Loblaw Companies Limited ($L)

Good morning, ladies and gentlemen, and welcome to the Loblaw Companies Limited 2026 First Quarter Results Conference Call. This call is being recorded on Wednesday, May 6, 2026. [Operator Instructions]. I would now like to turn the conference over to Roy MacDonald, Vice President, Investor Relations.

Great. Thanks very much, Colby, and good morning, everybody. Welcome to the Loblaw Companies Limited First Quarter 2026 Results Conference Call. As usual, I'm joined this morning by Per Bank, our President and CEO, and by Richard Dufresne, our CFO. And before we begin, I want to remind you that today's discussion will include forward-looking statements, which may include, but are not limited to, statements with respect to Loblaw's anticipated future results. These statements are based on assumptions and reflect management's current expectations. As such, are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from expectations. These risks and uncertainties are discussed in the company's materials filed with the Canadian securities regulators. Any forward-looking statements speak only of the date they are made and the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than what's required by law. Also, certain non-GAAP financial measures may be discussed or referred to today. So please refer to our annual report and other materials filed with Canadian securities regulators for a reconciliation of each of these measures to the most directly comparable GAAP financial measure. And also note, following the sale, the announced sale of PC Financial to EQ Bank and our ongoing partnership, PC Financial results are presented under discontinued operations, and it's important to note that we are not getting out of the Financial Services business as such, unless otherwise indicated, our remarks today will focus on the comparable total adjusted consolidated results. And with that, I'll hand the call over to Richard.

