North West Q4 2022 Earnings Call Transcript

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April 5, 2023

There are 6 speakers on the call.

Operator

Welcome to the NorthWest Company Inc. 4th Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr.

Operator

McConnell, please go ahead.

Speaker 1

Thank you very much, and good afternoon, everyone, and welcome to The North West Company First Quarter Conference Call. I'm just joining here today I'm being joined here today by John King, Chief Financial Officer and Amanda Sutton, our VP, Legal and Corporate Secretary. I'm going to start the meeting by asking Amanda to read our disclosure statement.

Speaker 2

Thank you, Ken. Before we begin, I remind you that certain information presented today may constitute Forward looking statements. Such statements reflect Norco's current expectations, estimates, projections and assumptions. These forward looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward looking statements. For additional information on Need for Us, please see North West's annual Information form and its MSB and A under the heading Risk Factors.

Speaker 2

Dan?

Speaker 3

Thanks, Amanda, and welcome again, everyone. I'm really pleased with our results this quarter and excited about the momentum we're building. I'll start by providing you an overview of the key highlights in the quarter. Consolidated sales in the quarter increased 9.7%, Given by inflation, foreign exchange and new stores. Consistent with previous quarters, we continue to cycle during pandemic related sales increases from last year, Although the impact was less than in previous quarters, customers dropping 2 years and following the same trend We've seen over the past few quarters with a shift in spending to food and essentials and a decrease in purchases of discretionary general merchandise.

Speaker 3

And this is all as a result of the impact of the higher cost inflation. This shift in spend was the key factor contributing to the increase in food And the use of general merchandise on a same store basis. The impact of higher cost inflation and changes in sales blend continue to negatively impact our gross profit rate As cost increases, we're not fully passed on these retail prices and we had higher markdowns on general merchandise. That said, the 23 basis point increase in gross profit rate for the quarter was less than the trends in previous quarters. Overall, net earnings were down marginally in the quarter, but adjusted net earnings, which excludes the impact of a large insurance related gain last year, We're up 17.9% compared to last year.

Speaker 3

With that overview, I will now provide some more color on the results For the quarter, I'll start with Canadian operations. In Canada, sales increased 8.6% In total, we're up 2.6% on a same store basis with a 4.3% increase in food sales, offsetting the impact of a 2.9% The increase in same Store sales was also due to higher inflation and government inflation relief payments combined with a good in stock position. The new stores we opened earlier this year also contributed to that increase in sales. We added a new store in Shichuankee in Newfoundland Continuing quick stop convenience stores in Pearl Harbor, Inuit and Little Grand Rapids, Manitoba. Overall, we were able to maintain a good in stock position on our essential items, particularly in the C Lip stores With the support from NSA, which contributed to the sales increases.

Speaker 3

Speaking of NSA, in addition to the support they provided in our retail stores, we Also had a very strong quarter and was driven by high craft utilization in both cargo and passenger, an increase in the 3rd party cargo As a result, we received a large cargo door ADR in the Q4 last year. This is To offer cargo services for larger items. All right, let me switch gears and bridge the call to those international. Sales increased 4.5 percent with new stores in Alaska with a huge mix results in the Caribbean and Pacific regions, Similar to what we reported last quarter. We opened a new store in December in Houston Bay, Alaska, which has a great reception from the community.

Speaker 3

This adds on top of the new Metcala store open that we did that earlier in the year. Same store sales increased 1.4%. We continue to see a similar story to Canada here, where a 3.7% increase in same store food sales offset a 14% decrease in general merchandise sales as customers continue to suspending the food due to less disposable income resulting from a combination of higher inflation And lower conversion income support funds. On the other hand, certain Caribbean markets like the BBI are performing very well Compared to last year, this tourism has improved after the pandemic. The sale of Canada, some U.

Speaker 3

S. Markets in the Caribbean Pacific continue to cycle through government income support funds To represent present last year, we are no longer available. Now a few comments on gross profit expenses. Our teams have prioritized operational excellence to help mitigate the impact of deflation. Merchandise cost inflations continued in the quarter, Although we've seen some moderation on the pace at which these costs are rising, there are still increases being passed on by suppliers.

Speaker 3

So when we factor in higher fuel and transportation costs, the impact of inflation on the shelf prices It's even greater in the north compared to southern retailers, given the remote nature of our markets. We continue to work with our suppliers And we will now begin the question and answer session. Thank you, The impact of higher merchandise and freight cost inflation that was not fully passed through retail prices, the change in sales bonds I referred to earlier Higher markdowns all contributed to the 23 basis point decrease in our gross profit rate in the quarter. Similar to previous quarters, expenses increased 6% compared to last year due to cost inflation, including Higher fuel based utility expenses and stock costs, the impact of foreign exchange and the translation of international operations expenses into export store expenses. In terms of inventory, our levels are higher than last year, largely due to the higher inflation and the impact of foreign exchange.

