Pet Valu Holdings Ltd. (PET) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for standing by. Welcome to Pet Valu's Fourth Quarter 2022 Earnings Conference Call. My name is Bailey, and I will be coordinating today's call. [Operator Instructions] I would now like to turn the call over to James Allison, Investor Relations at Pet Valu. Please go ahead, Mr. Allison.

Good morning, everyone. Thank you for joining Pet Valu's call to discuss our fourth quarter 2022 results which we released this morning and can be found on our website at investors.petvalu.com. With me on the call is Richard Maltsbarger, President and Chief Executive Officer; and Tammy Nunez, Vice President, FP&A acting in the capacity of Chief Financial Officer. Before we begin, I would like to remind you that management may make forward-looking statements which includes guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties which could cause actual results to differ materially from those expressed today. For a broader description of risks related to our business, please see our Fiscal 2022 MD&A annual information form and other filings available on SEDAR. I would also like to note that today's remarks will be accompanied by a earnings presentation for Q4 2022, which can be viewed live through our live webcast and is also available on our website. Now I'd like to turn the call over to Richard.

Thank you, James, and good morning, everyone. I will begin today with an overview of our strategic and operational accomplishments in 2022 and in particular the fourth quarter before highlighting some of the initiatives we have underway for 2023. Before I begin my remarks, I wanted to express how excited we are to welcome Linda Drysdale as our new Chief Financial Officer. And she joined us officially yesterday and has just started digging in, we have given her pass on participating in today's call. I'm very pleased to have Tammy, our Vice President FP&A who has been acting in the capacity of CFO help deliver our prepared remarks. 2022 was another exceptional year for Pet Valu. On the back of significant growth in 2020 and 2021, we set ambitious goals for 2022 only to consistently outpace them as we moved through the year. The Canadian pet industry continued to expand above its long term growth rate fueled by a growing pet population and perennial humanization and premiumization affect here. We accelerated our new store openings and outpaced the industry growth once again, gaining share and further solidifying our position as Canada's preferred pet retailer. For 2022, system-wide sales grew by almost 30% through a combination of record new store growth, same-store sales growth of over 17% with same-store transactions of 12% and a strategic entry into Quebec with the acquisition of Chico. We translated this into strong profit growth with adjusted EBITDA up almost 18% for the year, as our teams effectively navigated a challenging operating environment, including record high freight cost and product inflation as well as persistent supply chain volatility. From an operational perspective, we expanded our proprietary brand offerings across both consumable and hardline while simultaneously increasing distribution of these brands with phased introduction into our Chico banner. We expanded our omnichannel offering with the introduction of our auto ship subscription service in September. We kicked off our supply chain transformation with the initial construction of our new DC in Brampton, Ontario. And finally, we continue to invest in our people by offering competitive compensation and career development opportunities with reduced voluntary turnover especially in our customer-facing roles. We recognize our people and franchise owners are central to our success and only through their enduring dedication have we been able to accomplish so much. Turning quickly to our fourth quarter, our business momentum continued as we executed against each pillar of our growth formula. First, we expanded our store network opening 16 new stores in the quarter. For the full year, we opened 48 stores, a company record and 60% more than 2021. We were able to exceed the high end of our guidance due to the incredible performance of our real estate store setup and field operations teams. We ended the quarter with 744 stores across all 10 provinces while increasing our franchise mix to 70%. Through our franchise network, we are able to provide attractive opportunities for entrepreneurs across Canada while also deepening our brands relationship in local communities. At the same time, higher franchise penetration drives improved investment returns and free cash flow metrics. Second, we drove same store sales growth of 12% in the quarter supported by continued basket and traffic growth. The productivity of our existing stores has grown immensely since the pandemic with same-store sales on a 3-year stacked basis up over 46%, consistent with the trend seen throughout 2022. We continue to grow sales across all categories, including bulk consumables and services. We are seeing the resilience of the Canadian pet industry as our devoted pet lovers prioritize the needs and care of their pets. Within consumables, which account for 3/4 of our sales we continue to see strong growth in our premium food tiers and hardline discretionary products like toys and apparel experienced solid growth. We continue to see some softness in categories such as bedding, crates and travel as we compare to the final phase of record adoption rates in late 2021. Our category performance and multiyear purchase data accessible through our loyalty programs paint a clear picture of limited changes in consumer behavior. On our digital front, penetration of our online generated sales continues to climb as our customers leverage our full suite of e-commerce convenience, including both on-demand and automated fulfillment either to the home or across our nationwide store network outside of Quebec. We continue to be pleased with the uptake in our auto ship offerings, including seeing 25% of subscriptions going to net new customers of Pet Valu. We also saw