Metro Inc. (MRU) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the METRO Inc. 2026 Third Quarter Results Conference Call. At this time, note that all the presentation we will conduct a question-and-answer session. And if at any time during this call, pressor an operator. Also note that this call is being recorded on August 12, 2020. The 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 thanks for joining us today. Our comments will focus on the financial results of our third quarter, which ended on July 4. With me today is Mr. Eric La Fleche, President and CEO; Nicolas Amyot, Executive VP and CFO, Mark Giroux, Chief Operating Officer; and Jeane Coutu, President of the Pharmacy dividend. During the call, we will present our third quarter results and comment on his 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 can 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 indicated 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 2026 action plan. These forward-looking statements do not provide any guarantees that there's 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 2025 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 Eric.

Good morning, everyone. I will start with an update on the labor content in our Quebec operations followed by comments on our quarterly results. Marc Giroux will then discuss the network optimization initiatives announced today and Nicolas will address their financial impact as well as our financial performance for the quarter. As you will recall, on June 25, we provided an update on the ongoing strike at our produce distribution center in Laval, which has significantly impacted our operations and results in the quarter. Our adjusted EPS for Q3 of $1.24 is within the guidance provided at the time of the update. Our third quarter was certainly challenging. The contingency plan we put in place is working and steadily improving, and our stores are generally well stocked and in good condition. Our focus is on restoring full assortment, strengthening store execution and driving back traffic to our stores. That said, it remains a contingency measure and it does not replicate the effectiveness of our own network. Moreover, the labor disruption required significant attention and resources from our teams, which affected our operating focus in Quebec and to a lesser extent, in Ontario as our Toronto fresh DC supported a portion of our Quebec stores. I want to be clear, we remain committed to reaching a negotiated agreement with the union. The global offer presented by Metro provides competitive wage and working conditions that compare very favorably with the market in addition to offering quality long-term jobs here in Quebec. While the strike is having a significant temporary impact, we must preserve the long-term competitiveness of our operations and our ability to continue serving our customers effectively in a competitive market. We will not compromise on this objective. I want to thank our teams for their resilience and our customers for their understanding as we continue working to provide the best possible shopping experience. After 4 weeks in our fourth quarter, food same-store sales remained negative at minus 1.5%. Based on current operating conditions and the absence of clear resolution time line for the conflict, we expect that our fourth quarter results will continue to be significantly impacted. While our teams actively manage operations service levels and customer recovery. Going back to our third quarter results. The quarter reflected continued strength in pharmacy, sustained online growth and progress on our retail investment plan. Sales grew by 1.4%. Adjusted EBITDA was down 11.3% and adjusted earnings per share were down 18.4%. These figures are not adjusted for an estimated strike impact of approximately $0.32 per share. Total food sales were up 0.5%, while same-store sales were down 1.5%. In pharmacy, total sales were up 5%, with same-store sales growth of 4.8% on top of 5.5% last year. Our internal food basket inflation was in line with the reported food CPI of 3.9%. We continue to manage supplier cost increases through ongoing negotiations and a rigorous validation process. with the objective of limiting the impact on our customers. During the quarter, comparable store customer traffic was down, partly offset by growth in the average basket. Promotional activity remains elevated as the competitive environment remains intense, but rational. Online sales grew by 16.3% in the quarter driven by third-party marketplaces, the ramp-up of click and collect services and delivery within our discount planners. This growth, together with the customers' increasing demand for same-day delivery, supports the evolution of our e-commerce model, which Mark will discuss in more detail shortly. Turning to pharmacy. The business continued to perform well this quarter with prescription sales up 6.4% and driven by continued organic growth, specialty medication and GLP-1 therapies. Commercial sales grew by 1.4%, led by Cosmetics, Beauty and seasonal categories and supported by the strong promotional mix. These results build on strong underlying momentum with prescription sales delivering a 2-year stack growth rate of 13% and and commercial sales delivery in a 2-year stacked growth rate of 5.5%. During the quarter, generic semiglutide entered the market, causing some price deflation within the category. However, demand fundamentals remain strong with early evidence of increased patient adoption and higher prescription volumes. As generic supply continues to build we expect ongoing expansion of the GLP-1 category to drive low-teens volume and contribution growth. In addition, following the agreement in principle between the Pharmacists Association, AQPP and the Quebec government we expect professional services to gain renewed momentum beginning in the second quarter of fiscal '27. Our retail CapEx plan remains on track. We opened 5 new discount stores in the quarter, including 1 conversion and 1 relocation, and we will achieve our plan to open a utendiscount stores by fiscal year in. We are very satisfied with the performance of our new and converted discount stores. On the pharmacy side, our renovation program is also progressing well with 30 projects planned for the year, including 7 pharmacies under our new content. -- newly renovated pharmacies continue to outperform average network sales growth supported by enhanced layout and expanded consultation areas. To conclude, we are focused on restoring momentum and strengthening our market execution. We are confident that our merchandising programs strong private label offering, more loyalty program and consistent store level execution will continue to provide value to customers that support long-term shareholder value. With that, I will now turn the call over to Marc, who will discuss the network optimization initiatives we announced today.

