline and pharmacy performance, but discretionary merchandise sales declined.
Next 100 Program: Cost savings and operational improvements from the Next 100 program helped offset its implementation costs.
International Weakness: Sales in international operations fell 0.8%, largely due to soft economic conditions in Alaska and the South Pacific.
Outlook Uncertainty: Management highlighted ongoing economic and program funding uncertainty, continued wildfire risk, and fluid tariff impacts.
Overall sales were flat, with same-store sales down 1.1%. The quarter was heavily impacted by wildfires in Canada, which led to evacuations and reduced traffic in 16 communities. Excluding wildfire-affected stores, Canadian same-store sales were up 1%. Internationally, sales declined 0.8% due to macroeconomic weakness.
Wildfires led to store closures and reduced customer traffic in 16 Canadian communities, negatively impacting sales. Although the situation had improved by late August, some communities remained evacuated into the third quarter. Wildfires are expected to continue being a net headwind in Q3.
A reduction in government funding through programs like Jordan's Principle and the ICFI significantly reduced distributed funds, impacting food sales. The future of these programs remains uncertain, with management unable to forecast the duration or impact of the funding changes.
Gross profit was flat as gains from promotions and category management were offset by higher markdowns and inventory shrink. Expenses fell slightly, helped by lower share-based compensation, though investments in staff and technology for the Next 100 program and new store expenses partially offset these savings.
The Next 100 initiative is delivering operational efficiencies and cost savings, with initial benefits exceeding implementation costs. The rollout of private label products and new technology for inventory management is underway, with positive initial feedback from both customers and staff.
Third-party airline revenues were strong, boosted by increased demand from wildfire-related evacuations. The company added a new PC-12 aircraft to increase capacity, expecting it to contribute quickly. A new board member with aviation expertise was also added.
International sales, especially in Alaska, were affected by economic weakness in tourism and commercial fishing markets. Consumers are shifting spending from merchandise to food, with general merchandise sales dropping over 11%. Management noted both tourism downturn and broader macroeconomic pressures.
Inventory levels are higher as the company prepares for potential demand from expected settlement payments. Management expressed confidence in their ability to meet customer needs when these payments are released. The recent use of the NCIB share buyback program was described as opportunistic.
Welcome to the North West Company Inc. Second 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.
Thank you. Thank you, and good morning, everyone. Welcome to the North West Company Second Quarter conference Call. I'm joined here today by John King, our Chief Financial Officer; and Alexis Cloutier, our VP, Legal and Corporate Secretary. I'm going to start off the meeting by asking Alexis to read our disclosure statement.
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.
All right. So thank you, Alexis. I'll begin by providing an overview of our results for the quarter, followed by a brief commentary on North Star Air and wrap up with a few comments on our outlook and the Next 100 program.
All right. So let's begin. Overall, I would summarize the quarter this way. It was a flat quarter at the top line, which was negatively impacted by headwinds from community evacuations due to the wildfires and a decrease in child and family service funding for children in our Canadian operations and a weaker economic environment, particularly in our international operations.
With the flat Sales performance, there was a bit more torque on the bottom line due to some overall expense savings and a lower effective tax rate, which resulted in a 1.9% increase in net earnings in the quarter compared to last period.
Now let me expand on the consolidated results starting with sales. Consolidated sales for the quarter were up slightly compared to last year, but were flat to last year, excluding foreign exchange. Same-store sales were down 1.1% in the quarter compared to a 4.3% increase last year due to the headwinds in our Canadian operations and having to comp very strong sales in the second quarter of last year.
Canadian same-store sales decreased 1.8% compared to exceptionally strong same-store sales last year of 6.8%. There were 2 factors that had a significant impact on same-store sales performance. First, obviously, the wildfires we talked about, and this is affecting certain communities that we serve; and second was the decrease in the distribution of funding to individuals from child and family services, including the Jordan's Principle and Intuit Child First Initiative or ICFI programs.
