Empire Company Limited (EMPA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Empire Fourth Quarter 2022 Conference Call. [Operator Instructions] Also note that the call is being recorded on Wednesday, June 22, 2022. And I would like to turn the conference over to Katie Brine, Vice President, Treasury, Investor Relations, ESG Finance. Please go ahead.

Thank you, Sylvie. Good afternoon, and thank you all for joining us for our fourth quarter and fiscal year-end conference call. Today, we will provide summary comments on our results and then open the call for questions. This call is being recorded, and the audio recording will be available on the company's website at empireco.ca. There is a short summary document outlining the points of our quarter available on our website. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer; Matt Reindel, Chief Financial Officer; Michael Vels, Chief Development Officer; and Pierre St-Laurent, Chief Operating Officer. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors. I will now turn the call over to Michael Medline.

Thanks, Katie, and good afternoon, everyone. A lot has happened since we last spoke in March, and I'm really proud of our ability to consistently perform. Despite another volatile quarter, including a multitude of external pressures, including inflation and supply chain challenges, our teams have been busy executing with excellence to ensure we posted another quarter of strong results. At the same time, we've been busy preparing for fiscal '23 and beyond, including unveiling our exciting new loyalty strategy. With that in mind, today, we'll focus on 3 topics: one, our Q4 results in key market trends; two, progress on Project Horizon, including our recently unveiled loyalty strategy; and three, commentary on capital allocation. First, our results and market trends we're watching. This quarter had many unusual events with both puts and takes on our results. These included global supply chain disruptions, labor shortages, early redemption of outstanding notes, a 13-week strike in our Quebec distribution center and as you know, extremely elevated inflation. Despite these trends and the multitude of other challenges faced, the quarter was well executed by our team delivering EPS of $0.68. Sales grew 5.2% this quarter, excluding the 53rd week that falls in Q4. Now 2 years into the pandemic, 2-year stacks are no longer meaningful, so we will focus on comparisons to the prior year. While same-store sales were down 2.5%, it's important to remember that we are comparing to a period of significant COVID lockdowns, which we especially benefited from last year. Inflation, along with the resulting customer impact is something that we are watching extremely closely. We neither like nor profit from when inflation is at these high levels. There is sentiment in the market that it may be moderating and it's at its peak. That is difficult to predict, but we certainly hope so. We've gone through another intense period with copious cost increases being brought forward in the short time and have managed through it well with our supplier partners. But with May's food CPI at 9.7%, it's natural and logical that customers are very focused on what they are buying. We are seeing double-digit rates of inflation on basic commodities like eggs, flour, and meat. We're cognizant that customers simply won't and often cannot accept cost increases at some of the extreme levels we're seeing, while also paying more at the pump and for other essentials. With these dynamics at play, we are seeing customers shopping more stores, increased transaction counts with fewer impulse purchases. We're seeing product trade down, such as from beef to pork trading down on size and stocking off more on major promotions. And we're seeing our own brands growth outpacing the rest of our store and the market in general, both for the quarter and the fiscal year. Now these changes in customer behavior appear now to be stabilizing. As a grocer, there are levers we can pull to keep delivering great value to our customers and maintaining high foot traffic in our stores, including leveraging our own brand portfolio and promotional strategy. And we're doing that in both our full service and discount stores. While the inflationary environment requires a careful balancing act across pricing, promotions and product mix, our team has done an excellent job managing through this period. However, the reality is that a lot of Canadians are struggling under the way of inflation, and we hope this period of high inflation is short-lived. We are proud of how we manage these ongoing headwinds to deliver the bottom line. This took some time, our quarter ended better than it started, and our teams quickly pivoted to respond to the rapidly changing market conditions. Our margins were solid and they are a direct result of good execution of the right strategy, not because of inflation. We are very pleased with our investment in FreshCo, which has expanded our discount presence. The improved products and strong focus on value in our own brands portfolio are meeting the needs of customers, and we are finding ways to continue to offer value to customers across our entire network. Our consistently solid results through these challenging times demonstrate the positive impact of the improvements we've made, the consistent execution from our team and the strengthening earnings power of our business. Project Horizon has been critical in driving these improvements, which I would like to turn to next. Year 2 of Horizon is in the books, and we are laser-focused on execution going into our third year. We are now 5 years into our transformation strategy at Empire. When we started this journey, we had 4 priorities: addressing our then Byzantine organizational structure, taking significant costs out of the business, strengthening our brands and fixing the West. To accomplish these goals required more than doing things differently, it required