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

Good morning, everyone. Thank you for standing by. Welcome to Pet Valu's First Quarter 2025 Earnings Conference Call. My name is Marie, and I will be coordinating today's call. [Operator Instructions]. I would now like to turn the call over to Mr. James Allison, Investor Relations at Beth Value. Please go ahead, Mr. Allison.

Good morning, and thank you for joining Pet Valu's call to discuss our first quarter 2025 results, which were released earlier this morning and can be found on our website at investors.petvalu.com. With me on the call is Richard Maltsbarger, Chief Executive Officer; Linda Drysdale, Chief Financial Officer; and Greg Ramier, President and Chief Operating Officer. Before we begin, I would like to remind you that management may make forward-looking statements, which include guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties and 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 Q1 2025 MD&A, 2024 annual information form and other filings available on SEDAR. Today's remarks will also be accompanied by an earnings presentation, which can be viewed through our live webcast and is also available on our website. Now I would like to turn the call over to Richard.

Thank you, James, and good morning, everyone. Our Q1 performance delivered the improvements we expected to see in our business with all channels working for us. New stores, same-stores digital sales and strengthening wholesale revenue. Same-store sales growth was 1.4% in the quarter, benefiting from the effectiveness and execution of our go-to-market strategies. We accelerated revenue growth to 7% as the benefits of our supply chain transformation, including higher in-stocks, strong customer service levels and having added more than 3,000 new items available, strengthened our wholesale business with our franchisees in addition to improved system-wide sales and our industry-leading new store opening pace, and we paired this momentum with diligent expense management to deliver profit growth with adjusted EBITDA increasing 4% and adjusted net income per diluted share, up 3%. We also advanced key operational initiatives in the quarter, tightening our value propositions, driving merchandising excellence, and commencing the final leg of our supply chain transformation. Greg will cover these in more detail shortly. All in, we've had a healthy start to 2025. The industry-leading initiatives we have underway and the focus and agility of our people and our franchisees continue to be critical to winning in today's quickly evolving environment. And while shifting trade policies have pressured supply chains broadly, we've seen minimal cost impact to date, but continue to actively evaluate current practices and identify alternate solutions should we need to pivot. At the same time, we have seen a renewed sense of Canadian pride accelerating certain pockets of demand. We are leveraging and expanding our strong stable Canadian brands as Devoted pet lovers seek Made in Canada alternatives. Throughout, we remain focused on our mission to deliver the best for our customers, which remains at the center of our decisions. Now over to Greg to walk through our operational progress. Greg?

