Pet Valu Holdings Ltd

TSX:PET

Earnings Call Transcript

[Operator]

Good morning, everyone. Thank you for standing by. Welcome to Pet Valu's First Quarter 2022 Earnings Conference Call. My name is Rob, and I will be coordinating today's call. [Operator Instructions]

I would now like to turn the call over to James Allison, Investor Relations at Pet Valu. Please go ahead, Mr. Allison.

[James Allison;Senior Director, Investor Relations, executive]

Good morning, everyone. Thank you for joining Pet Valu's call to discuss our first quarter 2022 results, which were released this morning and can be found on our website at investors.petvalu.com.

With me on the call is Richard Maltsbarger, President and Chief Executive Officer; and Jim Grady, Chief Financial Officer.

Before we begin, I would like to remind you that management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations and involve risks and uncertainties, which could cause actual results to differ materially from those expressed today. For a broader description of risks related to our business, please see our Q1 2022 MD&A and other filings available on SEDAR. I would also like to note that today's remarks will be accompanied by our earnings presentation for Q1 2022, which can be viewed live through our webcast and is also available on our website.

Now I would like to turn the call over to Richard Maltsbarger. Richard?

[Richard Maltsbarger, executive]

Thank you, James. Welcome, everyone, and thank you for joining us this morning. I will begin today with an overview of our strategic and operational accomplishments in the first quarter, along with highlights and observations for the remainder of 2022. Jim will then provide a more detailed review of our financial results and updated guidance for the year, before opening the call up to take your questions.

Pet Valu had an excellent start to 2022. Through the efforts of our franchise owners, ACEs, supply chain, and corporate teams, we once again grew market share while better serving devoted pet lovers across Canada. With consumers facing intermittent product availability and inflationary pressures, the need for local expert advice and a broad product selection has never been greater, and we are delivering that for our growing customer base. We are incredibly grateful for the trust millions of devoted pet lovers have placed in Pet Valu as part of their pets' lives.

Turning to our first quarter results. Top and bottom line performance was strong, driven by robust industry growth and a stronger increase in transactions than we originally expected, especially in markets not impacted by last year's pandemic restrictions in Ontario. Revenue rose 25%, supported by same-store sales growth of almost 23% or 30% on a 2-year stacked basis, driving solid operating leverage. Adjusted EBITDA dollars grew almost 30%, while adjusted EBITDA margin expanded 70 basis points to 21.9%.

Supporting this performance, we once again executed against our 3 growth pillars: expanding our store network, driving same-store sales growth, enhancing operating margins over the long term. Let me speak to each of these. First, expanding our store network. We opened 6 new stores in the quarter, in line with our expectations. Together with the acquisition of Chico's, 66 franchise store chain in February, we ended the quarter with 705 locations across all 10 provinces of which 67% are franchised. Importantly, our 2020 and 2021 store classes continued to perform well against our expectations, which continues to validate our site selection process and the strong unit level economics of our stores.

We delivered particularly strong performance on our second pillar, same-store sales growth, which grew 23% in Q1. I am encouraged by the contributions we are seeing from both traffic and basket growth. On a 2-year stacked basis, both metrics are up 15%, indicating that we attracted new customers, while at the same time building share of wallet with our existing customers, and this is further validated by the consistency in growth we are seeing across our product categories. On a geographic basis, while sales increased in all markets, performance was stronger in Ontario where stores lapped 10 weeks of curbside-only stopping in Q1 of last year. Performance by store vintage was consistent driven in part by a renovation and refresh program. We completed 9 renovations, expansions, or relocations in the quarter, including targeted investments into expanding our capacity for frozen and raw sales.

On our digital front, we continue to be pleased with how this channel is building out. Online-generated sales were up significantly despite lapping the curbside-only environment in Ontario last year. This is due in large part to the roll out of our click-and-collect offering and website enhancements undertaken in the second half of 2021. We once again saw sequential growth in our loyalty membership base in Q1 which ended the quarter above 2 million. As a result, loyalty sales now account for over 70% of total sales, underscoring the value our customers see in our frequent buyer programs. To better serve this important growing base of our customers, we expanded the program at the end of the first quarter to include key products for specialty animals, such as bird seed and small animal hay. And the final pillar of our growth strategy, enhancing our operating margins. Our strong top line growth once again helped deliver meaningful expense leverage in the quarter despite public company costs and the strategic labor investments we made across our organization in late Q4 2021.