infrastructure investments that we were frankly behind on. The 5 major infrastructure investments we focused in on were: one, expand discount to the West; two, develop a scalable, profitable e-commerce solution; three, enhance our own brands offering; four, winning key urban markets like the GTA, where our market share was too low and, five of all, our loyalty program. In only 5 years, we made major strides against all of these priorities, and the recent announcement of our co-ownership of Scene+ and plans to transition to the Scene+ program marked the final infrastructure step we need to make to transform our company and to continue to drive results. We've been eager to talk about our loyalty strategy for quite some time. But when we started our transformation, there were so many foundational investments we needed to make in personalization, data, technology and marketing to even consider an evolution in loyalty. We have been steadily making these investments and today, we are well-positioned to introduce such an exciting and meaningful new program to our customers. In partnership with our fellow owners, Scotiabank and Cineplex, we are transforming Scene+ to become a preeminent loyalty program in Canada. Scene+ is already one of Canada's leading loyalty programs with more than 10 million members, touching approximately 50% of Canadian households. As the CEO of Scene+ said recently, Scene+ members and extensive customer research told us that grocery is a very important piece of any loyalty offer. Scene+ offers customers a superb assortment of opportunities to earn and redeem points across a broad spectrum of partners like banking with Scotiabank, escaping to Cineplex theaters and entertainment venues, recipe restaurants across Canada like Swiss Chalet, Harvey's and Montana's and travel through Expedia. Redemption partners also include great retail brands like Best Buy, Apple, and Sephora. Grocery will be a key pillar of this program. Scene+ members will be able to earn and redeem their points for food, and we simply cannot wait for our customers to access these benefits through our stores. For Empire, Scene+ will allow us to thrill our customers and unlock the true power of personalization that will deepen our relationships with our customers and reward them for their loyalty across many of our businesses. There is a mountain of opportunity here to thrill our customers, build our strength in data and personalization and take our marketing and merchandising to the next level. We have robust transition plans in place that start with introducing the Scene+ program to customers in Atlantic Canada in August 2022 and then rolling out to the rest of the country, culminating in early 2023. Through these plans, we will mitigate any disruption to our customers throughout this change. I also want to touch on 2 of those other major investments we needed to make in our transformation journey, fixing the West and developing the e-commerce solution. An important part of our fix the West strategy was to introduce FreshCo, our discount banner to Western Canadians, and we are very pleased that we decided to do this 4 years ago. Today, in partnership with our dedicated franchise operators, we are running 40 FreshCo stores in Western Canada. In the back half of fiscal '22, we increased our discount store footprint in the West by 40% and now have a presence in all Western provinces. Our discount network is thriving and soon FreshCo will have a completely new weapon to add to their arsenal, a competitive loyalty program. They previously had no loyalty program. Turning to e-commerce. As you know, we have been investing in the only profitable and scalable solution for grocery e-commerce in Canada. Voila now has 2 CFCs operational in Canada with 2 more in development and 98 locations with curbside pickup. Grocery e-commerce, coupled with a strong bricks-and-mortar offering and a strong loyalty engine like Scene+ give us a competitive advantage over the other models currently in market. Our e-commerce business has come a long way since we opened our first CFC in Toronto 2 years ago. With the opening of the Ottawa spoke, we can now reach approximately 90% of online spend in Ontario through Voila. We completed the launch of Voila par IGA app in Montreal, which now covers approximately 95% of Quebec's online spend and the transition has been operationally seamless. Net Promoter Scores for Voila par IGA app are higher than the iga.net and the service is attracting net new customers to Empire. Quebec dealers are happy to have all of their teammates focused on the in-store experience, and we are now setting our sights on the west in our future launches in Alberta and BC. We are proud to see these large infrastructure investments that have been key to our transformation journey come together. And while we are still clicking some of the final pieces in place, we're also delivering strong bottom line quarterly results. Today, Empire is focused on consistent day-to-day operations while also strategically investing in the future. Finally, before I hand this over to Matt, I want to talk about capital allocation. We announced a 10% increase in Empire's quarterly dividend per share, which brings our 5-year dividend CAGR to 9.5%. As well, we announced that we renewed our NCIB to repurchase up to 10.5 million shares, representing 7% of our public float. In fiscal '23, we plan to repurchase $350 million of shares. For fiscal '23, our capital spend will be approximately $800 million. About 50% will be used to continue renovating and refreshing our store network, expanding our Farm Boy and Longo's footprints in Ontario and our discount network in Western Canada. By the end of fiscal '23, we will have touched almost 50% of our network over the 6-year time frame. Additionally, we will continue to advance our e-commerce expansion and invest in advanced technology. Now Matt will walk you through this in more detail. I'll hand it over to Matt.