Thank you, Richard. In addition to delivering a solid quarter, we made progress on each of our core focuses. I'm pleased to be able to give you these highlights for the quarter. In our pursuit to be Canada's local and everywhere pet specialty retailer, we and our franchisees opened 7 stores in the first quarter, bringing us to a total of 830 stores coast to coast by quarter end. We surpassed the 100-store milestone in our Chico banner, having now grown Chico by over 50% since acquisition 3 years ago, establishing Chico as the largest chain in Quebec by store count with lots of room left to grow. At the same time as opening new stores, we completed 10 major renovations, expansions or relocations, as well as a few smaller touch-ups as we and our franchisees continually reinvest in our existing network. On the digital side, growth once again outpaced our company average as we continue to reap the expected benefits from our platform modernization last year. In the quarter, our digital teams implemented further enhancements to our online experience, upgrading the pet profile platform in January and launching a wholesale direct to shelter program in March. Together with our industry-leading store network, our digital storefront represents an important arm of our best-in-sector omnichannel ecosystem, which is attracting and retaining omnichannel customers who shop and spend with us over 4x more than other online customers. Turning to our focus on delivering the best pet customer experience. Our merchandising playbook continues to resonate with devoted pet lovers, representing a key driver to our positive same-store sales growth in the quarter. Let me highlight a few areas of strength. First, we continue to expand our loyalty program to cover even more consumable brands like Smack and SquarePet, helping to deliver record loyalty penetration in the quarter. Second, we delivered a strong promotional program, which was successful at winning the monthly shop and building their basket, leveraging in-store activation. Third, we continued to see positive impact from our investment in key consumables like our Fresh 4 Life litter and in exclusive promotions with key specialty food brands and fourth, we continue to see strong 20%-plus growth in our dog culinary sales, including frozen, raw and freeze dried. Altogether, these actions helped deliver another quarter of growth in our monthly customers, our highest lifetime value segment. We also continued to make progress elevating our proprietary brand offering. In the first quarter, we refreshed our jump fashion collars and leases with more to come through the rest of the year. Over the last 6 months, we've also tapped into the fastest-growing categories in wet cat food with the launch of Performatrin Ultra cat pouches and shredded cat food. We continue to be very pleased with our progress seen in Performatrin Culinary, where we are over-indexing on repeat purchases compared to industry standards for new introductions. And in April, we announced new lower prices on our Performatrin Prime scientific portfolio, offering devoted pet lovers significant savings on this high-quality product available only through Pet Valu. As Richard mentioned, we took additional steps to leverage and expand our already strong Made in Canada offerings. We added to our deep stable of innovative Canadian brands in the first quarter with the introduction of Stock and Barnsdale Farms and the national rollout of FirstMate. We streamlined the ability for devoted pet lovers to easily seek Made in Canada solutions with enhanced signage in store and online with a dedicated made in Canada landing page on our website. And we are leveraging our in-store expertise to facilitate deep conversations including highlighting the relevance of our proprietary brands made in Canada. Ultimately, while these are still early days, these actions are yielding benefits with made in Canada product sales outpacing the company average in recent weeks. Additionally, our marketing team continues to find innovative ways to broaden our reach in ways authentic to our brand. A great example was our Playtime campaign launched in late March, which was the first of its kind to leverage Amazon Fire TV to capture viewers in a fun and memorable way to encourage them to play with their pets. We are also empowering our in-store ACEs to be part of our social media creation to present our products and in-store experiences with authentic ACE generated content. And finally, our third focus to fortify strong retail and wholesale fundamentals. We are in the final stretch of our supply chain transformation with fit of work at our third and final new DC in Calgary, Alberta well underway, ahead of ramp-up commencing in Q3. Separately, with our Chico warehouse lease ending, we took the opportunity to consolidate and optimize that capacity into our GTA DC. Benefits from our transformation continue to flow through to our bottom line including ongoing improvements in productivity, incremental wholesale profits as our franchisees continue to purchase more through us and another quarter of inventory leverage. Through this transformation, we are building Canada's strongest pet specialty supply chain, and we are seeing this come to life in real time with service rates and in-stock levels at multiyear highs. Furthermore, our technology and capacity are providing us with enhanced agility and clarity in today's environment as we navigate disruptions across global supply chains. On the merchandising front, we have rolled out our new promotion planning tool, the outputs of which will start to hit the market in June. This tool, together with recent talent additions will sharpen our execution with gradual benefits to flow over time. Before turning over to Linda, I'd like to share 2 exciting leadership changes on my team. In March, we promoted Gaylyn Craig, a 30-year retail veteran, including 11 with us, the newly created role of Chief Retail Officer. Bringing oversight to corporate and franchise store operations under a talented proven leader with a deep appreciation for the unique nuances of each. And in April, we welcomed Tamara Sakota, our new Chief Merchandising Officer. Tamara brings over 30 years of merchandising leadership across a variety of segments, including some of Canada's most prominent retailers. We are thrilled with both Gaylyn's promotion and the addition of Tamara as we drive forward and continue Pet Value's strong legacy of growth. With that, I'll pass it over to you, Linda.