Let me unpack these starting with the wildfires. There were 16 stores impacted by wildfires during the quarter, with the communities either fully evacuated in which case our stores were closed or partially evacuated due to smoke and poor air quality, which resulted in significantly reduced customer traffic. Our thoughts are with those who are impacted. I want 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 our store managers and teams who remained in the community to keep stores open and ensure food and supplies are available for emergency personnel and others who remain in the communities.
Thankfully, all of our staff are safe and none of our stores or warehouses were significantly impacted. That said, we did feel the impact on our top line as the evacuations negatively impacted same-store sales. When excluding stores impacted by wildfire-related evacuations, adjusted Canadian same-store sales increased 1% compared to last year. As an update, the wildfires in Northern Canada have continued into the third quarter, but the impact has moderated in late August.
At this time, there are 3 communities that remain evacuated due to the destruction of hydro transmission lines, which are not expected to be repaired until later in the third quarter, while partially evacuated communities are starting to return. While the impact of the wildfires has moderated, several wildfires are still active and accordingly, conditions could change. The second factor affecting Canadian sales is a reduction in the distribution of funding to individuals through the Jordan's Principle and Inuit Child First initiative programs when compared to last year.
I touched on this as part of our outlook discussion on our first quarter call. Let me provide you some further context. Funding for certain Jordan's Principle programs in 2025 has decreased to 2024 pending the finalization of an agreement between First Nations, Inuit and the Government of Canada. This change in funding has negatively impacted a number of Jordan's Principle programs. For individuals in the communities, the community services and in particular, the ICFI food voucher program have started to ramp up in the second quarter last year.
The government of Canada announced that the ICFI program would be extended to March 31, 2026, while Canada and Inuit Partners work together on the development of a long-term approach for supporting Intuit children to get greater access to nutritious food. However, starting in late April 2025, the funding under the ICFI program was limited to individual child specific claims, which has significantly reduced the amount distributed compared to the ICFI food voucher program in 2024, which did provide broad access to nutritious foods for Inuit children. Looking ahead, there is uncertainty on how long this change in funding will last, or if and when the ICFI food voucher program that was available in 2024 will resume.
Overall, the wildfire community evacuations and changes in child and family services funding were the key factors contributing to a 1.9% decrease in food sales. On a more positive note, general merchandise and other sales increased 5.6% compared to last year as higher third-party airline cargo and passenger revenue and an increase in pharmacy sales more than offset softer general merchandise same-store sales, which were down 3.5% for the quarter.
All right. Let me switch gears and briefly comment on international sales. During the quarter, sales in our international operations decreased 0.8% as flat same-store sales results were more than offset by lower wholesale sales. Weaker macroeconomic conditions in commercial fishing and tourism-dependent communities in certain Alaskan markets, combined with the reduction in seasonal workers and construction activity were the main factors impacting sales. Softer economic conditions in the South Pacific were also a factor.
As a result, General merchandise sales decreased 11.5% and were down 11.2% on a same-store sales basis compared to last year as consumers reduced spending on discretionary general merchandise and shifted more of their spending on food which contributed to a 0.6% increase in food sales.
Okay. With that deeper dive on sales, I'll briefly comment on consolidated gross profit and expenses. Gross profit dollars were up 0.1% for the quarter, with the gross profit rate flat compared to last year. The positive impacts from our Next 100 work and promotions and category management were offset by changes in sales blend and higher markdowns and inventory shrink.
Expenses were down 0.1% for the quarter or 3 basis points as a rate to sales, largely due to lower share-based compensation costs, primarily related to changes in the company's share price. This decrease was partially offset by investments in higher staff and technology costs to support the Next 100 work, combined with an increase in depreciation and new store expenses. We also incurred $1.7 million in onetime costs related to the execution of our Next 100 program.