Thanks, Michael. Good afternoon, everyone. I'll provide some additional color on our results as well as setting some expectations for Voila, Scene+ and our capital allocation strategy for fiscal '23. We're really pleased with our Q4 results. We're making sure that we manage the various puts and takes that happen each quarter while still ensuring that we deliver consistently strong results. And at the same time, be well prepared to take advantage of opportunities as and when they arise. The early redemption of one of our notes in June was a good example of this. So let me comment on our results. Same-store sales were minus 2.5%, which was in line with our expectations and was driven by 2 main factors. Firstly, our comparables in Q4 of last year were highly elevated due to COVID lockdowns in Ontario and Quebec, particularly in February and March of 2021. We only started to see the impact of easing restrictions midway through our first quarter. Secondly, when we look at the current highly inflationary environment, as expected, we've seen some changing consumer behavior in our stores within the increased focus on value. As Michael noted, we're satisfying the needs of these value-seeking customers through a combination of promotions, assortment, that enables product trade-downs, value side SKUs and our own brands portfolio. We also saw a slight shift to discount. Our customer numbers are still strong in both full service and discount, but the net impact of the value seeking customer is a lower basket size. Overall, Canadian food budgets are not increasing at the same pace as inflation, and so customers are logically making value decisions in our stores. We improved our gross margin rate by 17 basis points, excluding the impact of fuel. This growth is largely due to the addition of Longo's and our continued progress against Project Horizon, partially offset by higher supply chain costs, including the costs from the strike at our distribution center in Quebec. Our SG&A rate was 21.8%, which was 16 basis points lower than last year. This is largely due to the additional week of operations, the so-called 53rd week, plus lower COVID-19 costs. It's partially offset by Longo's higher SG&A rate, which we will start comping in Q1 and higher depreciation due to right-of-use depreciation. Other income increased over the prior year, primarily from the gain of the surrender of a lease in Western Canada. The net impact of all of these puts and takes was an increase in our EBITDA rate of 10 basis points. Our effective income tax rate was 23.1% in Q4. The income tax rate for the quarter was lower than the statutory rate, primarily due to benefits related to tax investment credits and capital items taxed at lower rates. The effective income tax rate for the year was 25.0%. For fiscal '23, excluding the effects of any unusual transactions or differential tax rates on property sales, we're estimating that the effective income tax rate will be between 25% and 27%. Earnings per share were $0.68, which included $0.07 of Voila dilution for the quarter and $0.28 for the year, which was within our estimated range of 25% to 30%. We believe that the fiscal '23 earnings dilution for Voila will be marginally lower than fiscal '22. The dilution will be higher in the first half of next year as we ramp up operations in the Montreal facility and then improve in the second. Ultimately, future earnings from Voila will be primarily impacted by the rate of sales growth, but we believe that fiscal '22 was the peak year of dilution on Empire's earnings per share. Based on where we finished fiscal '22 and our plans for fiscal '23, we expect to deliver at least a 15% earnings per share CAGR versus fiscal '20, which as a reminder, we defined as the Q3 fiscal '20 trailing 12 months, i.e., the year before Covid. With strong results and a strong balance sheet, we will maintain a very positive capital allocation strategy in fiscal '23. We have announced a 10% increase in our quarterly dividend per share. This is the 27th consecutive year of dividend increases. We also renewed our share buyback program and intend to repurchase $350 million of shares in fiscal '23. We continue to increase our NCIB program aligned with our expectations when we announced Horizon. We anticipate investing approximately $800 million back into the business via CapEx, slightly more than the $767 million we spent in fiscal '22. About 50% of this investment will be allocated again to improving our store network through renovations and new and converted stores with 4 FreshCo stores in Western Canada, 4 Farm Boy stores in Ontario, and 2 Longo's stores in Ontario. We will continue to invest in our advanced analytics technology and other technology systems, which will be approximately 25% of our total CapEx. We've been preparing for the revamping of our loyalty strategy for some time. The investments you've seen in advanced analytics and other technology systems in fiscal '21 and '22 included work that positioned us for becoming a co-owner of Scene+. As a result, you will not see a large spike in CapEx in fiscal '23 related to Scene+ as we are already well prepared. As Michael noted, we're excited about the opportunity that the Scene+ program provides. With the addition of Empire, Scene+ will transform from an entertainment loyalty program into a preeminent loyalty program. Since Scene's inception, this program has evolved to be much more than just movies. In addition to the various other redemption opportunities provided, Scene+ members will be able to earn and redeem points for groceries. And with a meaningful number of points already in the market, we are expecting to welcome a significant number of new customers to Empire. We simply can't wait for our customers to begin to use it in Atlantic Canada in August. And with that, Katie, I will hand it back to you for questions.

Great. Thank you, Matt. Sylvie, you may open the line for questions at this time.

[Operator Instructions] And your first question will be from Vishal Shreedhar at National Bank.

I just want to get your perspective on what you saw intra-quarter as the trends improved and how they improved and for what reasons? I know you mentioned that in your script, so if you can provide some additional color.

Yes. It's Mike. I'll start, and then I'll see if anyone wants to add anything on. I mean I think what we saw throughout the quarter and so different in terms of periods are in rank order, our comparison to last year, right, whatever was going on last year and where we did pretty well had a big effect on whatever period we were talking about. And then we saw customer behavior change early in the quarter and in the middle of the quarter, but then start to stabilize. And these are all in rank order. So comparison last year, customer behavior. And then the third was, we saw a slight move to discount. But again, we've seen -- we saw in the quarter some stabilization throughout that. But I think all of it, if you look at the pandemic and you look at the inflation, it's pretty logical -- and predictable and not out of the ordinary. So that's what we saw. Is there any -- anything you want to add, Matt?