Speaker 3

As I just mentioned, we did take our accounts in the quarter, certain general merchandise categories that did not have sell through Do we expect it is holiday season? That said, the overall increase in inventory is predominantly in center store grocery and categories like motorized And whole furnishings are impacted by supply chain disruptions. Due to the durability of these items as a relevance that they still have in the communities we serve, We still expect to sell through these items in 2023. I will wrap up by saying that I'm optimistic about our journey at Edge. Our history has proven time and time again that we're resilient.

Speaker 3

Inflation and lingering potential of a global macroeconomic slowdown are headwinds that will affect our outlook. Our core competencies and the essential services we provide to the communities we serve will help maintain the impact of uziologists. Overall, we expect a lot of the pandemic related impacts and begin comparing to more normalized post pandemic earnings in the second quarter. Looking forward, there are some potential tailwinds, including government transfer payments and higher infrastructure spending in the communities we serve. I'm optimistic about the future.

Speaker 3

There is a tremendous untapped potential that we can unleash to drive efficiencies and grow. Opening new stores in new markets in Alaska and Canada has demonstrated our capabilities to bring to remote markets essential products and services That the communities we serve appreciate and value. Our conviction to our purpose of making people's lives better in the communities we serve As strong as ever and we will continue to build and optimize on our core capabilities in merchandising, operations At logistics, this is one of our top priorities. We will also continue with modernizing our technology, suitable greater efficiencies within our business And provide scale and capability for the future. With that, let me open up for any questions.

Speaker 3

Thank you.

Operator

Thank you. We will now take questions from the telephone lines. Thank you for your patience. The first question is from Michael Van Aelst with TD Securities. Please go ahead.

Speaker 4

Hi, guys. It's Evan standing in for Mike. Congrats on a strong quarter. I just Just had a question on gross margin. So in Q3, we saw your gross margins contract About 80 basis points year over year.

Speaker 4

In this quarter, we saw them contract only about 20. I would have expected that the high inflation in Q4 would have pressured margins more than what we saw. Can you walk through some of the factors that changed in Q4 versus Q3 that That prevented gross margins from coming down as much as in Q3.

Speaker 1

Sure. There's two factors. We did pass on more to the customers as obviously needed to be Done. And also NSA. NSA also increased as a result.

Speaker 1

I told you there was Higher performance there. And given some of the charges, the fuel charges that we talked about, we did pass those on as well. So That's what led to that impact.

Speaker 4

Okay, great. And is there any change in the competitive activity? Are the competitors passing on more than they were in Q3 as well? And anything you could talk to about that?

Speaker 1

Yes. No, I think that's absolutely that's one of the enablers to allow us to pass on some of our costs is exactly right because a lot of the Competitors are obviously feeling the pinch, I would say, as much, if not more than we are and definitely taken first stride in raising some of their prices.

Speaker 4

Okay, great. Thanks. And looking at sales in Canada, you had mentioned government inflation relief payments as a contributor. Can you talk about when this started and when it's expected to finish and what level, like what amount we're talking about?

Speaker 5

Sure, Evan. Hi, it's John. What we're talking about there is the federal and provincial governments had issued Various inflation relief payments is what we've called them. There was an extra GST that was that vehicle was used. Several of the provinces and territories had additional payments.

Speaker 5

So those all added up to have an impact in the quarter.

Speaker 4

Great, thanks. I'll get back into queue.

Operator

Thank The next question is from Kunal Gidwani with CIBC. Please go ahead.

Speaker 4

Hi. Thanks for taking my question. So I wanted to know if you could talk about How shopping and where does that stand right now versus year ago and then pre pandemic levels?

Speaker 1

Okay. So as far as do I have I seen a significant increase in out shopping?

Speaker 4

I don't Okay.

Speaker 1

I don't think so. And the reason being is because, as I indicated, a lot more of people's money is going towards Essential items. So I'd say that Peoples Disposable that went towards more general merchandise, which is typically more outshopped Is prevalent. But if you're talking about previously, there is no restrictions in travel. So people that are traveling out of markets Are definitely procuring out of market.

Speaker 1

It also aligns to the fact that it's I guess you're probably in Toronto, but The season is

Speaker 5

a little longer right now as far

Speaker 1

as the winter road. So there is a lot there's more out shopping than there would have been last year. So I'd say things are probably at a normal level as far as our out shopping, but it's a little bit more than last year For the reasons I mentioned, the winter roads are open a little longer, and I think people are definitely getting on the market more.

