Metro Inc. (MRU.TO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Metro Inc. 2025 Fourth Quarter Results Conference Call. [Operator Instructions] Also note that the call is being recorded on Wednesday, November 19, 2025. I would now like to turn the conference over to Sharon Kadoche, Director, Investor Relations and Corporate Finance. Please go ahead.

Good morning, everyone, and thank you for joining us today. Our comments will focus on the financial results of our fourth quarter, which ended on September 27. With me today is Mr. Eric La Fleche, President and CEO; Nicolas Amyot, Executive VP and CFO; Marc Giroux, Chief Operating Officer; and Jean-Michel Coutu, President of the Pharmacy Division. During the call, we will present our fourth quarter results and comment on its highlights. We will then be happy to take your questions. Before we begin, I would like to remind you that we will use in today's discussion different statements that could be construed as forward-looking information. In general, any statement which does not constitute a historical fact may be deemed a forward-looking statement. Words or expressions such as expect, intend, are confident that, will and other similar words or expressions are generally indicative of forward-looking statements. The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy, our annual budget and our 2025 action plan. These forward-looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks, known and unknown as well as uncertainties that could cause the outcome to differ materially. Risk factors that could cause actual results or events to differ materially from our expectations as expressed in or implied by our forward-looking statements are described under the Risk Management section in our 2024 annual report. We believe these forward-looking statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking statements, except as required by applicable law. I will now turn the call over to Nicolas.

Okay. Thank you, Sharon, and good morning, everyone. I will now go over our Q4 results, starting with a comment on our Toronto freezer situation. As you are all aware, operations at our frozen distribution center in Toronto have stopped on Friday, September 12, as a result of a mechanical issue with the refrigeration system. Since then, our teams have been working hard on securing supply for our Ontario food retail network. Our contingency plan is ongoing and working well, and Eric will be sharing more color on the state of the DC in a minute. On my end, I will be focusing on the financial impact of this situation in Q4, as well as the expected spillover in our first quarter of F '26. The after-tax financial impact of this situation on our fourth quarter was $22.5 million or $30.6 million before taxes, which includes $24.5 million for inventory losses as well as $6.1 million for other direct costs related to temporary equipment rental to keep the temperature down in our freezer as well as incremental transportation and third-party logistics costs for the execution of our contingency plan. Looking forward to Q1 of F '26, we estimate that the direct costs associated with the rental of temporary chilling equipment and with the execution of our contingency plan will impact our net earnings by approximately $15 million to $20 million. The impact on sales and margin is expected to be modest, given the contingency plan in place, and we expect being essentially back to normal by the end of December. Now turning to our Q4 results. Total sales reached $5.1 billion, an increase of 3.4% versus the fourth quarter last year, driven by higher sales in our discount and pharmacy retail networks. Food same-store sales grew by 1.6% in the quarter, while pharmacy same-store sales grew by 4.8%, supported by 5.5% growth in prescription sales and a 2.9% growth in front-end sales. Our gross margin reached $1.022 billion, 20% of sales versus 19.7% in the same quarter last year. The year-over-year increase is partly attributable to shrink improvement in food retail activities as well as productivity gains at our food distribution centers. Note that the direct costs related to the freezer were recorded under operating expenses. Turning to operating expenses. They were $535 million in the quarter, up 4% year-over-year. As a percentage of sales, operating expenses were 10.5% versus 10.4% in the fourth quarter last year as they were unfavorably impacted by $6.1 million of direct costs related to the temporary shutdown of our freezer. Excluding these costs, operating expenses grew by 2.8% year-over-year and represented 10.4% of sales, the same percentage as Q4 last year. EBITDA for the quarter amounted to $485 million, that's up 5.5% year-over-year and stands at 9.5% of sales. Adjusting for the $6.1 million direct costs incurred for the Toronto DC, adjusted EBITDA stood at $491 million, up 6.8% year-over-year, reaching 9.6% of sales, an increase of 30 basis points over Q4 2024. Total depreciation and amortization expense for the quarter was $140 million, up $4.1 million. Net financial costs for the fourth quarter were $34.4 million compared to $32.6 million last year due to higher interest on net debt. Our effective tax rate of 24.1% is lower than the effective tax rate of 24.5% in the fourth quarter last year, largely driven by the Terrebonne tax holiday. Adjusted net earnings were $246 million compared to $227 million last year, an increase of 8.6%, while adjusted fully diluted net earnings per share amounted to $1.13 versus $1.02 last year, this is up 10.8% year-over-year. These results are adjusted for the $22.5 million after-tax impact of the freezer situation. Our capital expenditures in fiscal '25 totaled $511 million, down $69 million versus last year. The lower year-over-year CapEx level is mainly the result of the completion of our automated distribution centers in the summer of '24. Looking forward, we expect CapEx in F '26 to reach approximately $550 million as we continue to invest in our retail network. On the food retail side, in fiscal '25, we opened 14 stores, including 5 conversions and carried out major expansions and renovations at 17 stores for a net increase of 294,000 square feet or 1.4% of our food retail network square footage. Under our normal issuer bid program as of November 7, we have repurchased 8.7 million shares for a total consideration of $848 million, representing an average share price of $97.51. Closing in on fiscal '25, we are very pleased with our financial performance and the fact that we delivered against our financial framework. I will now turn it over to Eric for more color on our DC situation as well as on our overall performance. Thank you.