Any further questions?

Yes. I just want to follow up on management's comments about expectations for positive same-store sales growth in fiscal '23. And what underpins that assumption? And to what degree will Scene+ play a role in that expectation?

Sure. So yes, the expectation of positive same-store sales, as Michael said, the biggest driver of that is when we start to lap a lower COVID base in our prior year. Having said that, the work that we're doing internally on all of our key drivers, we expect to significantly improve our top line the work that Pierre is doing will certainly contribute to that. And as we roll out Scene+, as we said, one of the advantages and one of the benefits of this new program is it is an existing program. So there are 10 million customers out there, 40% of whom do not currently shop at Empire. There are also a multitude of points out there in the market that existing Scene customers will be able to redeem at the Empire stores. So we are expecting that the launch of Scene+ will bring new net customers to Empire. Of course, that will be, over time, we have a phased implementation launch as we explained in our press release. But certainly, we expect the incremental impact of Scene+ to be positive and accretive in year one. So yes, that will be one of the drivers of next year.

Okay. And lastly, I was hoping to get your perspective on gross margin, up 17 basis points, excluding fuel. If you remove the strike impact up even more year-over-year, quite a solid result given all the inflationary pressure, but top line is a little bit lower than at least I expected on same-store. Wondering if management is satisfied with the balance between gross margin and sales or if there's any fine-tune adjustments to be made there?

Yes. So thanks, it's a great question. What I would highlight is, first of all, we're very happy with the balance and the mix. So gross margin, as you said, was 17 basis points higher. If you exclude the impact of the strike, probably 35 basis points higher. And that's really coming from 2 main sources. One is the inclusion of Longo's, but more importantly is our ongoing Horizon initiatives. This is not because of inflation, but our ongoing improvement in our operational excellence in our stores continues to have a benefit on gross margin. So the fact that we were able to increase our gross margin in this extremely volatile environment is a great testament to Pierre's team, in particular, who obviously manages our negotiations and ultimately, our pricing. And it demonstrates that we can consistently deliver results through challenging times. The balance of margin and sales is something we are acutely focused on. We could go out and buy market share. But that's not in the best interest of our company or our shareholders. So the fact that we are gradually increasing our gross margin demonstrates that we're capturing the right sales, and the right banners at the right time. So yes, we're very happy with the mix and the blend of sales and margin.

Next question will be from Patricia Baker at Scotiabank.

I'd like to resume discussion, Michael, on the Scene+. You guys certainly negotiated a very good deal to say the least. Can you share with us some of the discussions that you have with the partners and what they were split other than what you already told us, but anything else you can share about what saw such a coveted partner? And then also on Scene+, do you think that it's a little -- a bit of an advantage right now that you're going to be rolling that out in August to the maritime, which is probably one of the more struggling parts of the country and doing it in the context of inflation and that would make those Scene points look very value-oriented for those customers to really want to redeem the points for food when food prices are so high.

Yes. I'll take both those questions in turn. The first is that we were, and I'm not going to go through the details, highly coveted by many suitors to be the loyalty partner. One is that grocery is absolutely key to royalties. Second is that we're national and we are one of the only 3 national players in the country. And the other one already has a loyalty program, I think. And the third reason is because of being able to cut its dealers because we've been far more successful and our brand is so much better than we were 5 or 4 years ago. So we were able to find the best fit for us and have the -- and take the pick. At the same time, we were able to join Scene+, have a third ownership for no cost to us because that's how important it was and what a good partnership it is. So in terms of is there an upside there are -- I'm well aware as a Scene+ cardholder that being able to -- there are some glut of points that customers, especially those with a credit card, we'll be looking forward to being able to redeem in the grocery stores. And so I think that we'll go through different stages of mix where people are going to want to wear down their point for us, which we welcome and we'll have plenty of opportunity to do that. And then secondly, we're going to have to go through some change and have all our customers change over Scene+ and we have very many plans for that. And we just took the board a couple of hours ago through our plans for that, and they're excellent. And then third will be that we have these millions and millions of Scene+ members who do not currently shop our banners, who will be available to us and have a lot of points. And I think they're going to love this program. And I got to give credit or credit is due to Sandra Sanderson, our Head of Marketing, Mike Vels, who also with Sandra led the negotiation, and Matt Reindel and others who put together what is over time, what is a great program. What people don't see, I guess, and that's what you're looking for, is that over the last couple of years, we've been investing a lot in our business to get our data monetization and our store processes better. And so the -- there's no real spending here. Now we just we'll just convert over, we'll make it a seamless as possible.

So, Michael, you'll be able to personalize message to those 40% of the Scene+ members who we don't already shop at Sobey's?

Yes. And then we -- and this will not be -- we've been -- we just started some personalization already with the data we currently have before Scene+ and the -- our team is not in the cover of a both actually. And I don't -- when I use a sports analogy, you should know I'm extremely serious. And we're really happy. And so we build -- we're building that capability alongside of eventually being able to personalize to all these Scene+ holders. So we're going to have our own customers, they should be excited and we're going to have some new customers and we just have to execute.