These onetime costs were offset by the benefits from our Next 100 initiatives, including more effective promotions, a reduction in print media and other cost-saving initiatives, which I'll touch on later. In addition, similar to last quarter, we continue to see store labor productivity gains, which is resulting in lower store staff costs as a percentage of sales. The net impact of all these factors, combined with a lower effective tax rate resulted in a 1.9% increase in net earnings in the quarter, which is good considering the significant headwinds from wildfires and a decrease in government program funding for children.
Before moving on to the outlook, I wanted to briefly comment on our airline operations. As I highlighted previously, the airline revenues during the quarter were solid in both the cargo and passenger businesses. And consistent with our previous calls, we continue to have high utilization of the cargo and passenger fleet. As noted in our report to shareholders, late in the quarter, we acquired a PC-12 Pilates aircraft to provide some additional capacity in our scheduled and chartered passenger business and to help maintain our service levels during planned maintenance cycles.
I'd also like to take a moment to acknowledge the addition of Gregg Saretsky, a new member of our Board of Directors, which was announced in early August. Gregg brings deep aviation experience and industry knowledge in addition to a C-suite executive and Board experience, and I look forward to his contributions as a Board member.
Okay. Let me now briefly talk about our outlook and provide a few comments on the Next 100 program. Since we have provided commentary on the key factors we expect to impact on our near and long-term outlook in the report to shareholders as well as throughout this call, the only other comment I would add is on tariffs where we continue to see cost increases, but the overall impact to date 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.
With respect to the Next 100 program, we remain fully focused on continuing to drive operational excellence and cost efficiencies across our business while delivering further value for our customers, our employees and our shareholders throughout the program. We continue to refine our product assortment and are rolling out our expanded private label offering in our Canadian and international operations. While it's still early in the rollout, the initial feedback from customers has been positive.
Similarly, the implementation of store-based inventory forecasting and replenishment technology is also underway. This technology is expected to improve on-shelf availability for our customers and streamline merchandise ordering processes for our store teams. Recognizing we still have a lot of work to do, the feedback from our store teams on the process improvements has been positive. We are pleased with the progress and results to date. However, as I said, there's a lot of work to do as we embed operational excellence in every aspect of our business.
To wrap up, we had some external headwinds that impacted our results this quarter. We were focused on what we can control, ensuring that we continue to provide the goods and services that meet our customers' needs and deliver value to our customers, shareholders and employees through the Next 100.
With that, I will now open up the call for any questions.
[Operator Instructions] The first question is from Stephen MacLeod from BMO Capital Markets.
Just a couple of questions here. Just with respect to the outlook and specifically around the lower child and family services payments as it relates to -- or funding as it relates to Jordan's Principle. Just thinking back to the last quarter, I don't recall you calling this one out. So I'm just curious, is this new and/or unexpected? And how do you expect it to sort of unfold as you move through the balance of the year and into fiscal 2026?
Yes. I mean it is new to us as far as seeing how it looks like. It's really uncertain. I mean there's a lot of things still at play, obviously, the budget being one and just some of the negotiations and discussions going on between, I would say, First Nations, Inuit leaders in the Canadian government. So it's -- I would expect there's going to be some resolution, but I -- at this point, Stephen, for me to tell you when or what it's going to be is, I'm not really clear on what it looks like at this point.
Right. Okay. Okay. And I mean is there any way to quantify kind of what the impact of it might be? Just if you thought about, I guess, what kind of growth it gave you up until this point? Just kind of -- is there a way to understand what the impact would be to same-store sales growth or anything like that?
Well, I mean, look, we've kind of outlined some of the puts and takes. And I know it's a tough quarter probably for you guys to forecast, although you guys did pretty well in the sales forecast. But I would say that it's -- at this point, I mean, no, because it's -- there's still things that are going on. Some of the infrastructure has, again, slowed down as a result of the Jordan's Principle dispute with Canada and a majority of the First Nation leaders outside of Ontario and then obviously, as we indicated some of the Inuit Child First program being sailed back as a result of maybe an overcorrection in how they administer the funds. So I think it's pretty fluid right now, Stephen. And I think we're obviously going to learn more as time goes on here. But right now, it's really tough for us to forecast that.