Before turning to the outlook, I would like to provide a quick update on Chico. We are very pleased with the operational performance of the chain and the progress we have made with early integration. Chico's same-store sales growth was very strong in the first quarter, and we continued to open franchise locations. In April, we added Guy Beaumier as President and General Manager at Chico reporting to me. With over 25 years of experience at some of Canada's largest retailers, including Sobeys, Loblaw, Lowe's Canada, and most recently Kent Building Supplies. Guy is a seasoned retail executive and a great addition to the team. We have also added key finance personnel to assist with transition to public company reporting. While this is still early days, we are very excited for the runway of this banner and our future serving the Quebec customer.

Following a strong start to the year and continued confidence in our ability to deliver against our growth formula, we have raised our full year guidance, which Jim will discuss shortly. It is important to note our outlook balances our strong Q1 performance with the ongoing supply chain disruptions and inflationary pressures happening globally. Let me provide some comments on these as they pertain to our 3 growth pillars.

On new stores, given our progress to date, we have refined our target to between 35 and 45 new openings this year. We are well underway on advancing the remaining projects for the year despite elongated timelines resulting from supply chain issues and longer permitting wait times. There continues to be white space opportunity across Canada, including in Quebec, where Chico's founders have mapped out exciting new openings over the near term, which aligned well with the market priorities we identified before our entry. We are at the early stages of integrating Chico into our real estate pipeline review process, which will then help the chain set up for strong growth in 2023 and beyond.

On our same-store sales growth, we've increased our full year expectations to factor in the strong Q1 results. We remain constructive on the growth outlook for the Canadian pet industry, which has a proven track record of resilience through disruptive periods, supported by the strong underlying trends of pet humanization and the recent increase in the Canadian pet population. Our Q1 channel check suggests that 3 million additional pets have become permanent members of their new families, as availability and local rescues and shelters return to historical levels. We expect heightened product inflationary pressures will likely continue over the medium term, but we closely monitor ingredient and materials prices as we negotiate every potential cost increase. It is important to remember that our product mix is heavily skewed towards staples-oriented food and hardlines products, resulting in strong recurring revenue and repeat store traffic, and we offer additional value to the customer through our broad proprietary brand portfolio and our frequent buyer loyalty program.

I'm also excited to announce that we've just launched our newest extension to our award-winning proprietary food brand lineup with the addition of Performatrin Ultra Freeze-Dried Raw in toppers, patties, and powders. This entry now positions our proprietary brands across all 5 quality tiers in pet food, including value priced, natural, scientific, natural enhanced, and now culinary categories. This is only the first of what we expect to be several launches this year from the great work of our merchandising and expanded proprietary brand teams. We expect our omnichannel offering will continue to be a tailwind to our growth as we benefit from our first full year with direct-to-customer and click-and-collect capabilities, as well as improved website conversion as we continue to prioritize an agenda of usability releases throughout 2022.

And finally, enhancing our operating margins over the long term. This year we expect a modest margin compression as we are making intentional investments in 2022 across the organization to set the business up for continued success and drive future growth and margin expansion in 2023 and beyond. In addition, we continue to adapt the successful sourcing and inventory practices implemented in 2021, geared at managing ongoing supply chain disruptions and higher freight cost. For example, we have added incremental third-party capacity to store and pick products for stores as we implement our long-term supply chain strategy. We have signed the lease for our new larger facility in the GTA, which we expect will become operational in mid-2023, supporting our long-term growth objectives while easing our reliance on third-party support.

Freight costs have also continued to increase as we move through 2022. Given these costs are industry-wide, our assumption remains that freight pressure on margin dollars should ease in the back half of 2022, either as a result of lower cost or continued industry-wide price adjustments.

Before turning the call over to Jim, I want to again thank our franchise owners, ACEs, supply chain, and corporate teams. The passion of our people plays a critical role towards driving the strong results you see to date. And key components of this success is the diversity we foster across all levels of our organization. Earlier this spring, Pet Valu was honored to receive recognition in The Globe and Mail's 2022 Women Lead Here list, which identifies best-in-class executive gender diversity. We're proud to say that as of today, individuals who identify as women in our organization make up over 80% of our store managers, at least 50% of our corporate management and executive leadership positions, and 30% of our Board of Directors. Together, our diverse team is key to delivering on our mission to be Canada's preferred pet retailer, delivering the products, care, expertise, and memorable moments that devoted pet lovers want locally in stores and everywhere online.

Now over to you, Jim.