Thank you, Eric, and good morning, everyone. Today, we announced network optimization initiatives that are aligned with Metro's long-term strategy and our disciplined approach to network investments. Together, they are intended to better position our network in the markets we serve, and to respond to evolving customer needs. First, we announced the conversion of 10 metro stores to Food Basics in Ontario. This initiative should allow us to grow market share, strengthen our competitiveness in key markets and generate returns above our typical investment thresholds. These conversions are expected to improve store contribution beginning in fiscal 2017 with benefits ramping up over the next 2 years. This builds on the strong performance of our discount banners. Over the last 3 years, we've expanded our discount presence through new and converted stores in Ontario and Quebec, adding 31 locations bringing the Food Basic banner to 155 stores and the Super C banner to 121 stores. This is a disciplined market-by-market optimization of our network with the objective of having the right banner in the right market. Customers are responding well to our discount store format, and we are encouraged by the sales results and overall returns of our new and converted stores. Second, we are evolving our e-commerce fulfillment model in Quebec. We will be closing our dark store in Montreal and transitioning to a store-based pick pack model and delivery through third parties. Customer expectations and online grocery continue to evolve with growing demand for same-day delivery. By transitioning to a store-based fulfillment model, we will position ourselves closer to the customer and pick orders from our store network, allowing us to increase same-day delivery capacity while continuing to deliver the freshness, service and broader assortment customers expect from our stores. We expect to improve customer satisfaction while at the same time, reducing our fixed cost structure. We are confident that this evolution will enable us to support more profitable and sustainable online grocery over time. In addition to these network initiatives, we recently announced a strategic partnership with FGF Brands for the commercial bakery manufacturing operations of the Premium Lesson Group. As part of the transaction, FGF will acquire the group's production facility located in Bijoy for a total consideration of $90 million. This facility manufactures Panel Mason products sold in food stores. By partnering with a company recognized for its manufacturing expertise, we will continue to offer customers the Premier Mason products sold in our food stores while benefiting from enhanced innovation, product development capabilities and operational scale. The transaction reflects our ongoing commitment to focus our investments and resources on our core food and pharmaceutical retail and distribution operations while simplifying our operating model. The Premier Mason Group will remain a subsidiary of Metro and will retain ownership of the Cameroon brand and its network of 25 artisanal retail bakeries across Quebec. Taking together -- taken together, these actions are intended to improve the quality and performance of our network while reinforcing our disciplined approach to capital allocation. Before turning the call to Nicolas, I would like to take a moment to thank Eric for his outstanding leadership as President and Chief Executive Officer of Metro for 18 years. Under his leadership, the company consistently delivered strong results, strengthening its market position, made the transformational acquisition of the Jean Coutu Group and created substantial long-term value for our customers, our employees and our shareholders. On a more personal note, I'm grateful for his guidance and support over the last 17 years, and I look forward to continuing working with him as he becomes Chairman of the Board in September. With that, I will now turn the call to Nicolas to discuss our financial results and the financial impact of these initiatives. Thank you.