Yes. No, I understand. Okay. And then maybe just turning to the Next 100 program. Did you -- in the quarter, did you more than offset the Next 100 costs? Or was it a pretty even offset? And then maybe the second part of the question is, are you in a position to be able to quantify kind of what you talked about the annualized incremental EBIT ramping up through this year or next year. Are you able to quantify sort of what that impact could look like?
We've, I would say, a little bit more than offset it, Stephen, as far as for your first question. And as far as quantifying the forward-looking EBIT, the program is definitely, as I indicated, it's in its execution mode. There's a lot of puts and takes, and we're obviously, I would say, solving some of the opportunities as they come forward. But when we do solidify the earnings on a sustainable basis, then we'll definitely attribute some of the growth and the portion of growth that we have experienced to the Next 100 and allow you to kind of forecast that or create a trajectory or put that into your algorithm for a moving forward growth item.
The next question is from Ty Collin from CIBC. I'm sorry, his line just dropped. I will go to the next one, which is Michael Van Aeist from TD Cowen.
I'd like to start off with the $23 billion child settlement payments that are in the process, I guess, of being processed and distributed and -- there was an article that quoted, I think it was the AFN that said that -- in mid-August, it said the payments were expected the following week -- to start the following week. And when I tried to line that up with what your outlook statement was, it wasn't -- yours wasn't quite as definitive, let's call it. So have you seen some of these payments start to come in yet?
Not one. No, I mean, there's -- I guess, it's -- there's a bit of a line between their end, I would say, in the administration or the receipt and the approval of some of these and when it gets to market. So right now, Mike, we haven't seen one. But we know they're coming obviously, but it's just a matter of...
Yes. It's just a matter of time. It's just interesting that they said that the payments were starting in several different places it was quoted. So okay, I guess we'll have to wait to see on that. Secondly, the water settlement payments. At one point in your press release, it sounds like it was lower this year. And then another [ spot ] in Canada, you actually say that it was slightly higher. What are you expecting for the back half of the year? I know it's a crystal ball a little bit, but are you expecting flat water settlement payments? Or do you expect it to come down?
Yes, it was slightly higher. I would say for the forward-looking quarter, we're projecting flat.
Okay. And then when we look at the wildfire impact going into Q3, so it sounds like it was still a meaningful issue into mid or late August. But at some point, when you get -- if you're down to 3 communities now or 3 stores that are impacted, and you have people coming back in, and I'd assume there has to be some form of a restocking benefit when they first come back. Do you see the wildfires being a net negative still in Q3.
Yes, I think they will be, Michael. Because I mean, at the same time, we see people are starting to migrate back, but they're -- it's not one big swoop. To your point, I think there will be a stock up shop once people get back to community. But I do believe that the fires will be a net negative or a headwind on sales for Q3.
Yes. And then just finally, on the -- the gross margin was the one area where we were surprised it was a little low. You offset it with better OpEx. But on the gross margin side, you talked about markdowns and shrink. I'm wondering, was that a onetime event? I mean I know some of it's tied to the wildfires I assume that has been taken in Canada, correct me if I'm wrong.
No, that's correct.
Okay. And then and as far as your international markets, where you talk about markdowns because of -- more because of the economic environment in Alaska -- parts of Alaska. Is that something that you think is just due to the season that you're in, and you'll adjust and we won't see those in the coming quarters?
That's our intent, absolutely.
The next question is from Ryland Conrad from RBC Capital Markets.
I guess just to start off, you called out higher third-party airline revenue in the quarter. Is that related in any way to the wildfires? Or is that more so just stronger performance with the expanded facility in Thunder Bay.
Well, the prior for sure. We definitely saw an increase as a result of the wildfires. That's -- I would attribute a lot of it to that.
Okay. Got it. And then just on the private label initiatives, could you just provide a bit of an update there on how the rollout is progressing? And maybe just how the initial uptake has been in the stores where that's now being stocked?