[Jim Grady, executive]

Thank you, Richard, and good morning, everyone. I will start by reviewing our first quarter fiscal 2022 financial performance, followed by an update to our full year outlook. As a reminder, with the acquisition of Chico on February 25, all Q1 financial metrics include a partial quarter impact from this business, except for same-store sales growth, which excludes the impact of Chico. Overall, we are pleased with our first quarter results, which beat our expectations. Q1 system-wide sales increased 30% to $285.9 million. Excluding Chico, system-wide sales grew 26%, driven predominantly by strong same-store sales growth of 23%, which was comprised of same-store transaction growth of 18%, and an increase of 4% in average spend per transaction.

Recall that in the first quarter of last year, our Ontario stores were restricted to curbside shopping for 10 weeks of the quarter, which negatively impacted sales performance last year. We opened 6 new stores during the quarter, which, together with the 66 Chico stores acquired in late February, brings our network-wide store count to 705 locations, 67% of which are franchised. Turning to our company performance, fourth quarter revenue was $213 million, an increase of 25%, or just below 25% after excluding Chico. Gross profit in the first quarter was $77 million, up from $60 million in Q1 2021.

As a percentage of revenue, gross margin rate was 36.1% versus 35.1% last year, an increase of 100 basis points. The increase was driven by favorable product margins in comparison to Q1 2021 when margins were compressed by pandemic operating restrictions. We also benefited from stronger leverage of fixed costs due to higher revenue. These factors were partially offset by the absorption of incremental freight costs due to the global supply chain issues and higher wholesale shipments as we lap depressed shipments in Q1 last year, resulting from pandemic operating restrictions in Ontario where over half of our franchise stores are located.

Sequentially, Q1 gross margin decreased 70 basis points from Q4, driven by seasonality and higher freight costs, which came in as expected. Selling, general, and administrative expenses in the first quarter were $42 million, up 13%. Excluding the IT transformation costs, share-based compensation and other nonoperating items, our SG&A expenses were approximately $39 million, an increase of 23%, primarily driven by the investments in headcount Richard mentioned as well as public company costs. Despite these increases, we achieved leverage over last year due to the strong revenue growth. Adjusted EBITDA increased 30% to $47 million. While adjusted EBITDA margin improved 70 basis points to 21.9%, driven by the favorable gross margins and SG&A leverage I just mentioned.

Net interest expense in Q1 was $4 million, a slight decrease from the quarterly trends seen in late 2021 as we benefited from a stepdown in the interest rate on our 2021 credit facilities starting in December, resulting from our reduced leverage ratio. We do expect interest expense decline through 2022 due to rising interest rates. Net income was $23 million compared to $3 million in the same period last year. Excluding the items not indicative of our underlying performance, adjusted net income was $25 million or $0.35 per diluted share, up significantly from $7 million last year.

Now turning to the balance sheet. Once again, we ended the quarter in a strong liquidity position with $30 million of cash on hand and access to our full $130 million revolver, which remained undrawn through the quarter. Total debt, net of deferred financing costs, ended the quarter at $344 million. Taking into account leases, our leverage ratio remained at 2.1x. We are comfortable with our inventory levels at the end of Q1 with a balance of approximately $100 million, up 18% from a year ago. This intentional increase is a direct result of the higher sales volumes within our stores, the support of 30 net new stores over the last 4 quarters, as well as our continued practice of holding additional safety stock to insulate against global supply chain issues and maintain better in-stock positions. Free cash flow in the first quarter was an outflow of $15 million, similar to last year. While cash from operations improved significantly versus last year, this was offset by cash outlays for the acquisition of Chico.

Now I will provide an update to our outlook for fiscal 2022. Based on our strong financial performance in the first quarter, we have raised our full year expectations for 2022. We now expect full year revenue between $870 million and $895 million. This is supported by stronger same-store sales growth expectations of 9% to 12%, up from a prior range of 6% to 9% and a refined range of 35 to 45 new store openings. As a reminder, we continue to expect year-over-year growth to be stronger in the first half of the year compared to growth in the second half. The relative distribution of our system-wide sales and revenue across fiscal quarters is expected to be more representative of pre-pandemic years such as 2019.

Similarly, we have raised our expectations for adjusted EBITDA, where we now expect to reach between $191 million and $198 million, up from our prior range of $187 million to $194 million. This balances our strong Q1 performance and market-leading position with the current macroeconomic environment. Our adjusted EBITDA guidance continues to factor in the annualization of public company costs, intentional investments in human capital, and supply chain throughput capacity, and higher freight and distribution costs related to external factors. We continue to expect adjusted net income per diluted share to be in the range of $1.37 to $1.44, which factors in higher expected interest expense given the rising rate environment.