higher penetration in our loyalty sales, driven by the incremental value offered by our programs. Our loyalty ecosystem now consists of over 2.4 million active customers, including Chico. Loyalty program members contributed upwards of 75% of our consolidated sales in 2022. Another key contributor to our growth is our store reinvestment program. While our real estate team was busy opening a record number of stores, they also completed 15 renovation expansions or relocations in the quarter, bringing us the 35 projects for the year. These efforts expand square footage, provide strong returns on capital investment and help maintain customer experience consistency across our network ultimately driving growth across all store vintages and the final pillar of our growth strategy enhancing operating margins. We continue to make thoughtful reinvestments into our business to support growth for years to come. We were pleased that gross margin compression in the quarter was less than expected despite unfavorable exchange rates as strong execution drove top line momentum and cost management. 2022 has been a year of purposeful reinvestment and not only our systems and infrastructure, but also our people. These are investments that pay off across years and we are already seeing and expect to continue to see tangible returns. Turning our focus to 2023, we are already on our way towards delivering another year of strong growth. The Canadian pet industry continues its 30-year trend to expand at a healthy rate fueled by long-term trends of pet humanization and premiumization. At the same time, we're continuing to unlock opportunities for further market share growth in this attractive industry. With greater clarity of our capital needs together with our strong evictions and our growth trajectory, we are pleased to announce that our board has approved a 67% increase to our quarterly dividend. We are also exploring additional ways to return capital to our shareholders. Tammy will review these in more detail shortly together with our full year guidance. Before that, let me quickly review some of our operational focus points for 2023. First, our network expansion strategy continues as we expect to open between 40 and 50 stores this year. Work is already underway, benefiting from the proactive effort to identify and fill our pipeline over the past 2 years. We are expanding in all market types and geographies as we continue to see whitespace available across the country. On a same-store basis, we expect our sales momentum to continue to track above the industry's long-term, mid-single digit pace. We have some exciting plans for merchandizing innovation in 2023. We continue to enhance our proprietary brand offerings where earlier this quarter, we rebranded our core performance trend line to performance on Prime with new bilingual packaging, see through windows and digital graphics. We are pairing this packaging change with an upcoming relaunch of our Performatrin website which will showcase all Performatrin tiers, including Prime, Naturals, Ultra and Ultra Limited. We are expanding our proprietary treat lines through Performatrin Ultra Coated Cow's Ears and new lickable puree for cats. In addition to new proprietary brand SKUs, we're excited to launch several new national brand products such as a Canadian exclusive on Kiwi Kitchens, freeze-dried foods for dogs and cats and a new exclusive line of rain gear from Finnish company Pica. Our store refresh program is an additional pillar of our growth. After a record year of projects in 2022, we plan to maintain a similar pace to ensure consistency across our growing store fleet. We and our franchise owners expect to complete 20 to 30 projects this year, including remodels and expansions. On the digital and marketing front, we have another full agenda of enhancements planned as we leverage our suite of omni-channel capabilities to deepen our relationship with devoted pet lovers. We will continue to amplify our Love Lives Here campaign to grow brand awareness as we expand into new markets, while also supporting lower funnel conversion with our 360 degree approach, including a continued expansion of our personalized e-mail offers. And finally enhancing our operating margins over the long term. We expect adjusted EBITDA margins of approximately 22% this year as we leverage prior investments together with targeted actions to offset external cost pressures, particularly those types of unfavorable FX rates. While global supply constraints are easing, Canadians are still experiencing inflation levels near 40-year highs and unfavorable FX rate environment and heightened interest rates. As we've talked about before, this is translating in the margin pressure, which we expect to continue through at least the first half of 2023. So we're taking actions to ease this pressure through proprietary brand expansion and procurement benefits. At the same time, we expect greater focus on operational efficiency as we leverage added capabilities and industrial engineering and operational support talent. On the capital side, we have mapped out the transformation over nationwide supply chain to support our growth over the next decade and deliver operating efficiencies. We will invest in 3 sites, one each in the GTA, Calgary and Vancouver to supply our growing store network and national e-commerce platform. Together these sites will leverage upgraded systems, modern automation and our enhanced engineering talent to double our capacity for growth and create what we believe will be the strongest pet specialty supply chain in Canada. All in, we expect to invest approximately $110 million in capital and onetime transition costs over 4 years between 2022 and 2025. The first phase is well underway as we consolidate our multiple GTA facilities into a larger Central DC and Brampton. We expect to begin this consolidation through a phased multi-quarter transition starting in Q2. And then later this year, we expect to commence work at our other sites with plans to begin transition there in 2024 and 2025. And with that, I'll pass it over to you, Tammy?