Thank you, Roy, and good morning, everyone. I'm pleased to report another quarter of consistent financial and operational performance, carrying on the momentum from last year. 2026 is off to a strong start. Our business continues to perform well, reflecting our ongoing focus on Retail excellence and our commitment to deliver value, quality, service and convenience to Canadians. In the first quarter, revenue growth was strong at 4.5% when normalized for the exit of our Optical business and the divestiture of Well Wise. Our top line growth was supplemented by the opening of 13 stores in the first quarter, 8 Shoppers and 5 Hard Discount in underserved communities. Total company adjusted EBITDA increased by 6% to $1.7 billion and margin improved by 20 basis points to 11.5%. Adjusted diluted net earnings per share grew by 10.6%. On a GAAP basis, revenue grew $600 million or 4.2% and diluted EPS was $0.50, up 19% in the quarter. In Food Retail, we delivered traffic and basket growth on a same-store basis. Absolute sales grew 3.9%, and our food same-store sales grew 2.4%. Our investments in the right-hand side of our stores are seeing positive results in apparel and most GM categories. However, we see ongoing pressure in liquor and tobacco. Normalized for this right-hand side impact, our food same-store sales grew 2.7%. Our internal CPI-like food inflation metric continues to be significantly lower than Canada's grocery CPI of 4.4%. Customers are seeking value and are finding it in our stores. This is a function of the effectiveness of our loyalty program, promotional offers and value on shelf. Our efforts to push back on unjustified cost increases from global suppliers has delivered results, helping to reduce the inflationary pressures on Canadian. This shows up in our inflation measures at the cash register, which was more or less aligned with our same-store sale growth. As consumers continue to focus on value, our Hard Discount banners remain a key driver of absolute sales growth. We opened 5 new Hard Discount stores in the quarter and we'll open about 30 stores in total this year. We are pleased with the performance of our new stores. Included in this quarter's food comparable sales growth results are 28 Hard Discount stores that have opened since 2023. These stores are averaging double-digit same-store sales growth. We are looking forward to bringing more No Frills and Maxi stores into more communities across Canada. We're also pleased with the momentum and performance of our conventional stores. This growth continues to be led by our Fortinos, YIG and T&T banners. In Drug Retail, absolute sales increased 4.8%, while same-store sales grew 4.1%. Pharmacy and Healthcare Services grew same-store sales by 6.7%. Our Specialty Prescription growth continued to lead our Pharmacy performance. Within this category, our GLP-1 sales growth continues to outperform and has further accelerated in the quarter. Across our Pharmacy network, patients continue to respond positively to the convenience and expanded level of primary care we offer through our more than 1,800 pharmacies across the country. We opened 8 new drugstores in the quarter and remain on target to open more than 30 new locations in 2026. Front store same-store sales were up 1%. Beauty remained strong, while OTC was affected by the timing of the cough and cold season and inclement weather. Online sales continued to perform well, growing by 20.3% in the quarter. E-commerce sales were driven by growth in PCX delivery, along with the successful integration of third-party delivery options. Retail gross margin of 31.4% was stable. While our food margins were flat, our drug retail gross margins were down. This was driven by changes in sales mix in drug retail categories timing of the cough and cold season, partially offset by continued improvements in shrink. Retail SG&A was better by 40 basis points, primarily driven by operating leverage from higher sales and timing benefits on certain costs. I'm very pleased with our ability to reduce this rate despite the additional costs associated with opening new stores and ramping up our automated DCs. Retail adjusted EBITDA grew 6.5% and Retail EBITDA margin increased by 20 basis points to 11.1%. The ramp-up of our first automated DC in East Gwillimbury continues to progress well. Both costs and operational improvements have been better than planned. We remain pleased with our progress and expect to be fully ramped up later this year. Construction on our second automated DC in South Caledon is progressing very well. The project remains on plan, with automation installation beginning at the end of this year. PC Financial's revenue increased 3.9% driven by higher insurance commission and higher interest income. The Bank's adjusted net earnings increased by $9 million or 40.9%. This was primarily driven by higher revenue and favorable impact from lower expected credit loss provisions. The previously announced sale of PC Financial to EQ Bank has obtained all required regulatory approvals and we now expect the deal to close in the third quarter. We are very excited about this transaction, and it will expand the benefits of our PC Optimum Program and offer more ways for Canadians to earn rewards. As previously stated, Loblaw would unlock approximately $600 million in cash related to this transaction. We expect to deploy a portion of these proceeds to increase our share buybacks in 2026 and the balance to purchase EQB shares in the market. Free cash flow from the Retail segment was strong at $432 million for the quarter. We repurchased $648 million worth of common shares and announced a 10% dividend increase, our 15th consecutive annual increase. Our balance sheet is strong, and we continue to improve our key return metrics, as shown by our recent credit rating upgrade by DBRS to a A-Low. Our return on equity sits at 26.8% and our return on capital at 12.4%, reflecting our strong capital allocation discipline focused on cost management and proven strategy. Looking ahead to the balance of the year, performance should closely resemble what we're seeing in Q1. As mentioned earlier, 2026 is a year with the ramp-up of our East Gwillimbury DC and our investments in T&T U.S. have the greatest negative impact on our earnings growth. Despite that, we feel confident in our ability to deliver on our outlook for the year, as we've shown in Q1. Our focus on Retail excellence and on the execution of our strategic initiatives will allow us to keep delivering value to our customers while continuing to reward our shareholders. I will now turn the call over to Per.