And then do you have anything to say about my last comment about while it's fortuitous to be doing it at a time when there's high inflation, that makes the point to be even that much more attractive.

Yes. I mean, absolutely, I think that having this loyalty program is going to -- we want to bring value to our customers, and this is going to bring value to our customers and that they're going to be able to use points at a time when it's difficult out there. And so yes, it is fortuitous. Hopefully, by the time we get some other region, there won't be so fortuity and inflation will come down, and we'll be able to be firing on all cylinders. So -- but yes, for sure, in August, when we unveil it in Atlantic Canada, it's going to be a great help to us. Thank you. Thanks for your questions.

And your next question will be from Mark Petrie at CIBC.

Yes, I know there are a lot of moving parts in the top line and even in the same-store sales figure. And I know you're not going to quantify an inflation number, but I'm hoping you can just give some context around the actual impact of trade down on the top line. And then I guess, related to that comment about how you think you performed in terms of market share, both by channel, but also overall...

Okay. It's coming from, obviously, customer behavior changes. The biggest one is people are coming back to prepandemic behavior by shopping more stores. They're buying more own brands, private label product at a lower retail, but a good value for them and a good value for us. So because we did an amazing job we build own brand, so we're pleased with the results we're having, especially right now, retrending up, like I said in Q3, very clear with the performance on own brand, but it's at lower retail, but that's really good margin. So it's explained the top line and the bottom line, the penetration in own brand. Obviously, customers are trading down some category and in protein, it's obvious, beef to chicken. It's an easy one. They're buying less impulse product. They are buying less on impulse. They're sticking on their shopping list more. So they're just more disciplined and they're looking more for deals, obviously. So those things are impacting the top line, for sure. But we have everything in our portfolio to manage their demand. We are seeing -- we're measuring a lot of things in terms of promotion. We -- our promotional penetration is trended in line with the industry. So we're measuring everything, and we make sure that we remain relevant and competitive, and that's exactly what we're doing. And we are there to meet customer expectation and demand. So that's the main changes we're seeing impact on top line.

Okay. And then I guess just following up on the private label comments specifically, are you able to quantify any piece of that, either in terms of penetration or the relative growth of your private label business versus the last -- versus the rest of your business over the last year or even the last several years, would you just sort of help us get a sense of the relative opportunity from here that you still have on private label?

We are seeing much higher sales in private label than in national brand, which is good. And our overall margin rate is higher with own brand than it is with our average margin rate. So I will stop here. But we're benefiting right now of the good work we did over the last 2 years to rebuild own brand category by category, like I said in the past, this was the progress that we made in every category, we have relevancy for own brand, in some category, less in other categories, it's much bigger. So frozen fruit is a great example. Most of the products are our own brands. In other categories, it's less relevant having own brands products. So -- but overall, on rent sales are higher than national brand sales by a lot because that good job done and that higher margin rate.

Okay.

It's Michael. Mark, just -- obviously, we've got to make sure we don't give publicly disclosed information, but I know that you asked so nicely that I'm going to at least guide you. But we -- I mean the work we've done was at the right time to really improve what we're doing in own brands. And then obviously, consumer behavior is changing. And so everything we're seeing is we're growing faster than the market, but this is -- this is by far the fastest I remember since I joined the company that we -- our penetration is up. And as you know, penetration isn't the raise of debtor for everything we do on our own brands, but we haven't seen penetration like this before. So it's a really great timing for us on that -- on that standpoint, it's not great for the sales as Pierre pointed out, but that's really good for right now and for the long term.

Yes. Understood. And if I could just one more. SG&A was well controlled, adjusting out the COVID cost. Can you just help us understand the impact of the extra week on SG&A? Was it just a straight-line impact? Or how did that play out? And then also, how should we think about SG&A for next year, just given all the inflationary effects in your business?

Yes. I can take that, Mark. So yes, I mean there's nothing highly unusual in SG&A for the quarter. You're right. You had the 53rd week, which you can basically straight line it. I mean that's the absorption benefit we get from an extra week of sales. Having said that, of course, it's not a complete fixed cost because it's a big piece of SG&A that's variable with the stores. So it's hard to specifically call out what the impact is. But of course, we got a case in Q4 from that. As we look forward to F '23, I think I said on the call maybe 2 quarters ago that we're beginning to reach our kind of a stable run rate of SG&A. So what you saw in Q4 is not going to be materially different from what we expect for F '23. I know we're not going to give a specific number, but it will be in that ballpark.

And your next question will be from Irene Nattel at RBC Capital Markets.

I just want to clarify one thing that when you say the run rate similar to F '23, are you talking about dollars or percentages? -- run rate similar to F '22.

Yes, I'm talking rate.

Perfect. So just continuing on the whole discussion around consumer spending behavior, what are you seeing now in terms of penetration rates on promotions within the basket?