Okay. Thank you, Marc, and good morning, everyone. From a financial perspective, the initiatives described by a resulted in pretax nonrecurring restructuring expenses of $25.7 million as well as impairment of assets of $32.1 million in the quarter. The results include a $42.6 million after-tax adjustment for these charges or $0.20 per share. These network optimization initiatives are expected to be completed by the end of fiscal 2027 and generate estimated recurring annual after-tax earnings of $15 million by the end of fiscal 2028 with about half of the benefits expected to be realized by the end of fiscal 2027. The benefit will primarily come from improved store contribution as well as from a lower cost e-commerce fulfillment model. The capital required to execute these initiatives is expected to fit within our total CapEx envelope of $500 million to $550 million per year. Separately, the sale of the Premier Morton Group's bakery manufacturing operation is expected to generate proceeds of $90 million upon closing. The proceeds will be deployed in line with our capital allocation priorities and the transaction is expected to close in the fourth quarter. Turning to the third quarter results. Sales reached $6.97 billion, an increase of 1.4% versus the third quarter last year. Sales were positively impacted by new store openings but were unfavorably impacted by the ongoing labor conflict at our produce distribution center in Laval and its consequences on our food retail network. Food same-store sales were down 1.5% in the quarter. On the pharmacy side, same-store sales grew by 4.8%, supported by a 6.4% growth in prescription sales and a 1.4% growth in front store sales. Gross profit stood at $1.3 billion for the quarter or 18.8% of sales, which compares with 19.8% of sales in the corresponding period last year. The decrease versus last year is mainly driven by $87 million of estimated loss profit and incremental direct costs related to the ongoing labor conflict. Operating expenses were $725.1 million, up 3.2% year-over-year. As a percentage of sales, operating expenses were 10.4% and compared with 10.2% last year. The operating expenses in the quarter included $3 million of incremental direct costs related to the labor process. EBITDA for the quarter amounted to $555.7 million or 8% of sales, a decrease of 15.3% year-over-year. Excluding the nonrecurring restructuring charges of $25.7 million I mentioned before, adjusted EBITDA stood at $581.4 million, down 11.3% year-over-year and represented 8.3% of sales versus 9.5% recorded in Q3 last year. The third quarter of 2026 was unfavorably impacted by an estimated $90 million of lost profits and incremental direct costs related to the strike. Depreciation and amortization expense for the quarter was $193.6 million versus $184.9 million last year. The increase in depreciation and amortization is mainly due to the increase in retail network investments, including right-of-use assets and technology investments. Net financial costs for the third quarter were $50.5 million compared to $45.3 million in the corresponding quarter of 2025. The increase in net financial costs is mainly due to the higher interest expense on net debt. Our effective tax rate in the quarter was 24.4%, while the effective tax rate in the third quarter last year was 24.1% and both supported by the continued tax benefit associated with our investments in our Sedans. Adjusted net earnings in the third quarter totaled $262.6 million compared with $331.8 million for the same quarter last year, down 20.9% year-over-year. Adjusted fully diluted net earnings per share amounted to $1.24 and versus $1.52 last year, down 18.4% year-over-year. As mentioned before, these figures are adjusted for a $42.6 million after-tax impact associated with the network optimization initiative or $0.20 per share, but they were not adjusted or an estimated unfavorable after-tax impact from the labor contract of $66 million or $0.32 per share. Our capital expenditures in Q3 totaled $167.3 million versus $145.5 million last year. After 40 weeks in fiscal '26, the company opened 10 stores, including 2 conversions -- we also relocated 1 store and carried out major expansions and renovations of 7 stores for a net increase of 245,000 square feet or 1.1% of our total food retail network square footage. On the pharmacy side, we are on track to complete 30 major projects this fiscal year. Under our normal course issuer bid program as of July 31, we had repurchased 4.9 million shares for a total consideration of $463.1 million at an average share price of $94.56. In closing, our third quarter results were significantly impacted by the ongoing strike at our produce distribution center in La a nonrecurring event that affected sales, margins and costs. We remain focused on restoring momentum and continuing to execute with discipline on costs, investments and capital allocation. To that effect, we are confident that the network optimization initiative announced today will contribute to improve the position of our network in the markets we serve and to respond to evolving customer needs. On this, I will turn it back to Eric for closing remarks. Thank you.