Thank you, Richard, and good morning everyone. I will start by reviewing our full year and fourth quarter financial performance, followed by an update to our full year outlook. 2022 was another exceptional year for our business. In addition to the operational achievements Richard just reviewed, we delivered very strong growth in 2022 on top of the high bar we set in 2021. Revenue grew 23% to $952 million. Same-store sales increased 17.1% and adjusted EBITDA grew by 18%. Taking a step back if we compare it to only 4 years ago, we have increased both our revenue and adjusted EBITDA by almost 80% underscoring our ability to drive strong top line growth while carefully managing and maintaining our very healthy margin rate as we invest in our business. Turning to the fourth quarter. As a reminder, our Q4 2022 performance includes a full quarter impact from the acquisition of Chico which was completed in Q1 of 2022. As a result, the contribution from Chico impacts year-over-year growth rates across many financial metrics except for same-store sales growth, which excludes the impact of Chico. Fourth quarter system-wide sales increased 25% to $361 million. Excluding Chico system-wide sales grew 15% driven predominantly by strong same-store sales growth of 11.8% with same-store transactions up 5% and average spend per transaction up 7%. We opened 16 stores in the quarter and 48 for fiscal 2022. We ended the year with 744 locations, 70% of which are franchise compared to 64% at the end of 2021. While we plan on gradually increasing our franchise penetration over time, this 600 basis point increase in 2022 was largely attributable to the acquisition of 66 Chico stores in the first quarter. We expect the pace of franchise mixed growth to normalize in 2023 to about 50 to a 100 basis points per year. Turning to our company performance, fourth quarter revenue was $266 million, an increase of 19%. Excluding Chico revenue growth was 18%. Gross profit was $96 million. As a percentage of revenue, gross margin rate was 36.2%, down 60 basis points from 36.8% last year. This decrease was primarily driven by a weaker Canadian dollar which increases costs on foreign-sourced products. Higher wholesale merchandise sales related to increased franchise penetration and strong growth in national brands, such as in frozen raw also contributed. These factors were partially offset by vendor recovery associated with supply disruptions and the positive impact of Chico. While we have been signaling significant gross margin pressure as we feel the full brunt of recent Canadian dollar deflation, our Q4 gross margin exceeded our expectations due to the great execution by our merchandising team and slightly higher sales leverage. Selling, general and administrative expenses in the fourth quarter were $54 million. Excluding IT and business transformation cost, share-based compensation and other non-operating items, our SG&A expenses were approximately $47 million, an increase of 27% primarily attributable to purposeful investments in head count and wages to support long-term growth and higher ongoing technology costs as we continue to modernize our platforms. Adjusted EBITDA increased 11% to $59 million representing 22.3% of revenue. Net income was $26 million, down $1 million from Q4 last year. Excluding items not indicative of our underlying performance, adjusted net income was $31 million, up 6% from last year, driven by growth in adjusted EBITDA partially offset by higher interest expense due to rising rates. Adjusted net income per share was $0.43, up 5% from last year. Now turning to the balance sheet. We remain in a strong liquidity position ending the year with $63 million of cash on hand plus access to our $430 million revolver. Total debt net of deferred financing costs was $338 million. Taking into account leases, our leverage ratio dropped to 1.7x down from 2.1x at the end of 2021. Ending inventory was a $118 million, right in line with our expectations and a decrease from peak levels seen in Q3. Our merchandising teams are doing a fantastic job managing our safety stock while maintaining strong in-stock positions, which is no easy task in today's environment, given persistent supply chain noise and changing fulfillment time. The proactive investment we made to accelerate receipt of seasonal inventory and replenish core assortment stock paid off with strong seasonal sales and improved franchisee fill rates. While supply chain turbulence and inflation have caused lots of noise in reported inventory levels over the last few years, if you compare our levels today to 2019, our inventory has grown right in line with our revenue. We believe we have the right quantity and quality of inventory including at store level across our corporate and franchise stores as we start 2023. Net capital expenditures were $20 million in the fourth quarter, bringing our total for the year to $37 million, which was right at the midpoint of our guidance. A large portion of this then was attributable to the first phases of our new distribution center in the GTA, which amounted to approximately $17 million over the course of 2022. Free cash flow in the quarter was $25 