So as I said, our promotional penetration trended in line with the external reports. So maybe a few things to highlight. Though we're still facing inventory ability challenges in some category, and therefore, we cannot promote like we would like to do. Cereal is a great example, and it was during the quarter. And we are seeing less impulse buy, which are typically done on promotion in-store as customer now are more selective in their promotion. But overall, when we look at our promote penetration versus the industry, we continue to trend in line with the industry. So there's a lot of volatility because of supply chain and customer behavior, but we continue to stay relevant and competitive based on those metrics from the industry.

That's really helpful. So presumably, a lot of the work you've done on data and analytics and on your gross margin is really helping with your ability to sort of deliver the gross margin even with rising promotional rates?

It's a combination of many things. But if you refer to the promo optimization tool. So the usage of the tool is obviously well embedded in our merchandising practices regardless of the environment, which is good. And that said, when the environment experiences, rapid changes like we're seeing right now, we will make sure that the toll is refreshed more frequently. And we need to engage more professional judgment, I think that we do well when we make decision, and we continue to leverage insights from the tool and with our partnership with supplier to leverage those insights. So honestly, the team did a really good job working with the tool, working with insight and having good professional judgment and managing really well the promo mix right now. So -- and the decision we've made, as I said earlier, in recent quarters, by having a sourcing team, negotiating price increases with suppliers, keeping our merchandising team focused on merchandising and business plan with supplier is very, very helpful right now. So we're benefiting at it. It's a combination of many things that could explain our good performance on margin right now.

That's really helpful. And actually, it leads into my next question, which is what we're hearing from the supplier side is that they need to keep coming back for more price increases because, of course, they're facing the same magnitude of inflation. So can you talk about the types of discussions you're having now? And how you think that, that plays into the outlook for food pricing as we go through the back half of calendar '23 -- or '22, rather?

We're taking those ask one by one, and we're measuring those ask versus peers versus -- and what could influence higher, I would say, higher cost, i.e., the transportation? Is it commodity? Is it raw material? Is it packaging? So we have very good insight to manage every single ask individually. So I would say, so far, so good. It's really well managed by the sourcing team. But yes, we continue to face cost increase right now. It's not slowing down. Maybe the level of increase is slightly lower. We heard, again, an increase from dairy farmer in September, which is lower than the one we've got before in February. But this, once again, it's category by category, one ask at the time, and it's very volatile right now, and it continues to be volatile for -- it will continue to be volatile going forward based on what we're seeing right now. But really well managed, good discussion with suppliers. We have been able to manage it well with them, no major disruption, obviously, tough conversation because we're sensitive to their situation. But at the same time, our job is to keep really good value for our customers, and it's exactly what we're doing.

Next question will be from Michael Van Aelst at TD Securities.

You covered a lot, but I have a few left over. So part of the Project Horizon target and getting their involved market share gains from what I recall. And you did get some from Longo's acquisitions and the new store openings. But I'm wondering if you need some same-store tonnage [ market ] to also hit these goals over the period?

So yes, it's an interesting question. What I would say is when we look at our final year horizon and our plans that we have in place for the year, we have enough growth that's coming from our store renovations, space productivity, all of the operational excellence that we're delivering in stores to be able to capture enough growth to deliver Horizon. So I think those -- the work that Pierre is doing is going to capture tonnage growth. That's what our expectation is for '23, that will have positive same-store sales. So is there anything else specific out there that we need to do in order to capture that? I don't believe so. We've got confidence in our plans that we'll deliver '23 with positive same-store sales to deliver those Horizon numbers.

All right. And then on the discount, as you're, what, 2-thirds of the way through almost your expansion in Western Canada, I'm wondering if the success that you're having as well as the market conditions that we're seeing with all this inflation is leading you to consider going beyond the 65 or so that you have planned for Western Canada? And also, if you have any plans to launch any discount in Quebec?

So I'll take both those. No, we don't have plans to go beyond what we said we're going to do and -- because when we look at the market, around 55 stores was perfect, and it also helped us ticks the West. I think we've seen really good performance even before inflation, which was a bit muted during the pandemic because discounts suffered a bit during the pandemic and there's no way I want to overreact to the inflationary period that will end hopefully soon, but maybe within however many months or whatever it is, and make mistakes strategically and get off of where we want to be. So when we looked at the markets and we looked at what it could hold and where the right places where we came up with those 65 stores. Our -- in the meantime, our Safeway and Sobey's stores and our community banners are doing much better in Western Canada as well. And so there's always attention to that we believe there's real great growth in our established banners, too. And so both financially and strategically, at this point, we're not going to get off of that. In Quebec, there are no plans to put a discount banner to Quebec.

All right. And then just final question, just to clarify on the e-commerce. You said that there was growth in Voila, but I'm wondering if there was growth in Voila, if you excluded Montreal, the Montreal conversion or so. So like in other words, was there growth in Voila in Ontario?

