North West Q2 2023 Earnings Call Transcript

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September 13, 2023

There are 6 speakers on the call.

Operator

Welcome to the North West Company, Inc. 2nd 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

Hello, good morning. Thank you, and welcome to The North West Company's 2nd quarter conference call.

Speaker 2

Executive Officer. I'm joined here today by John

Speaker 1

King, our Chief Financial Officer and Amanda Sutton, our VP of Legal and Corporate Secretary. I'm going to start the meeting by asking Amanda to read our disclosure Executive

Speaker 2

Officer.

Speaker 3

Thank you, Dan. Before we begin, I remind you that certain information presented today may constitute forward looking Executive Vice President and Chief Executive Officer.

Speaker 2

Such statements reflect North West's

Speaker 3

current expectations, estimates, projections and assumptions.

Speaker 2

Executive Officer. These forward looking statements are not guarantees of

Speaker 3

future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially Executive Officer, from those contemplated in the forward looking statements. For additional information on these risks, please see NorthWest's annual information form Executive Officer and his MD and A under the heading Risk Factors.

Speaker 4

Back to you, Dan.

Speaker 5

Thanks, Executive Officer. For today's call, I'll start by providing a brief overview of our Q2 results and then transition to talk about our company's outlook Executive Officer. Okay. Starting with the consultant sales, we had a 6.8% increase in the quarter. Canadian operations spearheaded performance driven by same store sales and a strong performance in the airline.

Speaker 5

Executive Officer. These results offset softer performance in our international operations, particularly in general merchandise sales where inflationary pressures and lower Government income support continued to result in a shift in customer spending towards essentials. More importantly, on top of sales growth, Executive Officer. We're starting to see more torque in gross profit dollars as a result of 128 basis point increase in our gross profit Executive Officer, the increase in gross profit rate was due to changes in sales blend and a higher pass through

Speaker 2

Executive Officer, the cost inflation in retail prices compared

Speaker 5

to last year. As I have commented in the past, we continue to monitor and adjust our retail prices using a balanced approach. Executive Officer. That is always with our customers' reality and wallet in mind, while striving to maintain as low as possible negative impacts to margin and volumes. Executive Officer.

Speaker 5

Additionally, we had a higher margin revenue mix on the airline as we continue to capture more third party cargo and charter revenue on top of freighters servicing our stores. Executive Officer. Another factor that affected our results in the quarter was the impact of wildfires in Northern Canada. As I mentioned on the call last quarter, Executive Officer. Wildfires had a devastating impact on the community of Fox Lake.

Speaker 5

With this also included actually the destruction of our store. Thankfully, our associates and the community were evacuated safely, and this is because of the fire. We did incur a $3,700,000 expense in the quarter related to the write off of our Excluding this write off and the effects of share based compensation, expenses increased 7.9%

Speaker 2

Executive Officer.

Speaker 5

Overall, the impact of these factors resulted in strong results in the quarter with net earnings increasing 5,700,000 Executive Officer, or 17.5% compared to last year. Okay, let me unpack this and provide additional context. So starting with Canada, sales of Canada, which these increased in total by 7.4% and were up 7.2% on a same store basis. Executive Officer. Food sales increased 6.3%, and general merchandise and other sales increased 9.8%.

Speaker 2

Executive Officer. We attribute these

Speaker 5

results to 3 factors. Inflation remains high. Our operating income support payments increased

Speaker 2

Executive Officer, and our good

Speaker 5

and stock position obviously held us in good stead. The increase in government income support during the quarter was largely due to inflation relief payments Executive Officer of Canada and the Federal Government, including of which was the grocery rebate that was issued back in early July. Executive Officer. Our in stock position is in good shape and has enabled us to capture additional sales, particularly in motorized, which was driven by same store sales Executive Officer and the acquisition of Nickel City Motors in Thompson, Manitoba in the back of the Q1. The other key factor worth noting is that North Star Air Had another strong quarter with both top line and bottom line growth.

Speaker 5

And this is driven with increases in 3rd party cargo contracts and higher charter passenger volumes. Switching to international operations. Total sales increased 2.1% and were up 1.3% on a same store basis Executive Officer, as the impact of lower government income support payments continue to be a headwind similar to last quarter. As mentioned on our previous call, Executive Officer, the SNAP or food SNAP payments in the U. S.

Speaker 5

Have decreased considerably when compared to last year as we lap over the COVID-nineteen top ups. Executive Officer. As a reminder, during the pandemic, there were a large temporary increase in SNAP benefits ranging from about $95 up to the maximum benefit allotted per family. Executive Officer. This increased SNAP benefit expired in February, which combined with the impact of higher inflation continues to negatively affect customer purchasing power Executive Officer, the results in a shift in spending away from discretionary items and into food.

Speaker 5

As a result, same store sales increased 2.4%, Executive Vice President and Chief Executive Officer. Our international operations teams are laser focused on customer driven actions Executive Officer to mitigate these challenges, including assortment challenges and targeted promotional activity. Now let me transition to expand on our gross profit results. Executive Officer. We are seeing inflation and cost of goods increases, although at a more moderate pace when compared to the previous quarters.