Thanks, Richard, and good morning, everyone. We are very pleased to report a strong first quarter for '26, making a robust and successful start to the year. We delivered solid Financial results, including strong revenue and adjusted EPS growth, and I'm delighted that we are able to achieve this while making significant investments to grow our pharmacy and discount presence, expand our T&T banner into the U.S. and advance 2 new technology-enabled distribution centers. Our performance reflects the successful execution of our strategic priorities and our unwavering focus on the customer. Our strategic and deliberate investment in opening new stores are clearly resonating with Canadians. We are listening to our Canadians need and investing where it matters. Our [indiscernible] focus remains steadfast on providing quality, value, service and convenience for customers across our coast-to-coast network. These efforts are clearly resonating as evidenced by continued strong customer engagement and increased traffic levels across our business. From the strong performance and the continued growth of PC Express delivery to the consistent strength of our Pharmacy Services, we are demonstrating our commitment to being there where and when our customers need us most. We have momentum in our Food Retail segment, marked by the contribution from our new store investment and our same-store sales growth. Increased customer traffic was underpinned by our compelling everyday value offering, personalized PC Optimum loyalty offers and impactful promotions. The ongoing performance of -- outperformance of our Hard Discount banner Maxi and No Frills was a key driver of this success reinforcing their vital role in helping Canadian manage affordability. We're also very pleased with our conventional performance where our multicultural and preferred food delivered a very strong growth. Our conventional stores gained tonnage and share gains against our peers. We also achieved strong e-commerce sales growth led by PCX delivery and the successful integration of third-party delivery options. This growth was significantly driven by our discount customers as they are increasingly choosing the convenience of delivery, highlighting the broad appeal and accessibility of our digital offering. In Drug Retail, [indiscernible] and [indiscernible] continued to demonstrate resilience and growth. Pharmacy and [indiscernible] growth reflected positive trends in prescription volumes, specialty drugs and beauty categories underscoring the vital role of our pharmacies and health care professionals play in Canadian health care. This performance proves the strength of our Health Care Services and our commitment to meeting the evolving needs of Canadians. The strategic investments we have made across retail to expand and enhance our network continue to pay off. During the quarter, we're expanding Canadians access to both nutritious food and essential health care services. We opened 5 new Hard Discount stores and 8 new drug stores, further solidifying our commitment to being where Canadians need us most. Our commitment to modernization and -- was also evident with the introduction of a new look for our [indiscernible] marked by the opening of a new store in Komoca,Ontario, a modern design delivered at an efficient build cost. And for everyone living in the DTA area, I hope you are able to visit our newly opened T&T supermarket in [indiscernible], which we celebrated with a wonderful opening ceremony that was really, really well attended by many stakeholders. These investments are crucial to strengthen our foundation, expanding our reach in key growth areas and providing the best possible shopping choices for our customers. Last quarter, we launched the PC Express integration with OpenAI's ChatGPT turning previously dead-end recipe searches into transactions. Customer adoption is already ahead of plan, and we are continuing to advance our leadership with a 2.0 version coming soon. And earlier in this week, we are proud to announce that we are partnering with Canadian technology firm, Shakudo, providing our team with a common platform that will enable us to manage and scale machine learning across our data infrastructure. In addition, we're starting to roll out AI productivity tools across our teams to support them in their day-to-day way. There's more to come here, and we're just getting started. As a proud Canadian company with more than 2,800 locations and 220,000 colleagues, we remain deeply committed to supporting the communities we serve and providing everyday sensitive families from coast to coast. As we look ahead, we remain confident in our outlook for '26. We have a strong portfolio of businesses that are really exceptionally well positioned to meet the evolving needs of Canadians and successfully navigate the macro environment. I want to once again express my sincere gratitude to all our colleagues for their unwavering dedication, commitment and focus on our customers. Their hard work is the cornerstone of our success. With that, I'll now open the floor for questions. .

[Operator Instructions] Our first question, comes from Irene Nattel with RBC Capital Markets.

I was wondering if you could talk about what you're seeing in terms of consumer behavior in the store? And notably, as you went through the quarter and we saw the spike in gas prices, did you see any sort of notable changes in how people are trying to adapt and where are we Q2 today?

Thank you, Irene. And a great question that, of course, we are thinking a lot about. But honestly, what we are seeing right now is more of the same. And we are fighting back on the price increases from our suppliers. So far, we are not seeing any price increases due to that reason, and customers, they are still doing what they did in the last quarter. So they are trading down. For example, I just got an example this morning on chicken, where our customers, they are buying more into the opening price point of chicken, and they're buying less of the free from. And it's a double double-digit decline in the free form and it's a double up in our opening price point. So more growth in chicken. The same for stakes. Customers are buying less stakes, but they're buying more [indiscernible]. They're still buying more on promotion. So -- we are not worried about the customer sentiment because we do believe that the offering we have across our entire portfolio actually plays well to the customer sentiment. So -- so more of the same than the last in the last quarter. And it's also proven in that our internal inflation is lower than the external inflation.