Thank you, Craig. As Richard and Greg shared, we leveraged our momentum exiting last year to drive strong financial performance in the first quarter. Starting from the top, systemwide sales were $366 million, up 4% from last year, representing an accelerated growth rate compared to last quarter. This was driven by same-store sales growth of 1.4% as well as square footage growth from new sites. As expected, same-store sales inflected back into positive territory driven by strength in consumables as our commitment to everyday value resonates with devoted pet lovers. We continue to see steady growth in same-store basket size, partially offset by a contraction in same-store transactions, which eased sequentially. Revenue reached $279 million, increasing 7% year-over-year and exceeding system-wide sales growth for a 6 consecutive quarter as we continue to see the benefits from our strategic initiatives to grow our wholesale penetration with our franchisees through expanded product catalogs and transformed distribution centers. Gross profit was $92 million, up 5% from last year. As a percentage of revenue, gross margin rate was 33%, down 50 basis points from last year. Excluding nonrecurring costs related to the supply chain transformation from Q1 and the comparable period last year, gross margin decreased 130 basis points as anticipated. This was primarily driven by higher wholesale merchandise sales as we continue to lean into the strength of our industry-leading supply chain capacity to better sell to our franchise stores. Product mix was also a factor as the blend of these higher wholesale merchandise sales skewed towards national brands as we bring more of their offering in-house and introduced other exciting brands, such as the 1 Greg mentioned earlier and higher distribution and occupancy costs. Selling, general and administrative expenses in the fourth quarter were $55 million. Excluding share-based compensation and costs not indicative of business performance, our SG&A expenses were just shy of $51 million, growing in line with revenue as we continue to reinvest in key growth capabilities and absorbed cost inflation. Adjusted EBITDA was $59 million, up 4% from last year, representing a healthy adjusted EBITDA margin of 21%. Net income was $22 million compared to $18 million last year. Excluding items not indicative of our underlying performance, adjusted net income was $25 million, similar to last year. Adjusted net income per diluted share was $0.36, an improvement from $0.35 last year, despite absorbing roughly $0.04 in incremental depreciation and lease liability expense associated with our new distribution centers. Looking at our balance sheet and cash flow, we remain in the comfortable liquidity position, ending Q1 with $37 million cash on hand and untapped $175 million revolver and comfortable leverage at 2.1x including net lease obligations. To note, our leverage now incorporates lease obligations for all our new DCs, including our new Calgary DC, which we took possession of in March to begin fit-up work ahead of commissioning in Q3. Our teams continue to responsibly manage our inventory across our DCs and corporate stores, once again, driving leverage as a percentage of revenue. At the same time, while there is a minimal impact from the current tariff regime, our supply chain, replenishment and merchandising teams are taking actions now where it makes sense, while identifying additional opportunities to implement greater agility should adaptations be necessary. Q1 net capital expenditures were $10 million, primarily reflecting new stores, renovations and fit-up work at our new Calgary DC. And finally, turning to free cash flow and shareholder returns, we generated $15 million in free cash flow in the quarter compared to $23 million last year, mainly due to working capital timing. On a trailing 4-quarter basis, free cash flow conversion remained around the 40% range. With the valuation of our shares and continued confidence in our fundamentals and future growth trajectory, we remained active under our share buyback program in Q1, repurchasing roughly 0.5 million shares through our normal course issuer bid for a total consideration of $12.5 million, with plenty of room remaining under the current program. Now quickly on our outlook, we are reaffirming our financial guidance for 2025, as shown by the top line momentum in our Q1 results, which has continued into the second quarter, our core customers continue to look to put value to meet their needs. While we acknowledge the heightened level of uncertainty and apprehension from consumers in response to evolving trade policies, we have not seen meaningful direct or indirect impact on tariffs implemented to date. Acknowledging how quickly conditions may change, we are not remaining idle with our teams taking action and planning contingencies to best mitigate potential impacts, both for ourselves, but especially for the millions of devoted pet levers we serve. All the while, we continue to advance the multiple long-term value creation activities, such as growth in our network, reinvestments into our existing stores, introduction of innovative products and brands and the transformation of our supply chain. These actions will strengthen our industry-leading competitiveness for years to come. Before wrapping up, let me share one note on the expected phasing of our earnings through the balance of 2025. Due to timing of certain expenses, including promotional plans, specific projects and certain personnel actions already taken. For our plan, we expect our Q2 adjusted EBITDA margin to be roughly 100 basis points below Q1, before improving sequentially through the back half of the year. Ultimately, we remain on pace to deliver our financial expectations for the year while managing the business to remain agile in today's environment. With that, I'll turn it back to Richard for some closing thoughts.