million, down from last year, primarily due to the timing of the GTA expenditures I just mentioned. Before turning to our financial outlook for 2023, we wanted to share some thoughts regarding our capital allocation strategy. Our investment decisions are anchored to building value for all our stakeholders, which we believe is key to our long-term success from delivering excellent customer experiences, building long-term franchise relationships, creating career opportunities for our ACEs to enhancing shareholder return. These pillars form the core of how we balance capital decisions. This starts with reinvesting in our people, processes, systems and innovation to drive organic growth and evaluating strategic and acquisition opportunities. Our high franchise mix and strong free cash flow provides the flexibility to maneuver efficiently as well as create opportunity to return capital to our shareholders. Over the last 20 months as a public company, we have continued to gain clarity with respect to our capital needs. We've accelerated our store growth cadence. We've entered Quebec through the acquisition of Chico and we've mapped out a national supply chain transformation strategy all while simultaneously lowering our leverage from 3.4x prior to IPO to 1.7x today. We think the cash flow characteristics of our business could support leverage above where we are today. But in the current environment, we are taking an approach that's more focused on flexibility. This clarity affords us the confidence to begin to map out our long-term shareholder return plan. As announced this morning, we've raised our quarterly dividend by 67% to $0.10 per share. Moving forward, our intent is to deliver dividend growth as our earnings expand. In addition, we are exploring other opportunities to return cash to our shareholders, such as through share repurchases to opportunistically put our excess cash to work over time. Now I will provide our outlook for fiscal 2023. Following 2 consecutive years of exceptional growth, highlighted by a record expansion in Canada's pet population, we are excited to leverage the strong foundation we have built and expect to deliver another year of growth in 2023, in line with our long-term model. We expect full year revenue between $1.05 billion and $1.075 billion, supported by strong same-store sales growth of 7% to 10% and 40 to 50 new store openings this year across multiple banners. We expect industry growth to continue normalizing back to its historical run rate. And as always, we plan to match that growth while pursuing opportunities to capture share as they arrive. We believe our relative sales distribution across quarters in 2023 to be similar to that seen in 2022. On gross margin, we believe our business can sustain a margin rate between 35% and 36% over the long term, in line with our historical performance. While we have performed above this level through most of 2021 and 2022, this was primarily driven by favorable FX rates. As seen in recent quarters, including Q4, our gross margin rates have trended back towards our historical range as the recent depreciation in the Canadian dollar has intensified. While we don't typically plan to provide annual guidance on gross margin, we believe it would be helpful to give more context for 2023, given dynamics impacting the business. We expect gross margin rates for 2023 to be slightly below the low end of our historical range of 35% to 36%, driven primarily by an approximate 80 basis points headwind from onetime and dual running transition costs associated with our supply chain transformation. Turning to adjusted EBITDA, we expect to reach between $230 million and $237 million as we begin to see SG&A leverage on the key talent, software and efficiency investments made in 2022 and that will continue to be made into 2023. On adjusted net income per diluted share, we expect to reach a range of $1.60 to $1.66 assuming interest rates remain near current levels and at a tax rate between 26.5% and 27%. With regards to items excluded from the calculation of our adjusted figures, we expect to incur approximately $13 million in business transformation costs, primarily associated with onetime dual running costs and system implementation related to our supply chain transformation, $7 million in IT transformation costs associated with new back-office systems and $8 million in share-based compensation. And finally, on net capital expenditures, we have now completed the full road map for our multiyear supply chain transformation, which started with our new GTA DC. As Richard mentioned, the total investment will be upwards of $110 million, $80 million of which relates to capital investments. As I mentioned earlier, approximately $17 million of this was already incurred in 2022. We expect the bulk of the remaining spend to occur over the next 2 years. For 2023, our total net capital expenditures are expected to be approximately $60 million, roughly half of which is related to our supply chain transformation. The balance are pertained to ongoing new store growth, maintenance CapEx and continued investments in our back-office systems. With that, I'll turn the call back to Richard.