Yes, definitely. We're still quite early, but I was in stores over the last month. And like I said, the customers are receptive. The cost -- and the price differential between the private label and the national brands, I think, is meaningful. So I'm anticipating that customers are going to take advantage of it. There's going to be a trial period, obviously, as a lot of the products are new to some of the consumers. So we have to prove to them that the quality and value is worth it.
But I definitely anticipate that given the economics in some of the communities that we serve that it's going to be a benefit to our consumers, and I think it will get some good traction over the next number of months. We expect to be in strong operation. Like I would say, our plan is to be up and operating with a full complement in late October. So that's our goal and that's our plan right now. And we're on a good track to get to that.
Awesome. That's helpful. And just on inventories, up quite a bit year-over-year and sequentially. Is there anything to call out there? And then related to that, I guess, as this kind of $23 billion settlement, the payments begin to be dispersed, like how are you feeling about your ability to meet that demand just from an inventory perspective?
We're feeling good about our ability to meet that demand for sure. It's something we've put a lot of planning into. We've been kind of down this road before. And it's -- I wouldn't say that we've left any pages unturned as far as just our planning and some of the speculation that we have around when the money is coming and what the built-up demand would be on behalf of our customers. So yes, we're managing and monitoring our inventory levels. We know that they are high, but we definitely feel that when the money comes that we'll be ready.
Okay. Great. And then just the last one for me, I guess, it would be good to get your latest thoughts on the capital allocation with the NCIB utilized this quarter. I guess was that more opportunistic? Or should we kind of expect you to remain active there?
It was opportunistic, yes.
[Operator Instructions] The next question is from Ty Collin from CIBC.
Apologies my line got dropped earlier. So apologies if I missed anything. Let me know if any of my questions have already been asked and answered. But my first one, just on the Canadian communities that are being repatriated. Can you just help us understand maybe from some of your experience so far how long it's taking for those stores to kind of ramp back up to 100% once those communities have had their evacuation orders lifted?
It's -- it can be fairly long, unfortunately and that's what we've experienced so far. It is a bit of a long drive, especially at the time of the year being the summer. There's a -- it just hasn't happened as quickly and I think there's more things to do so maybe some more distractions and some more opportunities for people to catch up on some of their activities within the urban cities that they're currently in. So it hasn't happened as quickly as we would like to put that way, Ty.
Okay. Great. That's helpful. And then in terms of some of the headwinds within Alaska. So I know you guys have called out some of the macro headwinds in previous quarters related to the fisheries. It does sound like tourism might have been a bit of an incremental issue now. I guess I just want to understand what changed this quarter compared to previous quarters to drive the deceleration there? And maybe you could speak to how dependent your stores and your communities are on tourism specifically?
Well, they are on both tourism. The economy overall, they have an impact with fishing, obviously, just given the remoteness and it's really government -- there's government employees, there's tourism, fishing, which are the drivers behind the economics of our communities. So it is substantial. I mean the Alaskan economy, I think even seeing other places within the United States, they're definitely feeling a pinch and it's just trickled on into our operation. So it's even some of the SNAP decline, I know that's happened in the past, but it's -- the people are still feeling it. It's at a lower baseline rate. We're comping it off last year, but it just continues to be an issue.
You see it in our general merchandise sales as they -- people are moving their preferences over to food, and it's definitely going to a, call it, a less expensive food choice in the past. People are making more critical decisions on how they spend their money.
Right. And on tourism, yes, I mean, you alluded to that being an issue sort of throughout the U.S. Do you get the sense that some of the more recent headwinds in Alaska are related to lower tourism from Canada specifically, given some of the noise around tariffs? And if that's the case, would you be inclined to characterize that as a bit more of a transitory issue? Is that sort of moves into the rearview mirror, hopefully.