Thank you, Nicolas, and good morning, everyone. We delivered another solid quarter to finish a very good year, meeting or exceeding our financial framework metrics. In fiscal '25, we grew sales by 3.7%, adjusted EBITDA by 5.5% and adjusted earnings per share by 10.9%. Before turning to the quarterly results, let me share some color on the state of our frozen DC in Toronto. I'm pleased to report that operations resumed on November 10, and that we started shipping to our stores yesterday. We expect to essentially be back to normal by the end of December. The mechanical issue responsible for the shutdown affected several components of the refrigeration system and the repairs were complex. The setback was not related to the automation system. Our automated freezer DC in Quebec assumed a substantial portion of the Ontario volume together with 3 Ontario-based third-party logistics providers and also increased direct-to-store deliveries from several suppliers. I want to thank all our teams and partners who have worked nonstop on our contingency plan to minimize the impact on our customers. We have insurance coverage and are currently working with our insurers to confirm the amounts that we will be entitled to recover. Turning to the fourth quarter. We recorded sales growth of 3.4%. Food same-store sales were up 1.6% and 3.8% over 2 years. Discount continues to drive same-store sales faster than Metro with the gap between them remaining consistent with the prior quarter. Food same-store sales were negatively impacted by about 30 basis points due to the shutdown of the freezer over the last couple of weeks of the quarter and also by the lift we had during the LCBO strike that occurred in the fourth quarter last year. Total food sales growth of 3.2% reflects the performance of our new stores and conversions, which we are very pleased with. Our internal food basket inflation was below the reported food CPI of 3.4%. We continue to see inflationary pressures on certain commodity prices, namely in the meat category. We are presently in our price freeze period. However, we continue to receive price increase requests from our vendor partners at levels higher than a typical 2% to 3%. We continue to negotiate hard to minimize the impact on consumers going forward. During the quarter, our Metro stores saw an increase in average basket, partly offset by a slight decrease in transactions. On the discount side, both basket and foot traffic were up as customers continue to search for value. Promotional penetration remains at elevated levels and consistent with prior quarters. Private label sales continue to outperform national brands by a healthy margin. The competitive environment remains intense but rational, and our market share was flat for the quarter. Online sales grew by 19.8% in the quarter, driven by the ramp-up of click-and-collect and the launch of home delivery at both Super C and Food Basics as well as third-party marketplaces. Last month, we celebrated the first anniversary of the Moi loyalty program in Ontario. Although still early in the program, we continue to see encouraging metrics with a growing member base and improved penetration rates. Turning to pharmacy. The business sustained its momentum with another quarter of strong Rx sales growth and positive front-end performance. Prescription sales were up 5.5% driven by continued organic growth, specialty medications, GLP-1s and clinical services. In fiscal '25, we recorded 5.4 million clinical services in our network of pharmacies, a number that is well aligned with our leading market position in the province of Quebec. Commercial sales were up 2.9%. The strong performance was driven mainly by growth in beauty and cosmetics and partly offset by a slow start to the cough and cold season. As Nicolas mentioned, we are on track with our plan to accelerate the development of our growing discount banners as we successfully opened 9 new stores and converted 5 stores in fiscal '25. We continue to see more opportunities in the coming years, and our plan calls for a dozen new discount stores in fiscal '26 including a few conversions. Looking forward, halfway through our first quarter, we are seeing similar trends to Q4 in food same-store sales. On the pharmacy side, prescription sales continue to be strong, but sales of OTC products are softer due to the slow start of the cough and cold season. To conclude, in addition to the ramp-up of the freezer, our focus remains on realizing efficiency gains throughout our supply chain and store network while we continue to execute on our plan to accelerate the development of our growing discount banners. We remain steadfast in our efforts to deliver the best value possible to our customers through our effective merchandising programs, strong private labels, the Moi program and consistent execution at store level. Thank you, and we will be happy to take your questions.