Our assumption on tax rate remained unchanged at between 26.5% and 27.5%, as does our expectations for fully diluted share count of approximately 72 million. We continue to expect to incur approximately $9 million in the information technology transformation expenses as well as $7 million in share-based compensation, both of which are excluded from the calculation of our adjusted figures. And finally, we are now targeting net capital expenditures in 2022 of between $35 million and $40 million. The increase versus our prior guidance of $20 million to $25 million is due to the inclusion of approximately $15 million for advanced payments on equipment and the initial leasehold improvements for our new distribution center in the GTA. We had initially expected these payments to occur in early 2023, but having now signed our lease and after assessing supply chain conditions, we have accelerated some actions to secure key equipment and facility readiness.

With that, we would now like to open the call up to your questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Mark Petrie from CIBC.

[Mark Petrie, analyst]

Congrats on the results. Wondering if you could just give us a rough sense of the level of inflation you're experiencing in your sales today? And what's your outlook for that?

[Jim Grady, executive]

Mark, yes, as we talked last quarter and as we're continuing to see, and you're certainly continuing to hear about in the news, we are experiencing inflation in both products -- product cost inflation, inbound freight, and fuel for outbound freight. We're not quantifying that, but it is baked in. We've baked in a certain amount in our guidance, and that is a result of the inflation, and it is causing some gross margin rate dilution as you look at it as we're raising prices to pass along those cost increases.

And in addition to that, we're seeing it across the rest of the P&L as well in the cost lines from wage driving -- we talked about expanding our supply chain capacity for the higher volume that we're seeing. And then we're seeing it in stores as well as corporate as well. You've seen recent increases in minimum wage. So I'd say it's really throughout the P&L. Biggest impact, once again, is on products and freight, but we're not breaking out the exact amount, but it is influencing our guidance.

[Mark Petrie, analyst]

Okay. Fair enough. And then, I guess, just a follow-up question related to that. Hoping you can summarize what you're seeing just with regards to changes in the competitive dynamics in the industry? Is anyone lagging the price increases that you're implementing in the market? And then related to that, from a consumer perspective, any comments you could provide just with regards to shifting consumer behavior, be it trade down or other signs of reaction to the inflation, that would be helpful?

[Richard Maltsbarger, executive]

Mark, it's Richard. I'll take each of those in turn. Let's first start with the competitive dynamics. We did see early in the quarter some lag in some of the competitive movements of pricing as people, I believe, were really catching up on understanding just how quickly freight was actually passing through into the wholesale costs in our operations. We did see a more rational environment in the back part of the quarter and then to the beginning of Q2 as we do now believe that all the competitors across Canada have caught up, and our vendors have been having the appropriate conversations around minimum advertised pricing that's required on many of the national brand products across the country.

We do believe that it's going to help stabilize. We continue to see a very rational promotional environment with very low relative discounting to historical and pre-pandemic levels. But there was a bit of a lag early in the quarter that is now beginning to pass through on a more regular basis. We have historically seen strength in the ability to pass through vendor cost inflation on product cost and even a bit of the freight cost, but perhaps not all, as we pass through what is a very abnormal and very highly increasing freight environment.

On the consumer behavior side, so far this year, we haven't seen a noticeable shift in what customers are putting inside their baskets. We've seen healthy growth across categories in both consumables and hardlines, also in national and proprietary brands. The pet industry overall has continued to prove to be fairly resilient as our devoted pet lovers strive to minimize the impact of the environment on their pet's lifestyle. On top of that, right, our mix skews heavily towards products with weekly or monthly replenishment cycles. So over 2/3 of our products are staples oriented, like foods, cat litter, waste bags and supplements that have a higher purchase frequency and much lower price elasticity. So, to date, not a lot of change in the behavior. I believe that's reflected in the guidance update we provided on our revenue. But it does -- we are challenged on the cost side, specifically freight is the primary factor. But although as Jim just noted, we're feeling it throughout the entire P&L.

[Operator]

Your next question comes from the line of Irene Nattel from RBC.

[Irene Nattel, analyst]

Sorry, I was having trouble getting the mute off. Before I ask my question, I just wanted to clarify just a couple of things. So #1, it sounds like private label penetration remains unchanged at around 30%. And #2, the reason for the implicit upward revision to the lower end of the margin -- sorry, downward revision to lower end of the margin guide really is just because of the magnitude of the cost increases since we last met. Am I getting those 2?

[Richard Maltsbarger, executive]

So Irene, I'll take the first. Yes, you are correct. Private label's penetration continues to be very consistent around our 30% rate that we've had. And then I'll turn it over to Jim for the downward margin.

[Jim Grady, executive]

Yes. You got it exactly right. So it is -- as we do raise prices, and pass through the product cost inflation, there is a dilution factor that's happening into gross margin. So yes, that is a cost.