Thank you, Nicolas. So as previously announced, I will retire as CEO at the end of this fiscal year, and become Chairman of the Board. It has been an honor and a privilege to meet Mithu and to work alongside such talented and dedicated teams across our stores, distribution centers and offices. I would obviously prefer to exit on a more positive note, but I'm proud of what we accomplished over the last 18 years. Alongside my Board colleagues, I look forward to Mittal's continued success under Marc and Sharon's leadership and I'm confident that the company will continue to deliver long-term value to customers, employees and shareholders. Finally, I want to express my appreciation to you, the investment community, for your support and interest over the years have always valued our discussions, and I will miss engaging with many of you. So thank you, and we will now take your questions.

Thank you, sir. Ladies and gentlemen, [Operator Instructions] First, we will hear from Irene Nattel at RBC Capital Markets.

And before I ask my question, a huge thank you to you, Eric, for the past 18 years. It's been an honor and pleasure and wishing you all the best of luck. And hopefully, you won't be going too far away. And with that, I guess, normally you don't address different performance necessarily between Quebec and Ontario. But given the impact of the strike this quarter, can you talk a little bit about what you might have seen in Ontario, which presumably was not destructure and not meaningfully disrupted. And then, I guess, where within the stores in Quebec, are you seeing the greatest pressure on same-store sales?

Like you said, Irene, thank you for your kind words. Number one. Number two, for competitive reasons, we're not going to disclose by providence, by banner. We've said that many times. Clearly, the strike is having a impact in Quebec mostly. -- both of our banners are affected by the supplier were affected by the supply of produce to our stores. So yes, clearly, it's had a bigger impact there. Ontario, we're pleased with our business overall. It's a very competitive market. We're holding share in Ontario. So I will leave it at that, but we did impact our operations a bit in Ontario by serving our Quebec stores. So that created the disruptions. The people are working through -- so a lot of hard work by our teams to do a good job in both of our markets. So that's what I would say.

Much appreciate it. And then -- and maybe it's very hard. But kind of teasing through we continue to see elevated pricing for consumers. What can you tell us about underlying consumer spending behavior and promotional penetration trade down, et cetera?

Matt, you want to take that?

Yes, I can. I would say that the trends are similar to previous quarter. Consumers are focused on value that's proportionately buying private label, participating to promotion, and we're continuing to see volume greater volume and discount than conventional. We believe this is going to continue. And that's why we've -- we're continuing to invest in our network and investing in the right store in the right market as we announced.

Excellent. Thank you, and welcome.

Thank you. Thanks, Erin.

Next question will be from Tamy Chen at BMO Capital Markets.

Eric, I wanted to wish you as well. For my question, on the strike, I don't know if you're able to comment, but I think the last update you gave was the union rejected your proposal. Are you able to say if both parties are back negotiating right now?

So we gave you an update on June 25. And -- so there have been some discussions after that date. There have been no formal negotiations for a few weeks now. That said, we remain committed to reaching a negotiated agreement that recognizes the contribution of our employees enables their return to work. We're prepared to resume discussions with the union, but these discussions have to take place in a realistic framework that reflects the competitive market that we compete in. So we presented an offer a global offer to the employees that provides competitive wages, good working conditions that compare very favorably with the market in addition to offering quality long-term jobs here in Quebec. So in our lines of volumes in the union's court, and we look forward to resuming negotiations.

Okay. I see. And the costs and the disruption from the strike, like I would have thought maybe in the first few weeks, it'd be most costly as you're sort of scrambling. And now with the contingency plan in place for some time, has the magnitude of the cost from the strike? Is it a bit better now than initially? Or is it -- should we think it's a very similar cost drag that's been consistent throughout this period since the strike began.