Thank you, Tammy. Over the past 4 years, we have established a record high growth level for our company. Today, we are in all 10 provinces with plenty of whitespace available to expand. We will continue to invest in the key elements of customer experiences, franchisee relationships, ACE compensation and development, innovative new products and the key capabilities such as supply chain and refreshed stores that are at the heart of our winning strategy. While we will closely monitor and adapt where required, we believe we have the right strategy to continue to earn market share in the competitive and growing Canadian pet industry during any point in the business cycle. I am very excited about the work we are doing together as we continue this winning journey. With that, we are now happy to take your questions.

[Operator Instructions] The first question today comes from the line of Irene Nattel from RBC.

Obviously, great results in the quarter. Can you talk about sort of, in your view, the key drivers of the uptake in -- or the increase in penetration of private label, what you're seeing in consumer behavior or what you're seeing in competitive dynamics and where we are now in terms of promotional activity versus pre-pandemic?

This is Richard. I'm glad to share that with you. So let's break down each one of those different parts. I heard from you just to confirm the question, consumer behavior, promotional activity and proprietary brand penetration. Is that correct?

That is correct.

All right. So let's start first with the promotional activity because we did note to you going into the quarter that we expected to see competitive intensity gradually return to the industry as we went through and it was certainly more promotional black -- sorry, certainly more promotional activity during Black Friday and then the lead it for the holidays. The good news is we were ready. We had some exciting programs. Again, just a reminder, we're coming out of all-time lows with almost no promotional intensity within the industry in both the holiday seasons of '21 and 2020 prior. Always remember, though, Irene, that we center our value proposition really around the holistic value we provide to customers, convenience, care, expertise, compassion. As we move to the pandemic though, our marketing teams have really done a good job of leveraging the opportunity to drive some data-driven decisions and some test and learn strategies so that when promotional intensity did come back, we would be ready to do that selectively and in the right moments in our own style. So for Black Friday example, we did a buy more, save more, that really provide the customer a great offer for them for the things that were important to them and we had great success with it and we're quite pleased with what we saw. Similarly, on the consumer behavior side, our marketing team and data teams have been diving into that as well. As we've talked about on prior quarters, we really monitor very closely to understand any shifts that we will be seeing within purchasing patterns. As noted in my prepared remarks on the call, we saw growth across all categories, most especially led by consumables, post-pandemic rebound in services, but especially also in our premium tier products on both consumables and hardlines. We really saw growth in toys and apparel. And as I did note on the call, if there was any pullback, it was really softer sales in the make home categories around betting creates travel, again, associated with we are comping over the highest ever adoption rates in late 2021. Finally, in terms of overall buying patterns though, similar to what we saw last quarter, there are a number of customers who are purchasing larger sites, food bags and cans, but most often within the same brand just for a slightly better cost per pound economics. So overall, no real changes in our consumer behavior. We continue to see staples being about 2/3 of our sales with good, strong, solid weekly and monthly patterns. And then finally, on your proprietary brand question, really happy with the performance we're seeing. The performance and ultra-freeze drive that we introduced last year, really strong growth rates, very happy there. Strong expansion over 300 additional SKUs in our hardlines categories during the holiday season, the vast majority of what we sold in the holiday season were proprietary brand hardlines, bringing up our penetration there. The interesting thing is -- and if you look at the AIF that we just published with our results, you'll see our overall penetration very similar to 2021 without Chico. Now with Chico and going forward, we'll be quoting our penetration of 26% at a current enterprise level as we have successive waves of new proprietary brand products beginning to flow into Chico. So overall, Irene, much of the quarter was as we expected, very limited changes in consumer behavior, some increase in promotional intensity, not beyond what we expected for the holidays and continued strength in our proprietary brand growth.

That's great. And just one other question, if I might, please. On the capital -- the planned capital spend of a $110 million, what level of returns are you looking for from that spend and over what period of time?

So just to be clear, the $110 million quoting is very specific to the supply chain transformation, $80 million worth of capital, $30 million for onetime transition costs. 2 sides of this. First, hiring absolutely with a phenomenal growth that we've seen over the last 3 years, 80% revenue growth over the last 4 years. We need this capacity. We are already overcapacity in our supply chain today. This will give us the chance to double the capacity and also increase the automation primarily driving labor and other productivity within the system as we go forward over the next few years. The addition to that, we believe that with the strength of this, we're going to have the very best supply chain for pet specialty all across Canada. So we expect solid returns flowing through with our normal long-term growth rate that we expect in the business.

The next question today comes from the line of Mark Petrie from CIBC.