[Irene Nattel, analyst]

Okay. And moving on to the same-store sales growth, which obviously is very strong. Can you walk us through the key drivers of the basket growth? Obviously, price is one. But unit count, category performance and the various strategies that you have in place that to drive continued basket growth even as we -- okay. And then I would say, even as we've seen moderating pet adoption, but are we seeing moderating pet adoption?

[Jim Grady, executive]

Yes. So Richard and I will probably add on to each other. But from a basket perspective, obviously, we're very pleased with the development of the basket and the way it has held up throughout the pandemic and grown throughout the pandemic. We're pleased to see from a unit standpoint, the consumer behavior is returning back to normal, but we still have slightly elevated units in the basket compared to pre-pandemic operating times. So overall, we're pleased with it. And I'll let Richard kind of talk a little bit about the dynamics of the product mix within it.

[Richard Maltsbarger, executive]

Yes. So we're continuing to see essentially the same proportion of sales of staples versus discretionary as well as consumables and hardlines really from pre-pandemic times. And almost always, Irene, the first part of this year as we provided and the reiteration that we provided to look at sort of revenue breakdowns, more similar to a pre-pandemic year so just 2018 is because the way we set our plan and the way we're seeing it play out in the market is really a bit more of a return to normal. While the adoption rates from our channel checks are beginning to normalize as well, the great part for us is they're normalizing, right? They're not falling off. The surrender rates are not significantly higher. We are truly seeing a gradual easing back to a more normalized environment, which means the 3 million incremental pets in the people's homes have become permanent parts of the family.

[Operator]

And your next question comes from the line of Martin Landry from Stifel.

[Martin Landry, analyst]

Congrats on your good results. My first question is, when we look at your EBITDA guidance for the year and given your strong Q1, it implies that the growth for the remainder of the year is going to be muted according to our calculation, around 1% year-over-year growth. I was wondering if you can discuss a little bit that the dynamic at play which is going to translate into a slowdown in your EBITDA growth on a year-over-year basis?

[Jim Grady, executive]

Yes, I'll take that. Martin, thanks for the question. Overall, we were obviously very pleased with the strong performance in the quarter, and that was a result -- that was the cause for raising the guidance for the full year. And we're pleased beginning Q2 with what we're seeing, the momentum has continued, and that's factored into the guidance. What I'd say on the rest of the year is we're trying to balance the strong performance that we had in Q1 with the overall operating environment that you heard from the previous 2 questions, right, on inflation and so forth.

So we're trying to be very thoughtful in the way we approach the second half of the year. But overall, I'd say really pleased it's just a balance of the strong performance with the environment that we're operating in. Normally, we would not be looking to update our full year guidance when we release our Q1 results. Given the changes that are happening in the environment, given the inflation that we're experiencing, we thought it was very important to update you with what we know at this point. We expect to update guidance again in Q2. And then that will hopefully give us a much better view on the rest of the year at that point.

[Richard Maltsbarger, executive]

Martin, the only thing that I would add is that, as indicated, when we provided our full year initial guidance at the last quarter, we noted that during 2022, we would have a short-term increase, most especially in distribution and supply chain costs as we've had to add temporary capacity to ensure that we'll be in a position. We have made the decision to accelerate even more capacity in Q3 and Q4 to ensure that with this updated sales guidance that we are going to have what we need in terms of third-party support to get through what we hope to be a very busy holiday season.

And so that will put a little bit more pressure on our operating margin in the back half as well. Again, having now signed the lease for the new facility where footings are in and steel is going up. We're relatively confident we'll get to the mid-2023 transition that's in our plan, which will set us up for longer-term leverage as we work to bring down our supply chain cost once we exit these third-party facilities, hopefully in the last half of next year.

[Martin Landry, analyst]

And then maybe just on performance trend, you're talking about expanding into the culinary segment. Just wondering how big is that segment relative to others? And how many SKUs are you -- are being launched right now?

[Richard Maltsbarger, executive]

Sure. So Martin, the culinary segment is the fastest-growing segment in all of pet, so culinary more broadly defined would include all frozen raw as well as dehydrated human grade, gently cooked and of course, freeze-dried raw product, such as what we just launched for Performatrin Ultra. The category itself and culinary has grown at a 25%-plus CAGR for the past 5 years each year. And so very strong, very, very significant growth. It's still a relatively small part of the overall mix, so less than 10% of the business, but the fastest growing. This entry now gives us our first step into that super, super premium culinary price point. We have roughly 10 SKUs. It's primarily 3 types.