Yes. The only thing I'd add, Irene, is like definitely not [indiscernible], nothing in Q1 because actually, when you look at gas prices, though, it's definitely more in Q2, Q2 is a slight change, but not material. So -- but the example that Per mentioning are what we're starting to see now, but like the trajectory of our business continues to be going in the same direction.

Your next question comes from the line of Chris Li with Desjardins.

Maybe a couple of questions on the front store sales performance. I was wondering, in addition to the factors you mentioned, was that also impacted by any pricing adjustments you might have made to further enhance the value proposition to consumers at Shoppers?

So our Q1 front same-store sales were impacted by a number of events and not the one that you mentioned at all. On the positive side, we had a Prestige continue to do well. There was some Easter shift that drove a bit of sales, while the cough and cold timing, incoming weather and slow food sales in some regions moderated our performance. So there was more than negative than the positive in the quarter. But I stay very confident on the [indiscernible] front store performance going forward.

Okay. Perfect. And maybe just a follow-up here. I know you mentioned before, you've been doing some testing on the new food concept at some of the Shopper stores. Wondering if you can provide us an update on how those pilots are performing so far?

Yes. So what we are doing, we are adding about 1,500 products into the mix of Servers front-store where we're doing [ relay ]. So what we have done now, we have finished the first 3 tests. It's only 3, so we have agreed to do another 40. And I'm sure that by the end of next quarter, we will be able to give you some insight on the 40. And if that goes well, then we are ready to deploy that to a significant number of stores. And if it goes well, it will give us an uplift.

Your next question comes from the line of Mark Carden with UBS.

This is [ Matt Rothway ] on for Mark Carden. So I was hoping you could touch on the drivers of gross margin a little bit. you called out drug retail mix as a headwind. Can you just detail a little bit more about what the driver was there?

Yes. It's actually pretty clear like first of all, on food, it was flat, okay? Very likely flat, like no difference versus last year. On the drug front, it was, I guess, twofold, what we're talking about on front store like cough and coal. Like if you remember, we mentioned that cough and cold was happened this year in December, whereas last year, it was in January. So we didn't get the same margin that we had in front store this year. So that was the other factor to mention.

Great. Very helpful. And as a quick follow-up on SG&A, you mentioned the timing of certain costs as a benefit in the quarter. How should we think about that impacting subsequent quarters?

Yes, that was a onetime thing associated with the way the year ended. There were some costs that actually were booked in that were not in Q1. So therefore, that improved our SG&A rate. So -- but the bulk of the benefit came from operating leverage from higher sales.

Your next question comes from the line of Michael Van Aelst with TD Cowen.

You talked about a ramp up on the new store growth, and it's been pretty strong for about the last 6 quarters. And we know that there's always that drag in the -- particularly in the first year on the new stores. But what -- where do you think you are in that cycle? And where do you see this effort to increase your square footage growth rate becoming more neutral to earnings and may be even positive?

First of all, we have built a little bit fewer stores this year than last year, but it's more of the same stores. So those last year, they are now in the base. So it's not dragging us down further. Normally, a new store in discount would be profitable within 3, 4, 5 years depending on the location. About the new store growth, we're confident that we continue to build about, I don't know, 30 to 40 new new No Frills and Maxi's per year and about total, including the Shopper [indiscernible]. But what we're looking at what we are doing, and that's why we believe so much in our plan is that we are building in under-served areas. I can take as an example. So in the beginning of 2025 -- we only had one of with them in [indiscernible] Island. At the end of this year, we have 4, and we have planned and approved and [indiscernible] reach, so that would be 8. Another one is when I started in September 2023, I visited Shoppers of all places with 166,000 inhabitants. We had zero No Frills there. Today, we have two and they are doing very, very well. So -- so it's really, really working for us.

Yes. So financially, Michael, like you're right, like the drag on new stores is no longer a factor. That's actually not -- that's not what's dragging -- like what's dragging now it's essentially a ramp-up of East Gwillimbury, which is going to be completed like, let's say, around Q3 and T&T U.S. that's still dragging. What's not yet contributing is like, as you know, like a grocery store takes, I don't know, 3 years before it starts to contribute to earnings, and that's probably going to start a year or 2 from now. So when these new stores start to contribute to earnings, like this less drag is going to become a positive. So we expect to see that over the next 24 months.