I just wanted to ask about the new store or the performance of recent new stores and then also the pipeline. Maybe you could just give us a comment about the performance of the 2020 and 2021 cohorts in '22, how those ramp sort of versus expectations? And then I'm specifically interested in any comments you can share with regards to the performance of new stores in smaller markets because I think that's an opportunity that you guys have targeted increasingly over the last couple of years and over the outlook. So any comments on that would be great.

Mark, this is Richard. I'll cover that. Outstanding. That's the one word I'd give you quite frankly. When you look at the 2020 and 2021 new store cohorts well above initial expectations, partially driven by the higher than average industry growth that we've seen, but also very strong first year performance and maturity cycles. And the follow-up question that you had regarding your new stores in smaller markets also outstanding, really is a key part of our strategy to be able to continue to take our unique small flexible format into these smaller Canadian towns of 5,000 to 10,000 people and really be able to establish a toehold in places that wouldn't otherwise be able to be entered by other types of pet specialty. As we have noted in the past, I'll reiterate, we've had similar performance across all geographies, urban, suburban and rural over the past year as well as similar performance across all store vintages, continuing to see very strong performance on same-store sales growth even in our stores, 10 years and older through our constant focus on the refresh program.

Okay. And then could you just talk about the franchisee pipeline? I mean I think it's been very robust over the last couple of years, but any comments about how that's evolved? And then the whole dynamic of new stores going to new franchisees or going to existing franchisees to build up their own sort of personal network. And then I noticed that there were a chunk of stores, I think, refranchised or costs moved from corporate to franchise in Q4. And just any comment about that would be helpful.

Certainly, Mark. Very strong franchisee pipeline, approximately 1,400 inquiries this year, very similar to 1,500-plus inquiries that we had during 2021, continue to see a good evolution and a good balance. If you look at over the past 3 years and pretty consistent pattern here, a little more than 50% of our new franchise stores as well as our resold or refranchised corporate stores are going to existing owners. So really solid pipeline coming in for the half of the franchise stores we provided to new franchisees and also a very consistent interest of our existing owners and reinvesting into more stores.

And those -- sorry, just those refranchised stores in Q4, was there something behind that specifically or just sort of opportunistic and it just happened to lump into Q4?

It's really just timing, Mark. We don't plan very specific cadences, but it just comes up to win a particular store is available for sale and when a particular franchisee actually works their way through the pipeline.

The next question today comes from the line of Martin Landry from Stifel.

In your opening remarks, you talked about your gross margin ranging between 35% and 36% for the long term. And I'm trying to reconcile that with your plans for your new DC in Toronto, you're consolidating several leases into one. You're implementing automation. So I would think that there's going to be -- that new DC is going to be margin accretive. So Richard, I was wondering if you can help me out a little bit assess how much margin uplift do you expect from your new DC in Toronto? And what's going to be the offset to keep your margin stable?

So Martin, let me just rewind a little bit, make sure we recover again the broader perspective here because it's not just one DC in the Greater Toronto area and it's a part of what we want to make sure that we got through. First is the overall transformation, right? So while in 2023, we will begin to bring on board a new DC with greater capacity and automation in the GTA, we won't complete that transition until the first part of 2024 as we have multiple buildings that we need to consolidate into that. So right now we have a bit of capacity and efficiency as we're overcapacity for the amount of space and operations that we have. And we will continue to deal with that until we're fully into the new building towards the middle part of 2024. Shortly thereafter will be followed by transitions in our Calgary warehouse and then followed by that, a transition in our Vancouver warehouse. So I want to make sure you had the cadencing there to understand the $110 million, especially the $30 million of onetime transition costs are really spread over the next several years, the majority of which are in this year in 2024, but there will be some continuation all the way up to 2025 in terms of temporary pressures on our gross margins. Specifically, in the guidance we provided, about 80 basis points of gross margin pressure this year, more of that in the back half of the year as we expect middle part of the year, so early summer to begin to have entry into our new GTA DC and dual running costs for the better part of 12-plus months as we transition all of the different buildings that we have in operation across the GTA. We do absolutely believe Martin, long-term, over time, we will get to better efficiencies within our operations. But this is a 3-year transition as we work through each building. And so we want to be very clear that, yes, we will absolutely on the other side of this, have a more efficient operation and expect to get leverage on our DC capabilities and supply chain. But first, we need to work through the capacity and efficiency that we have, not only in the GTA, but also as we use 3PLs to bridge our capacity issues in Calgary and Vancouver over the next 2 years.