So we have toppers, which are small inclusionary nibbles that you put in with your kibble, we have patties, which can actually be fed as a food source or as a supplementation to kibble. And then we have powders, which is a great way to introduce raw into your dog's diet or your cat's diet by sprinkling it over either wet or dry food. So again, this is our first entry point. It's a great early sign of what our merchandising and expanded proprietary brand teams are doing to really bring some new innovation into our lines, and we hope to be the first of several launches as we go through the back half of the year.

[Martin Landry, analyst]

And have these been launched already? Or sorry, I may have missed that earlier.

[Richard Maltsbarger, executive]

Yes, they were launched into stores. I was just in Alberta, getting a chance to visit our franchisees and corporate stores there 2 weeks ago on the day they launched into the store. So it's given the opportunity to help set up some power panels and some end caps to help launch the product.

[Operator]

Your next question comes from the line of Paul Kearney from Barclays.

[Paul Kearney, analyst]

First, I was wondering if you can talk about inventory and how you're planning for inventory through the remainder of the year? Are there areas of product availability? Is it where it's still a challenge? And also, are there areas of the business that are experiencing higher inflation within your store?

[Jim Grady, executive]

Yes. Paul, as we talked about in our prepared remarks, we're obviously holding incremental amount of inventory than we would in so-called normal times. I would say we're pleased with the inventory levels. I think our merchandising team has done a great job of ordering early and ensuring in-stock positions. Having said that, we certainly have some outs where we would like to fill. But I would say they're not really material. They're a little elevated than normal. But compared to the operating environment we're in, I think we're doing pretty good with the in-stock positions.

And as we mentioned, we expect that we will continue to buy early and hold incremental inventory definitely through this year, and we're already looking into next year, given all the supply chain and transportation challenges, especially coming from the Far East. So from an inflation standpoint, I would say what we're experiencing is really characteristic of what you're hearing in the news, right. Raw materials are in consumables are definitely up. But I would say we're also experiencing it in the hardlines as well. And the hardlines are being impacted more by the freight costs that we were just talking about and then the consumables more on the raw material input.

So I'd say it's across the board, unfortunately. But you can imagine, we're looking at it very closely. We're negotiating partnering with our vendors very well. And then as always, we're taking a very keen eye on our competitive position and making sure we're maintaining competitiveness.

[Paul Kearney, analyst]

Very helpful. And just a second question. On the loyalty program, I think you said 70% of sales were loyalty customers. Can you just remind us what was this a year ago? And then any metrics on how these customers are behaving differently from the non-loyalty customers?

[Richard Maltsbarger, executive]

Sure, Paul. This is Richard. Yes. On the loyalty program, we were a bit below 60% of sales covered by our loyalty program this time last year. We're now a bit above 70%, so significant and continued growth as we move from the digitization of our program that we put into place in 2020. In terms of behaviors, with the incremental information that we have now, as I highlighted in our prepared remarks, we've been able to add incremental products into our frequent buyer programs, such as the bird seed and the small animal hay that helps to bring in a broader multi-pit household and reward them for having all of their purchasing behavior, with Pet Valu.

We've also implemented our automated and algorithmic-driven lapsed, lost and win back customer segments, very common practice within retail, of course, to identify those high-value customers that perhaps you may not have seen on their regular purchase trips within a month, 3 months, 6 months, et cetera. And the teams have put into place systems and tools that are very efficient, that working to help win back those specific high-value customers that we don't want to lose. It's really helped us to hone in on a significant proportion of our customer base that are monthly or greater customer frequency and do a really great job of pinpoint discounting or promotions or basket ad-based approaches with the right customers that we want to make sure that we keep bringing it back into our stores as opposed to the mass discounting of the past and flyer promotions that would have been a bit more scattershot. I think that's really helping to contribute to how we've been able to keep our discounting levels to all-time lows even as we continue to grow our sales.

[Operator]

Our next question comes from the line of Anthony Linton from Laurentian Bank.

[Anthony Linton, analyst]

So just quickly, I was just wondering on Chico. And again, so first of all, I'm just wondering, obviously, a lot of strong foot traffic in the first quarter there. I was wondering how your omnichannel platform fared in comparison and how penetration looks there? And then beyond that, I'm just wondering with the Chico acquisition, if there's any future opportunities to roll out the omnichannel platform there with some upside? And then also how the loyalty -- if the loyalty platform has been rolled out to the Chico stores, or if that's -- if you're working through the integration today and any potential upside there as well?

[Richard Maltsbarger, executive]

Sure. So, Anthony, let me just confirm for you. So 2 separate questions, right. Your first being omnichannel platform performance primarily with that value. Second question being more related to Chico and the progress there.