That's what I was looking for. And then just clearly -- just to be clear on the DC side, when do you see that becoming -- turn from a drag to a positive?

It's going to be a positive in the second half of the year. Like the drag on EPS of both T&T U.S. and East Gwillimbury this year in our plan is about 1%, slightly more than 1% EPS growth. So that will be gone next year.

And then when the new -- when the second DC ramps up, is that just going to replace the [indiscernible] that we're seeing?

Yes. So -- so in '27, you're going to get a year of comp -- and in '28, you're going to have the same thing we live with the first one. But by that time, hopefully, like our new stores are starting to drive earnings and the drag of T&T will be behind us. So it should be a better position than we are in right now.

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

With respect to the buyback, you suggested that some of the $600 million would be used for buyback. So relative to the [ 1-9, ] how much of that $600 million do we put in? And what should we anticipate the cadence being given that you were stronger than usual in Q1?

Yes. So I'd say, Vishal, like we haven't landed, but like [ 2-1 ] is probably as good a number for you to put in your model right now.

Okay. And -- with respect to genericization of GLP-1 molecules and the developments that have happened. Can you just clarify any updated thinking in terms of the impact to same-store sales growth and when that may begin and the impact across the P&L and how you see that unfolding to the extent you're getting better info now?

So it's too early to tell. Like what -- I think what we know today, 2 manufacturers have been approved. And we told you that we thought it would be in P8, which is August, that we should be getting supply. So that may come a few weeks before, okay? The truth of the matter is, is when we release Q2 we'll know a lot, okay? So we'll be able to give you more specific guidance. We won't be able to give you a trajectory of how it's going to get adopted by the market, but we'll have a better sense. Having said all that, like clearly, what's going to happen mathematically is you're going to have an impact on same-store sales, but you also going to have an impact on margin. Like we talked about the drag on gross margin of shoppers because of sales mix is because like GP1 drugs right now are accelerating, but when the price is going to fall, it's going to go the other way. So it's too hard right now to pinpoint it, other than to say that we feel good about our gross margin. We feel good about our SG&A rate -- and your guess is as good as mine as to what's going to be the impact on top line of generic drugs when they do become available.

Yes. And I would say this is really, really good for Canadians because they're getting this much more cheaper. It's about $350 depending on the doses today, and it's -- we don't know yet, but maybe it's going to be -- the cost is going to be -- so it's definitely going to be a tailwind for us. And it is growing about 40% year-to-date, which is a lot. And think about the growth when the price is going to be much, much cheaper. And again, as Richard said, we can only be guessing right now, but for sure, it's going to increase, but again, looking forward to informing you more in the next quarter.

Your next question comes from the line of Mark Petrie with CIBC.

I just wanted to ask about actually just follow up on the line of questioning that Michael had around store investment costs. And I know you've been working to get efficiencies in the upfront investments I think you mentioned that with the new format No Frills store. And so just hoping you could potentially quantify any of that? How does that affect the economics and the payback?

Well, the way it's very simple for every dollar that we reduce our construction costs and just drive up our IR. So we've been working hard on this, as we've told you in the past, like construction costs are a number that have been moving up a lot over the last 10 years. But like the areas that are big for us our refrigeration, and we found ways to cut costs on refrigeration. We're trying to find ways to build store faster, with semi-assembled panels, which reduce the time, therefore, reducing the cost, and we're also testing a bunch of other initiatives where we can reduce it even further. So the point I want to leave you with is this is a relentless focus on, like we're not -- we're happy where we are, but we're not satisfied. We keep working on it, and we want to find ways to reduce it even more. So that will just drive more IRs and allow us to have stores that deliver great return with a lower sales threshold to start with.