Okay. That's helpful. So I mean the whole exercise is going to be margin accretive. But -- and I would think that the Toronto...

Yes. Okay. Go ahead, Martin.

And then the next question is, I just want to touch a little bit on your same-store sales guidance. You're talking about the industry expecting the industry to return to previous levels of historical growth rates. So wondering what have you assumed in terms of the industry growth for 2023?

Yes. We assume, Martin, that the gradual return to normal levels of growth that we began to see in the latter part of 2022 for the overall industry will continue as we go through 2023. And so our same-store sales guidance contemplates that continued gradual return down to the mid-single digits as we cross through this year.

Okay. Can you -- sorry, can you quantify like give me an order of magnitude of what you expect the industry to grow this year?

Again, just slightly ahead of the mid-single-digit pace as we noted in our prepared remarks.

The next question today comes from the line of Adrienne Yih from Barclays.

Let me add my comments in a great finish to a very strong year. Richard, just to start off, I'm going to stand on the DC the supply chain transformation. How under -- and it sounds like you're using 3PLs now. So 2 questions. How under-capacity will you be sort of as you do this transition, what percentage of your capacity is right now being fulfilled by 3PL? And what proportion of that is I'm really interested in sort of the automation component of it. How much automation do you have in the preexisting -- and what does this new transformation look like when it's completed? And then I have a couple of follow-ups.

Certainly, Adrienne. So let's start first with the capacity to challenge. Today, we're well over a 100% utilized, having to tap into 3 different 3PL facilities just in the GTA alone as well as incremental 3PL facility capacity in Calgary and Vancouver. The transformation that we are undertaking will more than double our capacity and eliminate all needs for the 3PLs that we're currently pulling in at excess space today. In terms of the automation, we have no automation in our existing warehouses. And in fact, with the 3PL used as an overflow were worse than full manual. And so the automation we will be bringing into each of the 3 new warehouses will primarily be goods to picker and focus on our small piece pick activity, which is a majority of the products that we send to the store that are not food or litter. Since most of our stores are very small footprint, generally have capacity for around 2 to 6 items of a particular SKU, almost all of our picking is done by a piece pick and we'll be going to much greater levels of automation in each of the 3 buildings across the next 3 years.

Okay. That's super helpful. I'm not sure if this is the proper way to ask the question. But when you get to the automation level and your analysis, what's the kind of full-time equivalent or kind of wage improvement that could be picked up from that?

Yes. We're not going to disclose that at this time, Adrienne, until we actually have some automation in and make sure that we understand not just the theoretical, but the actual empirical performance improvement that we see.

Makes sense. Of the 40 to 50 stores that are opened this year, how many of those will be in Chico? And what are you learning in the Quebec market that you're pleased with and can roll out further? And my final question is for Q1, it sounds like you're off to a pretty strong start for the year as well. Should we assume -- what should we assume kind of on the full year 7% to 10% comp for kind of current quarter?

Certainly. So on the 40 to 50 stores, I would say, generally, our proportion that we saw on '22 and our openings will hold across the next 3 years. It will be a little more a little more weighted to Pet Valu this year simply because we are still transitioning with Chico and helping them move on to our new real estate platform and approach. But generally, as you model it out, you can expect that the proportion of new store openings you saw in '22 will be similar to the Pet Valu to Chico proportions going forward and now also lines up with the proportion of our incremental 500-plus new store opportunities that we still have ahead of us between Quebec and the rest of Canada. In terms of the quarter, we're off to a great start. I provided that information already. We're very comfortable with the guidance we've given, given the performance we've seen to-date.

[Operator Instructions] The next question today comes from the line of Vishal Shreedhar from National Bank.

Pet Valu, obviously, a different value proposition than the general merchandise retailers or even other specialty retailers. Wondering when you look at your basket of goods and the price gap versus your peers and competitors, has that changed through 2022? And is management satisfied at that relative gap versus the competition?

So Vishal, we are very satisfied with the gap that we have, both in our comparisons to pet specialty as well as to other masks. We have slightly tightened that gap as we've moved through the year as we are expecting promotional intensity and other factors to increase, much of which has occurred as we expected. So yes, we're very good with where we are today in terms of our current market pricing and relative market share gains that we've continued to take given that strategy. Okay. So through 2022, it tightened, meaning the gap between peers is reduced, and we shouldn't anticipate further tightening through 2023. Is that a fair characterization? We like where we're priced today, and we like the actions that we took during '22 to tighten that slightly to be a bit more competitive as the market adapting.