Yes. So we're not going to provide the split of all of the individual businesses that we have under e-commerce and particularly in a period where we're transitioning the iga.net business over to Voila. So that's obviously a moving picture. But what we can say, as we've said previously, the -- we are continuing to experience growth in our Voila platforms, and we expect to continue to do that as we move forward. And in the older platforms against a very high COVID baseline, they are lower than the previous year. So the overall net increases of 12% obviously had some positives and negatives in there, but that's the key takeaway. Voila growing and the older businesses are not comparing to a COVID elevated baseline.

Even for us -- it's a great question, Michael. Even for us, sometimes you get blurred by the pandemic memory, trying to remember what the heck happened when there were lockdowns. And obviously, we have to look at that all the time to be able to make sense of our results. But big portions of Q3 and -- sorry, Q4 and Q1 a year ago, there were major lockdowns in Central Canada, which we got through it. And so obviously, there's been some small pullback. So the business is growing, but that's kind of pandemic fever is not there. But we're happy with the underlying growth, but it was really -- everything was COVID influenced last year, [indiscernible]. It was scary. It's still scary times now for a lot of people, but it was very scary last year at this time in Central Canada.

Next question will be from Peter Sklar at BMO Capital Markets.

Michael, a question on the new loyalty program, which I can see management is very excited about. So like you're going to lose Air Miles customers who are not Scene members and you're going to pick up Scene customers who are not currently Air Miles, currently don't hold Air Miles. And so net-net, like why is your management and you so optimistic that you're going to be so far ahead at the end of the day? Is it like it seems to me that you're substituting one loyalty program for another, but you're just so optimistic that the net impact is going to be so positive.

I try not to wear rose-colored glasses, but I am a bit rosy on this one, but I guess the way to look at it, Peter, thank you for the question because I'd like to clarify all that, which is, one, almost all our customers will convert over to Scene+ and they might still have on Air Miles account, and I hope they do, and they'll also be Scene+ members. So we'll bring over almost all our customers. And then we'll gain new customers. Now that's one -- I thought the only reason I'm really excited. The other reason is that we're going to be able to use the data and the personalization and be able to communicate with more customers than we ever had before. Remember, Scene+ is 10 million members, that's without a grocer. So this is going to be a really large and powerful program. And also, I've had the benefit which you haven't of seeing our marketing and the plans for Scene+. And so it's an advantage. But yes, we're pumped about this. We've worked hard. We followed the customer on this one. We did a lot of research -- and we're pretty darn good at executing now. We make plans and we do everything to make sure that we're ready and a lot of thought was going into this. I think we're just glad that we don't have to keep it secret in more, and we can talk about it and share with our stores because they're going to be the key to. They're the front line of our company, and they are very excited about the change because they know it's going to be positive.

Yes. But Michael, how do you know that you can convert almost all of your existing Air Mile customers to take on a Scene -- to take up the Scene loyalty program and be active on it? Like is it -- I would think there'd be some meaningful proportion that I'm loyal to Air Miles. So I'm going to stick with my Air Miles.

I'm not going to take you through all the work we did because we don't have time, although we could do it at a different time, just so you know. But I think the key to that is that people are very loyal to their grocer and that they're going to be very excited to about the loyalty program. And so that will increase their loyalty, love, stickiness with us. And it's the growth -- they're going to go to where the loyalty program is. And because this is such a good one, I'm not worried about it, but there's -- this was not taken -- this was not an overnight decision. This was plenty of thought put into it.

Okay. And I just had one final question on a different topic. I don't know if you saw, I'm sure you saw that [ Cato ] in their recent revised guidance, they said that consumers are putting one or 2 fewer items in the basket. And so there's some kind of online phenomena going on in the U.K., I guess, is the consumer squeeze by high cost of moving inflation. When you look at Voila, are you seeing anything like that? Or even in your in-store like even in your in-store, are you seeing fewer items in the basket?

Yes. I think probably most -- every retailer is saying that because of the heavy cost of inflation. I don't think anything to do with online or not. I don't think it's huge, but it's enough to make a small difference. And it's clear, I'm sure, Peter, you've filled up grid last week or 2, people only have so much money when they stop up the car or they have extra expenses or they have to buy hockey skates they're more expensive, where they have to go to the grocery store, they have to make harder choices. And so to me, periods of high unemployment or high inflation are terrible for Canadians and for anyone. And so they have to make tough choices. And I don't think that's a surprise and this is a global phenomenon. So I wasn't surprised at all. This too shall pass, and our job is to create even more value and get people to come in our stores more and loading up. So I don't think our job becomes a tiny bit harder. But as Peter said, we have to tackle that. But these are tough times.

Next question will be from Chris Li at Desjardins.

Maybe just a few follow-up questions. Michael, in your opening remarks, you mentioned that the quarter ended better than expected than it started. So wondering if you can elaborate on that. Were you talking specific to same-store sales growth?