[Anthony Linton, analyst]

Yes, you got it. Sorry about that.

[Richard Maltsbarger, executive]

Sure. No problem. So on the omnichannel value continued progress. Again, this is our -- only our second quarter ever of having a fully integrated click-and-collect and direct-to-customer solution. So we're still only in our first full year of having it in the place. We continue to see very strong growth with our omnichannel sales outperforming this year in Q1 compared to last year in Q1, despite the fact that last year, right, we were under curbside only in Ontario for 10 weeks, which was driving abnormally omnichannel-focused purchasing. We're still out comping that this year as we continue to grow the expansion of our omnichannel. The usability releases that we highlighted last quarter, we've continued to put those into place. We continue to see record conversion rates as we go into Q1 of this year. So very pleased with what we're seeing on our omnichannel business continues to grow. It was a bit more than 1% last year in the business. We expect to continue to see growth above that as we move throughout the year.

On the Chico side, again, as I noted on the last call, I'll just reiterate, very limited integrations on technology and systems this first year. We're primarily going to be focused at Chico on integrating their financial reporting and compliance, HR support, including training for their new associates and their new franchisees, introduction of proprietary brands and the continued growth of Chico's new store pipeline, which, again, we opened 1 new Chico store even in the 1 month that we had with them in our business last quarter, and we're on track to hit our expectations for our 2022 Chico openings and already beginning to shape out our 2023 pipeline. So overall, again, limited technology sort of integrations with Chico during this first year, our primary focus on making them part of the family introducing our proprietary brands and keeping up the great organic growth they already had even before the acquisition.

[Operator]

Your next question comes from the line of Vishal Shreedhar from National Bank.

[Vishal Shreedhar, analyst]

On inflation, wondering if you're approaching the top of the hill there in terms of vendor asks? Or is it -- is the inflation asks are the escalating or more stable? Any color appreciated there.

[Jim Grady, executive]

Yes. That's really a tough one to answer. I think we're in it. I would be very hesitant to call this the top of the hill. But what we're seeing, I think, is really representative of what you're hearing in the overall environment. How long it's going to last? How long it's going to continue. The peak, I'm not in the economist side. I can't call that. But we are seeing it. I go back to, it's just -- it's not really different than what we're hearing across the overall economic environment. So sorry, I can't give you a point of view, whether it's ending or increasing right now, but I'm telling you we're in it right now.

[Vishal Shreedhar, analyst]

Of course. Thanks for color. The transaction growth was exceptionally strong now for the last 4 quarters at least. And we are beginning to lap these bigger transaction compares. Just wondering how we should think about more kind of steady-state traffic growth, if that's the right way to think about it. Your same-store sales guidance seems to be imputing about 4% to 8% for the remainder of the year. And given that basket has been relatively stable for the last few quarters. Is there a scenario which management contemplates negative traffic? And how should we think about the traffic?

[Jim Grady, executive]

Yes. So, the fine answer is no, we don't -- do not contemplate negative traffic going forward. We're very pleased with the traffic we are seeing. As we have been talking about throughout the pandemic, the consumer behavior has been very choppy and changing as a result of the operating restrictions at various times during 2020 as well as 2021. We continue to point out, right, Ontario, where about half of our stores are located, was in lockdown for 20 of the 22 weeks of last -- first half of the year. So for the quarter, for Q2, we expect continued strong performance for April and May. June, we'll be lapping a very, very strong performance. And then, of course, last year, we had extremely strong performance at the second half of the year. So we have tough compares as the second half of the year plays out, but we are not contemplating negative transaction growth.

[Richard Maltsbarger, executive]

Just to reiterate, Vishal, 2 key factors that go into that. One, again, the 3 million adoptions over the past 2 years has continued to help grow the overall market, and we're continuing to take an active position with our marketing and expanding our awareness and availability to new customers. Helping, as you note, last year, we added 600,000 people into our loyalty program last year on a net basis, giving us up over $2 million. We're continuing to lean into adding new customers through our expanded especially digital marketing capabilities that the teams have built.

The other factor leading to it is, again, we did open 30 new stores last year, and we're on track for our 35 to 45 new stores that we outlined in our guidance here. All of that will continue to help contribute to our traffic growth as we continue to invite new customers in those new neighborhoods into our stores. So no contemplation of a negative traffic environment. We are responsibly believing that we will have relatively lower levels of transaction growth as we begin to comp the very strong back half of 2021. But overall, again, it's part of our normalization to really closer to a pre-pandemic operating environment.