Okay. When we look at your guidance, just wondering if you can help us understand what are the major parameters which differentiate the high and low end of your guidance? What are the major factors?

Certainly. So if you look at what we provided in our prepared remarks, I'll start first at the top what the overall market growth. As we've indicated, we expect the market to be slightly ahead of its mid-single-digit pace. Of course, our guidance will be slightly ahead of that given some of the actions that we've taken and invested in, in the last 2 years to continue to drive market share. As you slow down a large factor for us, especially on the gross margin, is FX. And some of the unfavorable impacts we're feeling from FX right now as we compare to very favorable FX rates as we experienced in late '21 and going into early 2022. And then, of course, Vishal, the most significant of all of this is just the economic uncertainty. We do closely track what is going on in the Canadian economy. We are not economists ourselves, but understand that there can be impacts to the consumer. And we want to make sure that we're in a position to adapt or adjust our approach, if necessary. But I would say that other than FX pressures and just the overall feel for the market growth, the most significant thing causing the variance in our guidance ranges would be the economic uncertainty and just being able to navigate the waters of this particular market.

Right. Okay. And in your prepared remarks, you mentioned you intend to unlock further opportunities for market share. I'm paraphrasing. I'm wondering if there's something new did that signifies or implies some new initiatives coming down the pipe? Or is it more of the similar initiatives you've been working on through 2020?

So Vishal, as we've said in the past, again, our long-term plan is to grow at market and plan our business for that and then being in a position to opportunistically take shares should the opportunities arise. If you look back to holiday of '21, that opportunity was being in stock when others weren't, right? And the opportunity that we had because we went so much earlier in our seasonal buys that we were in a much better position going into Q4. If you go into '22, we believe a key thing that contributed to our holidays was the quality of our proprietary brand mix and the relative value of that to the other products that were on the market. While the promotional intensity was greater, we did not have to take quite the same promotional steps in order for us to appropriately clear the seasonal inventory that we were looking to move through, allowing us to sell more at full price earlier in the season, allowing us to take some incremental share in comparison to the rest of the market. So there are no specific initiatives, I would give you, Vishal, that would say that we particularly want to identify, especially for our competitors that we may have in place to be able to opportunities take share. But the great news is, with the people stability we have, the low turnover we had in our stores, the increased money that we're putting into developing our people, we can pivot pretty quickly when we do identify an opportunity.

The next question today comes from the line of Martin Landry from Stifel with a follow-up.

Just a quick follow-up. With 2022 behind us, I was wondering if you can give us an idea of your market share right now in Canada?

Certainly, as we provided in our AIF that we posted, you'll find that we worked with our outsized market share adviser. On a periodic basis, we work with them to ensure that all the market and data inputs that they have available to them are being appropriately synthesized into our estimate. We did provide a restated market share within our AIF. The restated market share puts us at approximately 18%. We include all of the banners that we have operating, including Chico.

Okay. And what's your aspirational market share if we look at using your long-term store count if I think 1,200, what would that bring in terms of aspirational market share down the road?

We've not quantified that, Martin, and I'd be hesitant to provide a particular target for where market share could go. Again, I would just reiterate our long-term path that we provided to note as we plan to grow with market, including all of our investments in our SG&A cost and then opportunistically tap into either additional expansion opportunities, additional relocation or renovation opportunities, additional categories such as the outsized growth we've seen in frozen raw from the investments we've made into freezers. So don't really have a particular target for market share. I would say we continue to optimize our modeling around how many units we have available and then continue to look for other ways of taking incremental share of wallet with our customers.

Thank you. This concludes today's question-and-answer session. So I'd like to pass the conference back over to Richard for any closing remarks. Please go ahead.

Thank you, Bailey. And as always, to everybody on the call, we appreciate all the time, investment and attention that you put into Pet Valu as a great investment opportunity. I want to take, again, one last chance to thank Tammy for the work she's done acting in the capacity as CFO over the last few months. Thank you, Tammy, for stepping up and assisting with that. Again, excited to have Linda on board and begin to incorporate her into these processes. And then since I have the floor in 1 minute, just one last time, outstanding 2022. Thank you to all of our franchisees, all of our ACEs. All of the people helped to contribute to the success of the company and the strong growth we've seen over the last 4 years, really looking forward to what we have ahead of us as we continue to reinvest into the business. Thank you all so much and have a great day.

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