Thank you, Linda and Greg. I often highlight the proven resilience of the Canadian pet industry and our position within it. In good times, it's a fact that's easy to overlook. While in tighter environments like what we expect in 2025, our resilience is a critical factor in maintaining our long-term industry-leading returns for our franchisees, shareholders and other stakeholders. Through decades of unwavering focus on delivering the best care and nutrition for Canadian pets coast to coast, we have proven time and again our ability to weather and compete across all stages of a demand cycle. Through the service, our ACEs and franchisees provide every day to the multifaceted initiatives we continue to drive from online to in-store, from merchandising and supply chain to critical financial and IT systems from new stores to ongoing renovations, we are very excited about the trajectory of where we plan to take pet value as shown by our strong 7% revenue growth in the quarter. Even as we manage through the current environment, we're maintaining our focus on the combination of actions that strengthen our foundation to deliver sustainable profitable growth and enhanced shareholder returns over the long term. And with that, we'll now be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Mark Petrie of CIBC.

I wanted to ask about the sales line and sort of the promotional activity that you guys have already been engaged with. And I'm hoping you could just sort of expand on that, your level of satisfaction with the balance that you struck between sales and margin investment. If you were to skew the activity from Q1, would it be to be more active on promo or less active? And then how the engagement or the turn on of the tool next quarter could adjust that outlook?

Mark, it's Greg. Thanks for the question. I think we were happy with the same-store sales trajectory in Q1. And I think that, that success is tied to the strategy and execution of the commercial plan. So -- and we would have talked about last quarter the wins we saw in Q4 and carrying those forward into the beginning of this year. To reiterate those, we're really focused on maintaining and growing the monthly trip from our core customers. We saw good progress in that. We're also focused on building their basket when they're in store with compelling offers and strong in-store execution. This was a good quarter for that. We saw things like jump toys do well with some of our buy more, save more events. We also saw the treat of the Month program do well in adding to the basket. And finally, along that, we're focused on enhancing our value through targeted everyday price investments. Both the Fresh for -- things like the Fresh 4 Life investment that we made in the fall, but also the prime food investment that we just made at the beginning of Q2. So altogether, I think they're driving the actions. These tactics are driving the actions that we planned for. We're seeing momentum in both trips and we're seeing momentum in UPP. Your question around what we expect in the future. As I said, these are the tactics and plans that we built for the first part of this year, and I'd expect this quarter to play out quite similar to what we would have seen in Q1. That is our plan. The tool -- so just as reference, the promotional planning tool that we have in market, I think you'll see slight teams with that as we hit Q3. The team has finished the June and July planning for that. So you'll see some slight improvements and hopefully a little better optimization. I wouldn't expect anything dramatic [indiscernible].

Okay. Fair enough. And then I also wanted to ask about the wholesale shipments up 14% versus sales growth of 4%. You highlighted some of the pieces there, more SKUs, Chico, I assume, continues to ramp up. And I know that some factors can bounce around, but could you just sort of shape the quantum of the key pieces sort of driving that outperformance? And then how should we think about that gap between sales and wholesale shipments throughout 2025 as -- is this the right level? Or should we expect that to moderate?