And think about that -- If we and when we get cost down to build and what we have done and with the team have done that until now, we can get into smaller towns with a catchment area that's significantly lower than today and still make the same IRR. So meaning that the accessibility to discount stores, of course, the country will increase, and that's just basically solidifying our strategy.

We're very happy, Mark, like all our performance of our new stores, like we said we opened a bunch since the beginning of the year, and we -- all of that -- all of the ones we open are doing really well. So for us, like we just keep on going here.

Yes. Okay. So more about expanding the markets that you can get into as opposed to necessarily improving or materially improving the paybacks. But are you able to quantify at all or just give us a sense ballpark about how much the construction costs have fallen with all of your efforts so far versus, I don't know, 3 years ago?

Well, without throwing an absolute dollar number, I'd say we've been able to reduce construction cost by 30% so far.

And to your other question, it's not only about expanding. It's also about improving the IR where we can get new stores. So it's not only going into smaller catchments There's also lots of places with the big catchment areas where we can build more more discount. Again, back to the example of Sudbury. We only have 2 stores in the city with 166,000 inhabitants and there are many, many places similar to that.

Your next question comes from the line of Etienne Ricard with BMO Capital Markets.

This is Emily for Etienne. Just wanting to focus back on any differences between discount and conventional. And we know that discount growth is really driving sales. So are you seeing any different behaviors within each of them? And are you seeing more or less trade down within discount or conventional?

It is still more of the same, and we are positive both in our conventional business and in our discount business. And our discount business comes as a significant higher the conventional business. But still, it's not accelerating -- customers. They are staying cautious. They are. And as I said before, maybe it's a more conventional into price point for chicken, exactly free from, the organic barriers might see a decline and then the conventional barriers is increasing. So -- so it is like buying more on promotion. So it's kind of the same mechanics that our customers are using, but we are not seeing it's increasing. It is more of the same.

Yes. And I want to add that our conventional business remains very healthy. We look at our same-store performance, our total growth, despite the fact that we're not adding much square footage, if any, and that business continues to perform really well for us. So that with the strong growth in our Hard Discount business, which because we're adding stores on top of higher same-store performance is growing really fast is helping us deliver the results that you're seeing today.

Okay. And just a follow-up. How should we compare the competitive dynamics in Quebec versus other provinces -- and are you seeing any better or worse contribution from the new stores in Quebec versus the other jurisdictions?

The Quebec market is as competitive as the rest of the country. And so we're very happy with the performance of our stores in Quebec as we are happy with all of our stores across the country. So no notable differences.

And your next question comes from the line of John Zamparo with Scotiabank.

I wanted to come back to the GLP-1 side of the business. And I believe you said you're seeing this accelerate and that Shoppers is taking share and even before generics were announced. I wonder what you attribute that to? It's obviously a dominant player nationwide, but -- and then you can say about why you share has increased so much and whether that's the result of any intentional efforts or investments from Shoppers?

I don't know whether we said that we were gaining shares on GLP-1. Probably, we are, we're growing by 40%, but we don't have the same [ Nielsen ] data as we have on food. So we can say something with the exact knowledge. But we are seeing a significant gain in GLP-1 [indiscernible] by the growth in sales.

And I don't know why, to be honest with you, just like we were surprised when we saw the acceleration in growth in Q1. So -- and as you said, we're not even generic yet.

Yes. Okay. Understood. And then back to the state of the consumer, and in particular, trade down metrics. I appreciate the color on discount versus conventional. Is there any other color you can add on promotional intensity and performance of national brands against private label?

Yes, I still see an outperformance on our own brands. They're doing really, really well, and we have an enhanced focus on our PC and our no name. So -- so we're doing well there, and customers they like it and it's a good alternative to the brands when they want to save money and have better quality.

And with no further questions in queue, I'd like to turn the conference back over to Roy McDonald for closing remarks.

Great. Thanks very much, everybody, for your time this morning. If you have any follow-up questions, drop me an e-mail or give me a call. And then please mark your calendar for the Thursday, July 30 when we'll be introducing our Q2 results. Have a great day.

This concludes today's conference call. You may now disconnect.