[Operator Instructions] First, we will hear from Chris Li at Desjardins.

Thanks first for quantifying the impact on the same-store sales with the DC shutdown. Eric, I was wondering, are you still seeing some impact in Q1 when you said the trends are in Q1 and similar to Q4, or is that 30 basis points pretty much now behind you in Q1?

The answer is we continue to see an impact from the freezer situation. It is impacting our same-store sales a bit. So that's continuing. I said the 30 basis points was 2 events, the freezer for 2.5 weeks and the LCBO last year. So the freezer situation is having an impact. We're losing a bit of sales and margins. It doesn't show too much to the consumer, but we don't have a full assortment in certain categories, and frozen bakery is an example. So when I say similar trends in Q1 to Q4, we're in the same -- very much in the same ballpark. And we continue to be affected by the freezer situation. It is a bit of a drag included in that number.

Okay. And presumably, once it's fully back online by end of this calendar year, I mean, that shouldn't really be a headwind anymore?

That's correct.

Okay, okay. That's helpful. And then just maybe a quick one on gross margin. It continued to benefit nicely from the productivity gains at the food DCs. Is it fair to assume we'll continue to see the benefits manifested in fiscal '26?

Chris, so I would say, yes. However, I guess, as you know, we are in a very competitive industry. So we're always looking at preserving, gaining market share. So not to say that some of these benefits would not be "reinvested" in promotional activities. But the -- I would say that, yes, the benefits that we've been able to capture are there to stay.

Okay. That's helpful. And maybe last question on the pharmacy business. We had another very strong year both in terms of prescription and commercial sales growth. I guess my question is, do you expect kind of similar drivers for this year that have supported the strong growth in the previous fiscal year? And then what are some of the things that you guys are watching closely?

Yes. We expect the same fundamental trends. The Rx growth has been very strong the last couple of years. We're seeing still good growth. The expanded scope of practice going forward is going to be a tailwind on Rx eventually when Bill 67 kicks in. On the front-end, it's a competitive market. We're well positioned. We have a great network, good merchandising, good programs, and we're confident in our ability to continue to see decent growth in our front-end sales. The fundamental drivers are still there. Aging population, health trends, clinical services, expanded scope of practice, these are all good tailwinds, structural tailwinds for pharmacy for us in Quebec.

Next question will be from Mark Carden at UBS.

So just to start, just wanted to see your latest thinking on the health of the consumer. Has purchasing behavior changed much from last quarter? And then just related, are you still seeing much of a Buy Canadian push?

So consumer behavior is very similar to what we've been reporting for several quarters, as I outlined in my opening remarks, so not much to add there. Buy Canada, it has softened up. There's still more growth in Buy Canadian product sales than non-Canadian product sales, but that growth has somewhat narrowed versus what we saw in spring and summer. So it's declining a bit. And since counter tariffs were lifted in -- on September 1, some of these products, U.S. products prices have gone down, so that's maybe contributed to the narrowing of that gap.

Okay. Great. And then just on prescription drugs, you guys continue to do well there, slight deceleration from the last few quarters, though. Just curious what the primary drivers you're seeing in the growth of prescription drugs are from a category standpoint. What you're seeing from the GLP-1 angle? And then any update on your outlook for health care services?

I'll let Jean-Michel have a crack at that.

Yes. So I think Eric highlighted the drivers very well. So GLP-1s continue to be a tailwind. There's been some changes in that category as new products have come into market in Canada, and that's also continuing to boost growth in that category overall. In terms of professional services, we're continuing to see growth on professional services. Although since there's no new services, we're starting to see that it's moderating a little bit, but with Bill 67, we do expect that to pick up. We don't have any news on the Bill 67 front. Right now, we're probably looking at a January time line depending on the negotiations between the government and AQPP. But on that is the same underlying drivers that are going to continue to maintain that momentum in F 2026 for us.

Next question will be from Irene Nattel at RBC Capital Markets.

I think we're all kind of hyper focused on any marginal changes in the environment, kind of competitive intensity consumer behavior. But based on your comments, Eric, like are there really any or is it fairly stable to, let's say, earlier in the year?