So Mark, it's Greg. I'll take that one again. We were very pleased with the wholesale demand from our franchisees in Q1. As we've been saying for several quarters now, our franchisees across the country are choosing to purchase more of their merchandise from us every day. And I think there are 2 key drivers behind this, and they are both tied back to the supply chain transformation. First, it is the growing catalog of French language compliant products that we're making available to the Chico franchisees, like you mentioned, we continue to add brands in this quarter. We've expanded access to JUMP!, Bailey & Bella and others. And that just makes it much more compelling for Chico franchisees to consolidate their purchases with us. We're tracking well at the 50% wholesale penetration with Chico by Q4 that we've talked about and believe that there's still further upside to that over time. The second driver is the broader offering we can now support to all our banners, all our franchisees, thanks to the doubling of the DC capacity and what that's unlocked as part of the supply chain transformation. Just last year, we added over our almost 3,000 SKUs, consisting of many products that we knew our franchisees were selling, but couldn't previously order from us. So we expect that tailwind to taper in the back half, but we -- as we launch that SKU expansion. But all that being said, I wouldn't be surprised if we continue to see more upside on this over time.

We have a question from Irene Nattel of RBC.

Could you just spend a few minutes talking, please, about what you're seeing in terms of consumer behavior buying patterns, the different categories, discretionary versus consumables, services and where you might be seeing particular strength or weakness?

Certainly, and this is Richard. I'll take that. So I'll start off with the bigger picture, and then I'll let Greg dive into a little bit of what we're seeing more specifically in our results. So really, the bigger macro trends are very similar to what we saw throughout 2024. Devoted pet lovers are continuing to prioritize quality and value. We're seeing great growth still in super premium Kibble. As Greg noted on the call, we saw really strong growth in dog culinary, it still over 20%. But at the same time, we continue to see interest in our value tools like our loyalty program, our proprietary brand offering with the litter changes we made, and as Greg just highlighted with the performance and prime changes that we're starting to take. From a category perspective, we do still see consumers prioritizing need space purchases and being more selective in hard lines and discretionary products. But I'll let Greg talk about some of the strengths and weaknesses specific to us.

Irene, with the tweaks that we made to the commercial program, we've been pleased with the reception of behavior that this is generating. So we are growing our core monthly customer base and with the events and in-store activations we're now starting to grow units per transaction, and we're seeing that in results. The trajectory of same-store sales has begun to stabilize, and we expect that to continue and our basket growth is the highest that we've seen in the last 4 quarters. The marketplace does remain competitive, though. So we know we need to continue to fight to earn our customers' business, but we've been really encouraged by what we saw so far.

That's really helpful. And just as a follow-up to that, your comments about the competitive backdrop. We continue to hear about other retailers of more mass and grocery channels, emphasizing pet and nutrition. Are you seeing any sense that, that is making inroads in that slightly more value-oriented element of your customer base?

Irene, this is Richard. I'll take that. It's an interesting spin. We've been hearing a bit of the same. We've been really looking in and making sure that we continue to track all the different indicators that are out there. But I think it's first most important to really highlight the special role that our channel plays within the marketplace. Look, it's the first place that Canadians go through for quality. It's the first place to look forward for innovation. And most importantly, of course, it's the first place to look for, for expertise and advice. All of these critical roles allow the pet specialty channel to continue to have more than a 50% overall share of pet spending within Canada. And of course, we have a value excel in all of these, right? On our points of differentiation from product, only less than 10% of our food sales overlap were grocery and mass that really hasn't shifted a lot over the last decade. Key brands like Acana, Orijen, Go!, FirstMate that are out there, that are Canadian only that we're really driving through our channel. We're also seeking out new innovative brands we just went nationwide with Smack to new Canadian-made air-dried alternative food. And of course, we invest heavily in our in-store expertise, focusing on building the animal care knowledge of not only our own, but also our franchisees ACEs. So when we pull all this together and then look at our third-party tracking on market share, it would indicate that over the last several years and continuing to now really showcasing the strength of our platform and that we continue to hold share and even take share in certain pockets. So we're really excited about what we're doing and what we're doing to change. In fact, just to tie in to the overall promotional activity environment, while as Greg said, it remains competitive and a bit elevated, I'm going to steal a little bit Greg's thunder here and say, look, I think the most noticeable shift from perhaps a year ago has just been our targeted and smart promotional plan within that backdrop that's really helped us to improve the top line results.

We have a question from Martin Landry of Stifel.