Speaker 4

Okay, great. That's helpful. Thank you. And then my second question is on just kind of gross margin for the year, Given you're going to be lapping some pretty unfavorable gross margin compression, do you think just with the pricing that you're passing through In market right now, but we could probably see gross margin expansion as we

Speaker 1

I mean, That's the hope. I mean, as you can see, we've definitely come around. We don't have a crystal ball really as some of the economic challenges are so difficult just to understand what the inflation rate is going to be Next year, we don't think it's going to drop as significantly as we would all like, particularly in the first half of twenty twenty three. But our intention and our hope is that we would see a gross margin or gross profit improvement on into the latter half of next year or this year.

Speaker 4

Okay, perfect. And then my last question is, in the past, you talked about making selective price investments. And just given that you're passing more price through right now, how does that thinking in this inflationary environment impact that?

Speaker 1

How does the thinking sorry, just to follow-up on your question, if you clarify. So how does the thinking of our past price investment Impact the passing on of some of the cost increases today. Is that what your point is?

Speaker 4

Yes.

Speaker 1

Okay. I would say that

Speaker 5

The price investment is something that

Speaker 1

we do on a regular basis. So that's what I've explained, I think, over the last couple of quarters. It's simply it's Just a fact of regular retail operations. So we're always trying to work and negotiate on behalf of our customers better pricing. It's been obviously more difficult over the last couple of We've tried to hold back on passing through all of the price increases, obviously, just given The fact that we work hard on behalf of our communities, but we are taking a more we're optimizing, I would argue, a little bit more balanced approach.

Speaker 1

But in the future, we have a number of initiatives that we're going to be exploring to try and bring more value to our customers. And so this is kind of the work that I indicated near the end of my discussion that we're focusing on because obviously, it's been a last couple of years, it's been About just procuring, getting sustaining stock, managing, trying to keep employees, obviously, ambitious and Optimistic about the future, but now that we think that the climate outside of COVID is somewhat normalized, Despite the inflation and some of the macroeconomic measures that are coming our way, we think it's a great opportunity for us to look internally Within our company and really put a lot more focus into the back office to try and optimize some more efficiencies and create some value that we can pass on to the customers and the shareholders, frankly, in this upcoming year.

Speaker 4

Okay. That's fair. Thank you very

Speaker 3

much. Thanks.

Operator

Thank you. The next question is a follow-up from the line of Michael Van Aelst with TD Securities. Please go ahead.

Speaker 4

Hey, guys. It's Evan again. So just a few more questions. So If you're looking at SG and A and like excluding depreciation, you mentioned higher Fuel base utility costs and staffing costs. Are you seeing further increases So far this quarter in Q1, in that line?

Speaker 5

Yes. Hi, Evan. Yes, we're seeing like for communities in Northern Canada that pre bought their fuel and was sent in, that price is stable. But certainly, Other communities, we continue to see pressure on the fuel related utility costs. Other costs that are in the business, things like insurance costs, I don't know recall whether we specifically called that out, but those costs are up

Speaker 1

as well. There is a general,

Speaker 5

I would say inflationary impact that permeates through that SG and A. Those would be 2 items.

Speaker 4

Okay. And how much of an impact was

Speaker 5

We didn't quantify that. They were down from last year, but that's just part of the factor.

Speaker 4

Okay, great. And Just from a seasonality basis, in a normal year, Is it fair to say that Q4 is weaker than Q3?

Speaker 1

Go ahead, John. That's hard

Speaker 5

to say. I mean, as

Speaker 1

long as the transfer payments, it turns on the PFDs, It depends on the amount of money that is in market. It's tough to say Really inclusively. But it's definitely a strong market for us for sure, a strong quarter.

Speaker 4

Okay. Great. And then I guess just one last question. Can you talk a little bit about Your decision to close the Curacao store and the relative size of that store versus other Costula stores. And If there's similar dynamics that are in play in other islands That may affect your decisions in those markets.

Speaker 1

Yes, not at all. In fact, it's a smaller store. It's always been A store that we had some concerns over. And so we were at a point where we didn't think that the way Loftix, looking at the market and market conditions, we didn't think that it was the right place for us to be spending more resources Where do we think there's other better opportunities for us to allocate our resources?

Speaker 4

Okay, great. Thank you.

Operator

Thank you. There are no further questions registered at this time. So I will turn the meeting back over to Mr. McConnell.

Speaker 1

Okay. Well, thank you very much for the time today, and appreciate it. We'll see you next quarter.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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Earnings Conference Call
North West Q4 2022
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