So Nicola gave you the numbers, we said $90 million of lost profit and cost impact. The large majority of that is lost profit and margin on lost sales. The direct costs associated with this contingency plan were quantified in the quarter at $3 million. So it's -- those costs are some of the ongoing security costs, for example, continue to be incurred. The large majority is related to the sales decline and the associated margins. So as long as we're on strike as long as our same-store sales remain negative, that's because that's why it's continuing to have an impact on our results. That said, we're in better shape every week. The assortment is not 100%, but getting close to that. It wasn't that certainly at first, people couldn't find organic produce, for example, for a while in our stores. So that trip really lost sales and some traffic assorted with that. So like I said, we're improving every week. Stores are in good shape, and we can compete. But we have work to do to bring traffic back to our stores and that's what we're trying to do in the day.

And maybe, Nicolas here, adding a bit of clarification. As Eric mentioned, the direct cost of $3 million, primarily associated with security services and other very within margin. We also have, in addition to lost margin on lost sales, additional costs for the actual operational -- operating the contingency plan with third-party logistics provider, that is obviously costing more to us than the normal operating conditions of our own infrastructure. So that is also included in margin.

Right. Okay. Last 1 for me is on the network optimization, specifically the rebranding of 10 locations in Ontario to discount. Are you able to talk about -- is that mostly in the Greater Toronto area and why now?

It's mainly -- it's across the products, both in the GTA and the rest of Ontario. Did I answer your question? I'm just wondering. Out of respect to our employees, we will announce gradually to our stores and our employees as this plan is deployed. So a few stores have been advised, will be advised very shortly. We have been advised very recently. -- but not all stores. So that will roll out as per our plan. But there's some in the GTA. There's 1 in Ottawa will open by the end of this fiscal year, and there are some other parts of Ontario. We'll keep you posted on future calls.

Okay. I was also wondering, timing, like why now is it just from the entry of competitors discount banners nearby?

No, I think it's a question of the evolution of the market. And like Mark said, we optimize our network on a continual basis, market by market. We plan and we look at the future of every store. What's the best format for it, and we make decisions. So this was a good time to relook at the network as we were preparing the plans for next year. And for those 10 locations, we feel discounts a way to go. And within all these stores will be done over the next fiscal year, and we will ramp up the contribution, better sales in all of those markets, and we look forward to a higher contribution, which was singled out when we had that in the opening remarks.

Next question is from Vishal Shreedhar at National Bank.

With respect to the total impact associated with the strike on Metro's results in order to forecast next year's results more accurately, you highlighted the 32, the $0.32 on EPS and and then there's $3 million and then there's the 3PL costs. So how would I think about the totality of costs, so I can forecast next year more accurately?

Well, so Vishal, thank you for your question. As -- just to clarify, again, the $3 million that you've quoted is obviously included within the 90 million I would say that initially, and to an earlier question, initially, as the strike started, we had what I would call a normal level of shrink and lost inventory, which hopefully should not repeat as much. So I think on an ongoing basis for now, what we see in the fourth quarter is a per period level that perhaps is slightly less than the $90 million we've seen over 4 periods. -- slightly less, but the same ballpark figure. And I would say that about 1/3 of that number would be associated with direct costs operating the contingency plan and 2/3 has to do with lost margin on lost revenues.

Okay. Related to related to the network reorganization and the changing of the stores. Is there a sales -- a negative sales impact as you close the stores and you changed them to the discount banners? Or is that the subsequent growth in the the discount banner sales growth going to more than recover that and we should expect a sales benefit through the totality of the plan.

Vishal. Yes, the impact is positive. There is a decline in sales in in the 2 weeks prior to the closing, but then it's compensated by the growth of that new discount store. That's growing the first year, but also will be continuing to grow the year after. If we're deciding to convert a store, it's because the store is not the right store for that market and the store has not been performing as we would want to. So -- the overall impact on sales is positive first year and ongoing after that. When we do convert a store, depending on the work required, there could be a closure for 2 months for the conversion. So you see a drop in total sales. we will take those out of comparable sales anyway. So short term, there might be a drop in sales during the work. But as soon as we open, we are expecting higher sales than before and bigger returns and things better contribution.