I would like to dig a little bit into the guidance for Q2, Linda. Just -- I'm not sure if I understood correctly, but did you say that you expect your EBITDA margin to be 100 bps lower than the Q1 level. Is that correct?

That's correct. Yes. As I said in my prepared remarks, main drivers behind our Q2 adjusted EBITDA margin plan related to the timing of certain expenses in actions such as price investments and promotions, product expense and some personnel actions. As a result, 100 basis points lower than Q1, and we do expect this to alleviate in the back half, what we typically generate a greater fixed cost leverage. All in line with our expected plan for the year because you can see we haven't changed our full year expectations. So really, all I wanted to do was just help with your quarterly modeling.

Okay. Okay. That's helpful. And then just you also alluded to traffic patterns. Your traffic was down this quarter again. But I think you did say that it was easing throughout the quarter. And I was wondering how does traffic look for April? And what's your assumption for Q2?

Martin, it's Greg. I'll take that one. We were pleased that our transaction pressure eased sequentially in the first quarter. We are, as I said, we are really focused on winning the monthly shop and we're seeing good indications of the strategies that we are working on that. So we continue to see momentum on that as we move into Q2.

We have a question from Adrienne Yih of Barclays.

This is Michael Vu on for Adrian Ian. Richard, I believe in the beginning of the call in your prepared remarks, you discussed a shift of customer purchase towards Canadian native alternatives. Is it fair to say that is associated to Canadian consumers boycotting American goods and I know we've been seeing that in other industries. So just curious how you've been seeing that as well within the pet industry broadly.

Michael, it's Greg. I'll take that one. Let me start by saying that we've always had a really strong stable of Canadian brands, many of which you've heard us discuss over the years, brands like Acana and Orijen, Go!, FirstMate and our proprietary brand Performatrin Prime, Ultra and the dry kibble and those brands. This puts us in a great position for the higher demand that we're seeing on main products. It's still early days, but we are seeing growth and the product continue to accelerate relative to the company average that we've seen in recent weeks, so that's encouraging. And so we are seeing consumers buy more Canadian products through the last several weeks.

That's great to hear. And then I guess as a follow-up, so I guess you already said that it creates an opportunity for you. Are there any specific proprietary products that you have that customers can substitute that actually provide you guys upside down the road?

I think our proprietary brand portfolio is well designed. So we would have alternatives or trade-offs in every major segment. So we are very well positioned in that to give the devoted pet lovers options that are our brands. And -- just as a reminder, all of that comes at a discount to national brands. So good value for them at the same time.

And I'll just further reinforce what Greg just said there, too, as he highlighted on the call also specifically in the French language compliant now, which is helping to drive an increase in those alternatives and the uptick in Chico.

We have a question from Michael Glen of Raymond James.

Just in terms of basket, can you give a characterization about how inflation or deflation impacted basket in the quarter?

Michael, it's Greg. I'll take that one. We don't break down our outlook to that level of granularity because frankly, think there's a whole bunch of factors that flow into our same-store sales growth. It's a positive contributor, and we'd expect that to remain positive going forward, but we're not banking on higher prices as the main tailwind, especially when we've been leading into continued value-seeking [indiscernible] customers. Our focus is much more on making sure that we win the monthly shop that I've talked about building customers' baskets through thoughtful and targeted promotions and merchandising. So we expect to see some tailwind on that, but we also expect to see just overall tailwinds around the annual increase in humanization and premiumization that our category is seeing.

Okay. And then just on e-commerce. You did mention it in the opening remarks. Can you give just a little bit more detailed assessment as where you are in terms of your e-commerce penetration. I don't know if you can size how big it is within the company, but just trying to think about this as a -- how should we think about e-commerce as a tailwind to growth in the next 3 to 5 years?

So Michael, we don't disclose our penetration as -- just as a reference point, third-party estimates have the Canadian pet e-commerce penetration continuing to be in the high teens, and that's remained relatively stable, post-pandemic. We remain below industry average with a very strong omnichannel offer, both our bricks-and-mortar stores, our click and collect in the bricks-and-mortar stores and our direct-to-customer offer. So our focus is around making sure that our customers have control over when, where and how they shop. As referenced, our omnichannel customers spend 4x the average of an online-only customer annually. So we are very focused on those customers and keeping those customers as a tailwind.