[Vishal Shreedhar, analyst]

And in your last call, correct me if I'm wrong, but management suggested that H1 would have stronger margin compression than H2. And I know some parameters have been adjusted. So is that still the case? Or should we expect margin compression to accelerate into H2 given that margins were on the EBITDA level, strong in Q1?

[Jim Grady, executive]

Yes. No, we have not changed that perspective. So H2, we do expect slight margin expansion -- margin improvement through the second half of the year. But I would call, when you're looking at that, as we talked about, right, we had very strong gross profit margins during the second half of the year. And as we talked about all along and what you saw this quarter is that we're returning to that normal long-term gross profit level of 35% to 36% that we talked about during our IPO. Q1 was at 36.1%. Last year, Q3 was at 39%. So that gives you an idea of how strong last year's Q3 is, and we don't expect to repeat that, of course.

[Richard Maltsbarger, executive]

And then as we noted, right, in Q2, especially Q3 of last year and even in the beginning of Q4 last year, we had significant uplifts from FX and exchange. Those will not be repeated. And as we noted on our previous calls, during those quarters when we reported those were the largest factors that were lifting up the margins to those higher than normal levels. So again, backing that out, assuming a more normalized or even weakening Canadian dollar does change us back to our more long-run range for gross profits.

[Operator]

[Operator Instructions] Your next question comes from the line of Mark Petrie from CIBC.

[Mark Petrie, analyst]

I just wanted to ask about the labor dynamics. And I guess 2 parts. One, the response and sort of payoff that you think you're getting from the certification and training and wage rate increase last fall? And then second, how are you sitting today in terms of labor availability, I guess, stores primarily, but also in the supply chain?

[Richard Maltsbarger, executive]

Yes, Mark. We're giving a good return on our investments. As Jim noted, we made and reminded, we made those investments in Q4. Across the board, we continue to see lower than industry average turnover within our workforce at higher levels of stability than specialty retail norms and especially normal retail norms. As we talked about on the last quarter, the one area in which we do face the most significant challenge is in our distribution centers, in which, again, our operating environment is very similar to other environments and there are certain distribution center players out there grossly exceeding market rates and what they're offering to what -- for them is a high turnover workforce.

So we have stepped up our game. It is part of what feeds into our updated guidance on the rates that we will be offering within our warehouses and most especially in our transportation group within our drivers and other high-demand areas. So we are not immune from the pressures in the marketplace generally, across our business. We have pretty good access to talent and not significant availability challenges. The one area in which we are [indiscernible] for talent more so than others is in our distribution and transportation areas.

[Mark Petrie, analyst]

And I guess just one other one, also sort of higher level. The franchisee economics have improved pretty materially. How does that change, if at all, how you approach your growth strategy with regard to the store network, sort of consolidation of franchisees or allocating second or third locations? And then also re-franchising. It was probably just timing but noticed that there was no re-franchising in Q1. So for the first time in a while. So I'm just sort of curious about all of that.

[Richard Maltsbarger, executive]

Yes. So Mark, no real change to the strategy that we've outlined. We have noted over time, we expect to grow about 50 to 100 basis points or more on franchise penetration per year. We had a significant number of re-franchises last year at 18%, which is more than 2x our normal rate of re-franchising in a year. So it really is timing as we came into this year as we had generally more than we usually do in the back half of last year. And first quarter is also typically a slower month because, again, you have to go through the financing process in order to purchase a franchise, of which most people aren't doing financing activities in the Q4, especially not our existing owners because they're kind of focused on keeping up with the volume in their existing stores since they are owner operators, they're hands on every day. Very strong demand continues.

Our inquiries are significantly higher than pre-pandemic. So we're continuing to see high levels of interest in our franchising. And like I said, we opened 6 new stores in the first quarter. We expect to continue to accelerate that throughout the back half of the year. We are continuing to focus on franchising as our primary vehicle of expansion in the future. So it's no real change in the environment. It's just -- the reality is, is we had an excellent year last year on re-franchising, and we just got to sort of get the engine restarted back up this year.

[Operator]

And there are no further questions at this time. Mr. Richard Maltsbarger, I turn the call back over to you for some closing remarks.

[Richard Maltsbarger, executive]

So as always, thank you, everybody, for your interest in Pet Valu and the time that you're investing into our company and understanding the growth story that we have as the market leader in Canada and the continued steps that all of our franchisees, our ACEs, our supply chain, transportation and corporate teams are taking in order for us to continue to be the best choice for devoted pet lovers across Canada. We appreciate the time and the attention and look forward to talking to you all again at the end of next quarter.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.