I think it's fairly stable, like very consistent environment, I would say, and consumer behavior. The accelerating square footage growth is not new for this quarter, but it's been something that we've opened stores, others have opened stores. So there's industry square footage growth out there that's having an effect. It's making the market certainly more competitive. So the level of same-store sales we're reporting, I think, reflects some of that new competition, new square footage in the market. So that's the only comment I would add.

That's really helpful. And then just coming back to a comment that you made about requests for price increases being in excess of the historical 2% to 3%. I think you called out meat, but what about other categories? And what would be your expectation for where things actually settle out versus the request?

So price request of over 2%, 3% is not unusual. We've seen that before, mid-single digits, high single digits, sometimes more, it depends on the category, the ingredients, particular situations. So this is, I would say, normal situation. The quantity remains elevated of price increase request, but we deal with it as best we can. We negotiate in good faith with our vendors. We pushback when we can. And when it's justified, it will be a market increase and we will have to take it. As I said in the opening remarks, we're in the freeze right now. So there were some price increases before November 15, and the next wave will not come before February. So consumers -- we're trying to protect consumers as much as we can and give value as much as we can. What the outcome of those negotiations are, we expect to be normal and we expect it to be manageable and we expect to stay in a range of inflation in the 2%, 3%. But the jury is out, and I don't have the famous crystal ball. We'll see where it lands.

That's great. And just one final one for me, please. You mentioned the accelerating square footage growth, yours and the others notably in discount. What kind of returns are you seeing as you open these real estate projects? And are they any different from historically?

In general, we're pleased with our returns. We analyze investments very carefully. We have our internal thresholds. We're meeting our investment thresholds. So market by market, investment by investment, we're careful to make the decisions that will contribute to long-term shareholder growth and capture the market share that we think is out there to capture for us in a responsible and disciplined way. So short answer is we're meeting our financial targets.

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

I just wanted to go back on your answer to one of the earlier questions about the industry's square footage growth. And I mean, I think it makes sense that it's moderating the levels of same-store sales growth. But you also said that it's making the industry more competitive. Now I guess I'm wondering, is it just making it more competitive in terms of lowering that same-store sales growth? Or is it also impacting your gross margins? Because your gross margin up 23 basis points was actually quite solid. And so I'm kind of curious as to whether you're seeing pressure on the gross margin.

The comment was more of the same. When there's a new store opening across the street, it makes it more competitive for your existing networks. So I said, square footage makes it more competitive because it adds competition in certain markets and it impacts same-store sales for that market. So for me, it's one and the same. The gross margin, we're pleased with our results this quarter. So we're able to manage through this competitive environment and pleased with our performance. I think we have experienced merchandisers, and we're doing what we can to meet our targets. But we're in a competitive environment and we always have been.

Okay, so okay. And then Nicolas mentioned that the DC efficiencies that you're getting are helping to drive that gross margin higher. I mean that was the case, obviously, in this quarter in the face of some of these competitive pressures. So what might change? What do you think might change over the next -- over fiscal '26 that might require you to reinvest some of that margin improvement back into promo activity like you suggested might be necessary?

I don't want to speculate. We are competitive. We always will be competitive in the market to protect our share, protect our sales and deliver decent margins to our shareholders for the business. What might change? It's hard to give you a straight answer or clear answer to that. We're in a competitive market and we're confident in our position and our ability to compete. We're well positioned with our network of stores, both Metro and discounts in both provinces with a very good market share. I think we're well positioned to continue to do well.

Okay. So maybe just I'll ask it a little bit clearer. Is there anything that you're seeing now that's causing you to reinvest some of that gross margin gain that you got in Q4? Or is that just a possibility in future quarters?

Well, it's always a possibility, but we don't give guidance like that, and I think we should. That's all I'm going to say.

Okay. Just to be clear on the DC impact. When you talked about the direct impact of $6 million, all of that was in OpEx, I believe you said. So when you say you got -- you had -- I don't know, you said 30 basis point impact from 2 factors. So let's call it 20 basis points from the freezer. Was that adjusted for in the EPS? Or is that not? Or was that left to flow through?

No. So what I said, as you've mentioned, is that all the direct costs associated with the freezer were recorded under OpEx. When the freezer situation happened, we completely stopped operating the freezer, shipping products out of the freezer. So the gross margin benefit that we've seen was realized, if you will, prior to that situation and is "not adjusted for." It just does not include any impact for the freezer. All the direct cost, incremental costs are in OpEx.

Just to pick up on that, we did not adjust for the lost sales and the margins on those lost sales. We adjusted for the loss of inventory in the warehouse and the direct cost.