[Operator Instructions] We have a question from Michael Van Aelst of TD Cowen.

Just wanted to follow up further on the implications of the by Canada movement that you're seeing in the recent reason. And is this mostly consumers switching to your private label brand? Or is it or control label? Or is it moving to other Canadian brands as well?

Michael, it's Greg. I think what I can say is we've seen improvements across the board in Canadian brands, both in the national specialty brands that I highlighted earlier and in our proprietary brands.

And I think, Michael, this is really where you're seeing an advantage of the supply chain transformation and investments we've made over the last few years. As Greg highlighted, right, on the call, the 3,000 item expansion we've been able to do over the past 12 months into our warehouse has enabled us to add to our revenue of different regional brands that we've now been able to take across the country. At a time when more consumers are looking for things that have been made in Canada. So it's been a good use of the incremental investments we've made over the years in our supply chain to enable us to generate that incremental revenue growth you saw in the quarter.

Okay. And so that -- as we -- if we were to see this by Canada ramp-up or tariffs were driving costs higher for imported product. Would you see this as an erosion to the top line a little bit just because of the lower price points on average or -- and then by higher margins? Or is it -- or is there more of a similar type of trend or price profile?

Mike, I wouldn't expect any overall change to any part of our profile. Generally, it will wash out. Overall, it's a positive for us since more than 75% of our purchases are made in Canada and purchased in Canadian dollars, so it leans into some of our strengths. But the mix impact is negligible. We are -- as Greg said, we're seeing really strong growth across all forms of crop.

Okay. On hard lines, I don't think you -- I didn't hear you give an update on that, but are we at a point yet where the consumer's demand for hard lines is starting to stabilize? And is there anything you can provide us in terms of kind of what you expect over the -- as the year progresses?

It's Greg. I'll take that one. As you know, we don't disaggregate by category, but we were pleased in the quarter that we saw strong improvements both within consumables and hard lines.

Okay. Okay. And then just lastly then, the technology costs that are helping to keep OpEx costs from growing too fast. Is there -- can you provide a little bit more color on what's bringing these technology costs down what we can expect going forward?

Sorry could you provide a little more context there, Mike, we're not following the question.

So I think you said that when you talked about your OpEx I think one of the offsets to the OpEx growth in summer was a decline in technology costs.

No, I'm not sure we're following that. Why don't we take that offline with our follow-up.

Yes, I'll take hat offline. No problem.

We have a question from Irene Nattel RBC.

I just wanted to ask on Chico. First of all, I heard you say that you've now closed all the Chico warehouses and you're distributing from Toronto if you could please clarify that? And then just as you're expanding the SKU count and the availability of product into Chico, can you talk about some of sort of what the same-store sales trends might be there and the degree to which you're not really differentiating Chico from some of the local competition?

So let me start first on the warehouse question, answer that very quickly. Yes, we were able to actually consolidate what had prior been a very small warehouse in Quebec back into our new GTA warehouse. So we are shipping all of our Chico business directly out of our GTA Warehouse another way of leveraging the investments that we had already made into that. The SKU count continues to increase, as Greg said, making us more relevant, well on our way to our target 50% run rate by Q4 in terms of wholesale distribution to Chico. And we don't disaggregate same-store sales trends by banner, not just for Chico but for any of our banners across Canada. But I'll tell you, we're pleased with what we're seeing in terms of store growth and the opportunity to continue to grow in that marketplace and we expect to continue to grow from there.

We have a question from Michael Glen of Raymond James.

Linda, the 100 basis points that you're talking about sequentially, is that -- should we think about that splitting? How should we think about splitting that between SG&A and gross margin?

Yes. So based on the items that I mentioned, it would be a mix, Michael.

We have a question from Vishal Shreedhar of National Bank of Canada.