I mean, look we -- definitely, that's a consideration. And we think -- we don't know how long that's going to last. I think you've probably heard some of the commentary behind some of the Canadians that are moving their travel from the U.S. to other places. But at the same time, I think it's probably just a macroeconomic impact from -- yes, tourism is one of the points but I think it's just an overall pinch. Looking at hopefully some of the dollars that are going to be coming back to the state of Alaska through some of the military spend and some of the other programs that are going to be -- sorry, driving a bit of a catalyst behind that economy, we're optimistic around that. But right now, I think it's a number of factors that are just having a negative impact on the macroeconomics scene in Alaska. But tourism is definitely one. And the reason, what you identified is the Canadians going over to Alaska is definitely a contributor. But I think there's a lot of factors at play right now and the macroeconomic environment that is.
Okay. Got it. And then just last 1 for me. I think you -- in one of your previous answers, you mentioned that SNAP or changes to SNAP has already sort of been a headwind in Alaska. I mean my understanding was that the more recent changes came into effect after this quarter. So are you expecting incremental headwinds from SNAP? Or are some of your consumers sort of prepositioning for those changes and already dialing back before those decreases actually came into effect?
Well, it's -- yes, so I would say probably the latter. I mean, look, people are more nervous about the economy. So the fact that the SNAP -- the changes are coming into play, some of the commentary around -- the President's comments around SNAP, I think that Alaska will be excluded from some of the impacts or changes that are going to be occurring maybe in the lower 48. But, yes, I definitely think it's just the -- some of the pessimistic outlook on the economy is rippling through just to my previous comment, and it all contributes to the macroeconomic picture in Alaska.
Just people are a lot tighter on their pocketbooks, making more frugal decisions, shying away from general merchandise, moving away from some of the, call it, more luxury food and just more into an essential mindset as far as what they're procuring for their homes. Did we lose you, again, Ty?
Sorry, I think I'm having technical difficulties all day. I just said thanks for the questions. I appreciate it.
That's funny, Ty, because we're the ones that are remote right now. We're out in [indiscernible] out in a remote community.
The next question is from Michael Van Aeist from TD Cowen.
Just a couple of quick follow-ups. First of all, on the higher SG&A spending tied to your investment in staff resources and IT to support your Next 100 initiatives. When do we kind of cycle the higher run rate of spending?
Q4, Q1? I was going to -- Michael, I'd say Q4 is probably more conservative, probably Q1, but I'd say Q4.
Okay. So you just -- so in other words, you kept spending at a higher level through the first half -- I guess through the end of last year and then starting into this year?
Correct.
Okay. And then the tax rate, John, it's moved around a little bit. I know you have the global minimum tax, but last year was a -- just over 25%. Where should we expect it for the full year?
Mike, it's really at this point now that we're comp on the global minimum tax and that came in, in Q2 last year. And just a reminder that, that was a year-to-date true-up in Q2 last year. So that's the reason for the tax rate differential in the second quarter. But we should be comp on that now heading into the back half of the year. So it really comes down to the earnings across the various jurisdictions. And so going off of -- you'll come up with your run rate tax rate, but more in line with, I would think, where we ended up last year as overall blended rate, somewhere in that range. But I don't think there is -- should be too much other noise like the global minimum tax rate. It should be more normal course, just blend of operations.
Okay. And then just actually one more question. You mentioned that you purchased another or leased another -- did you lease or purchased the PC-12 aircraft and is this something?
Purchased.
Oh, you purchased it. So I think in the past, you said you wouldn't add more capacity unless you're confident you could fill it. So this doesn't have to do with just a higher demand during the wildfires or anything like that. You're actually seeing a higher level of third-party demand, I suppose.
Yes, that's correct. Yes, this was contemplated obviously and planned and actually executed well before the wildfires.
Okay. So we should expect this to contribute pretty quickly.
Correct.
Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Dan McConnell.
All right. Thank you, operator. And thanks, everybody, for attending, and we look forward to speaking with you for Q3.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
Perfect. Thank you.