I'll talk about everything including same-stores. And so -- it's so hard to see. I like numbers so much. I load to see trends that are in too short a period. But I can only tell you what I see, and that is -- and we'll see how it goes from here. But we saw a stabilization, but we also saw that it takes a little while for any retailer, including ourselves, no matter how good we are. And no matter how smart Peter and his team are to figure out changes that occur in such with such velocity. And these changes came on us just getting out of pandemic and you see inflation in a period of quarter took off. And so we had to -- the customer had to get used to it, and we have to get used to it. And so I like what we're doing. We've got further plans. And if I knew the answer to all economic questions, I think a lot smarter than I am, but that's just what we saw.

Okay. That's helpful. And you also mentioned that you see a bit of -- you saw a bit of a shift to discount picking up towards the end of the quarter. I was wondering, has that sort of accelerated post the quarter in May and June? Or has that also started to stabilize?

It is so hard to see, right? Because it's a bit a lot of moving pieces, but I think it's -- our view at this moment would be stabilized pretty much. But it's all logical, right? I think everything -- the customers are incredibly logical in a certain period of time, we all are, and we make different decisions. And so as I said, I rank the order, the third thing that influence sales was a small movement to discount.

Okay. Okay. That's great. And then...

[indiscernible] comparing to COVID heated failed a year earlier where full service benefited more than discounts. So it's all -- it all moves around that lever as well.

Okay. Great. That's helpful. And then another one I have is just in order for you to achieve your financial targets for Horizon, do you need market conditions to improve a lot? Or do you have enough levers under your control to really achieve those targets? And essentially, I'm trying to get a sense of how confident you are in achieving the earnings growth target for F '23?

We said that we remain on track and confident. We take into account -- we basically think that whatever is happening now, we'll anticipate that and if it gets better, good for us. And we'll make other changes as necessary to be able to hit our targets as we have over the last 5 and half years. But I mean, I'd rather it was smooth sailing, honestly. I rather it was a better market, but our job is to perform on the bottom line in any type of market. And so that's how we're feeling.

Next question will be from Mark Petrie at CIBC.

Yes. I just had a couple of follow-ups. On Scene, does it have any sort of regional strength? Like is there a region of the country where it's over or underpenetrated versus the national average?

Mike, do you want to take that? You have been too quiet. I got to hear from Michael Vels.

Sure. Thanks, Michael. There are variations across the country, Mark. Strong but less penetrated in Quebec. And so it would be the only region that I would call out. Having said that, our dealers and our employees in that region are -- as we've introduced the programs, then I'm just super excited to have it actually and actually [indiscernible] started. So nothing material that it causes us significant concern or issue. I think it's going to be strong all the way across the country.

Okay. And then also just following up on Scene+. Is there any change in the cost of offering that program versus Air Miles? Or is it pretty consistent?

Mike?

We have more flexibility in terms of how we're going to set our earn-in burn rate, Mark. So I'd say the best attitude is it's going to be significantly more effective for us because we have more control about how we take it to market.

Yes. Okay. Fair. And then, I guess, also, just one other follow-up with regards to Voila. You reiterated the achievement of positive EBITDA for the Vaughan facility. I know this is on track with your original plans. But could you just talk about how the actual P&L there or other operating metrics are coming in relative to the original plans? And then related, what should we expect for time to breakeven or positive EBITDA for the Montreal facility, just given the different ramp curve?

So first of all, we're very happy with the operational metrics. The one thing, as we've said and as we've called out, the one thing that we can't control is the speed, the curve, the shape of the curve of e-commerce adoption. So that's the one risk we called out, but we are happy with how that's tracking versus the business. We have not committed to when we're going to break even for the second CFC. But again, it's a very, very different model because we're actually taking over the iga.net business into that facility. So that's not something that we've given any guidance on.

Next question is from Vishal Shreedhar at National Bank.

Just a quick follow-up. CapEx seems to be trending above the $300 million to $700 million target indicated. I was hoping you can give us some color on that extra spend and if your capital investments are generating the desired rate of return.

Yes, they are because we wouldn't be investing more if we weren't. We're very happy with our -- especially our store renovation program. And so -- yes, and so that helps us spend capital knowing full well that it's going to get the return. We also have Longo's numbers in there that in some ways upped the number. And so yes, I think that with our store investments with our Voila investments and with the -- everything we're doing on the technology and data side, which is really helping us, and it's going to help us that this is -- we're going to be higher than that $700 million, and we're going to be closer to this trend today that we just talked about at the $800 million.

Okay. So past fiscal '23, is there -- is the $800 million number a more sticky number I should consider for Empire's CapEx on an ongoing basis?

Well, we haven't announced what our future ones are. But if you want to put that in, that's a good number to use whatever we just announced in F '23 and will either be slightly higher or slightly lower than that, but probably around that number. Is that okay, Matt?

Yes, I agree.

And at this time, we have no other questions. Please proceed with closing remarks.

Great. Thank you, Sylvie. We appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by calling me or by e-mail. We look forward to having you join us for our first quarter 2023 conference call on September 15th talk soon.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.