With respect to the comment that you're seeing improvements in hard lines and consumables. My understanding was that mix was not helpful for the gross margin. So if hardlines is improving, what is the cause of the mix being unfavorable?

Yes. So the cause of the mix being unfavorable. So as I mentioned in my prepared remarks, it's Linda speaking, Vishal, is that uptick in wholesale penetration. So you've heard both Greg and Richard talked about the increased DC capacity. And that's allowed us to lift a broader set of national branded SKUs at wholesale. So while that's applying near-term pressure on our margin rate, it is delivering incremental gross profit dollars, helping us grow the bottom line.

Okay. That's fair. Okay. And with respect to longer-term EBITDA margins, obviously, pressure on EBITDA margins over the last little while. Where does management envision that to shake out? And what are the key drivers of EBITDA margin improvement? Is it simply leverage? And the investment phase with the personnel and the supply chain, how should we think of that evolving in broad brush strokes over the next several years as management aims to recoup or even expand upon the margins at once achieved?

Yes. So I think Vishal, first we talked about -- we refer you back to the financial framework that we've talked about since IPO. So really 3 key elements in that. So we aim to grow the top line alongside market, lean into opportunities to grow a little faster, such as our store growth and higher wholesale [indiscernible]. At the same time, we will leverage our strategic investments like the supply chain transformation. So as you know, we'll be hitting that inflection point as we annualize the step-up that we've seen in depreciation and interest related to the DC. And then with our franchise-first model, we expect to continue to drive the strong free cash flow, allowing us to return capital to our shareholders over time. So I think any...

Yes, Vishal, this is Rich. I'll just weigh in and reinforce exactly what Linda said and said, look, we're really excited as we annualize those investments in Q3 we're expecting Q4 to be a very great indicator for us in terms of our long-term profit generating capability of this business. And we're already seeing benefits of the supply chain investments, as you saw. But we will consider that with the already healthy adjusted EBITDA margins that we have, we should have a slight pickup once we start to get the fixed cost leverage. But as Linda said, we really like the incremental gross profit dollars we achieved in the quarter from our step-up to wholesale revenues, thanks to the supply chain, and that we'll continue to lean in demand.

We have a question from Martin Landry of Stifel.

Richard, I was wondering if you could talk about the health of your franchisees. Do you have any franchisees in financial difficulties or behind payment terms? Do you still have a long lineup of applicants. And maybe just what's the number of store openings we should expect for Q2?

Certainly, Martin. So there's a lot there. So let me kind of walk through those different parts that you have. I'll actually pull us into the last part first with store openings. We're still on track to around 40 store openings for the year. That is our target. We reiterated that in our guidance. We had 7 openings in the first quarter. As you know, we are a little bit back half weighted in most cases for our openings. We continue we'd expect that to happen again this year. In terms of health of our franchisees, we're quite excited. We just released, of course, as part of our AIF earlier this year, the unit level economics of our franchisees despite being a bit under pressure from costs over the last years are still very much amongst the very best in all Canadian franchising opportunities. We continue to see strong demand for future stores. We are still on target and plan to be roughly 100% net franchise openings this year, meaning a combination of both new stores opening as franchise ownership which happens about 50% of the time and then corporate store [indiscernible] typically also end up seeing a bit more in the back half. So quite happy with what we're seeing inquiries, as we noted in our AIF, we were the highest ever last year as we continue now to franchise across the entire country, inclusive of Quebec. And yes, we had on buyback in the quarter, primarily due to a franchise health issue, which we've talked about many times is most often would generate one of our buyback opportunities. And then we did have 1 store closure. We had the opportunity to optimize real estate in a 2 corporate store town by expanding 1 store and closing the second. So no real big news on that front. I'm quite excited about the expansion opportunity we continue to have.

We currently have no further questions. So I will hand back to Richard Maltsbarger for closing remarks.

Thank you, Marie, and thank you to everybody on the call for your continued interest and investment within Pet Valu. We appreciate your time and look forward to talking to you again on our call in August.

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