Speaker 5

However, we are very closely monitoring certain parts of the supply chain where cost escalations happen on a vendor or carrier level. Our teams continue to prioritize operational excellence to help mitigate the impact of inflation as we work with suppliers and transportation partners to help minimize cost escalation Executive Officer, reflecting our gross profit rate. That said, we are starting to see more torque in our gross profit driven by 128 basis point increase Excluding the gross profit rate as a result of the changes in sales blend that I had mentioned previously and a higher pass through of inflationary cost increases, Executive Officer, which is coming through in retail prices compared to last year. At this point, let me make a few remarks on inventory. Inflation continues to affect inventory levels.

Speaker 5

The impact of foreign exchange on the translation of international operations inventory is also a factor. Executive Officer. As I previously noted, we have a higher general merchandise inventory in Canada compared to last year, and it's mainly concentrated in motorsports, Executive Officer, Snow Machines, ATVs, Oats and Motors. This strong in stock position helped drive sales during the quarter as demand shift Executive Officer. This is a result of the increase in income support.

Speaker 5

Given the durability of these items and the relevance they have in the communities we serve, we expect

Speaker 2

Executive Officer, to

Speaker 5

sell through these items. The strong in stock position will also help meet expected increased consumer demand Executive Officer, which are anticipated to hit our markets latter into this year, part of this year or early next year. In summary, we are adjusting our ordering where needed as we continue to calibrate our inventory levels based on current demand with particular emphasis Executive Officer, on our international banners given the sales trends highlighted earlier. Okay. Moving on to expenses.

Speaker 5

Let Executive Officer. I'll start by saying that for Northwest, cost controls are top priority and we are making progress through our operational excellence focus to help offset Executive Officer, the increase in expenses in the quarter was largely driven by cost inflation on staff and utilities And the new store expenses. The impact of foreign exchange rates on the translation of our international operations expenses was also a factor. Executive Officer. Our focus on cost control is a key area as we continue to push as we look to drive more productivity and efficiency within our cost structure.

Speaker 5

Executive Officer. This is a good time to talk about some of our strategic operational efficiencies initiatives and our journey ahead. Executive team and all our leaders across this organization are laser focused on reinforcing policies and procedures both at the corporate level Executive Officer. As noted last quarter in my JAGM remarks, we are excited about our journey ahead and our strategic direction. Executive Officer.

Speaker 5

Our goal, to generate meaningful productivity and efficiency gains for cost savings in order to reinvest Executive Officer and more sustainable growth, we're optimizing margins and delivering meaningful ESG outcomes. We continue to identify opportunities Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our

Speaker 2

Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our Chief Executive Officer, our

Speaker 5

Chief Executive Officer, Excluding store labor planning across the network, optimizing our transport modes across land, air and sea to mitigate freight cost increases and reducing shrink Executive Officer, and finally operating expense and savings. Additionally, we're making changes to our assortment, which will help drive volume Executive Officer. In terms of higher demand and higher margin items our customers want. To support these efforts, Executive Officer. We are developing our analytical capabilities across the business to drive data driven decision making.

Speaker 5

In terms of the outlook for the remainder of the year, Executive Officer. Overall, we expect to have a more normalized gross profit rate as inflation starts to moderate and we lap the negative impact of the ramp up in inflation on our Executive Officer, President and Chief Executive Officer, President and Chief Executive

Speaker 2

Officer, President and Chief Executive Officer, President and Chief Executive Officer, Vice President and Chief Executive Officer, Vice President and Chief Executive Officer, Vice President

Speaker 5

and Chief Executive Officer, Vice President and Chief Executive Officer, Vice

Speaker 2

President and Chief Executive Officer, Vice President and Chief Executive Officer, Vice President and Chief Executive Officer, Vice

Speaker 5

President and Chief Executive Officer, Vice President and Chief Executive Officer. In our international operations, we're up against the impact of a higher permanent fund dividend in Alaska last year and the ongoing shift in consumer spending from discretionary items towards Executive Officer. In our Canadian operations, we are closely monitoring the impact of wildfires, which have resulted in the evacuation of some communities Executive Officer and Supply Chain Disruption in Other Communities. On the upside, our strong in stock position will help us meet the expected increase in our customer consumer demand Resulting from the water settlement payments anticipated and issued, again, I say later in 'twenty four, but Executive Officer, sorry, later this year or early 2024. So closing things off, I'd say here at NorthWest, we're committed to making a positive impact Executive Officer.

Speaker 5

In spite of inflation, pandemic, wildfires, typhoons and other externalities

Speaker 2

Executive Officer,

Speaker 5

that maybe temporarily affect our business. Our associates continue to rise to the challenge and deliver on our commitment to the communities we serve.

Speaker 2

Executive Officer. This unwavering commitment you've seen throughout our

Speaker 5

company is something that continues to make me proud of being part of this organization. With that, let me open it up for any questions that you might have.

Operator

Thank you. Executive Officer.

Speaker 2

ITU.

Operator

The first question is from Michael Van Helt, TD Securities. Please go ahead.

Speaker 4

Hey guys, it's Evan in for Mike.

Speaker 5

Hi, Evan.

Speaker 4

So just the first question, I guess on the sales mix. So you had pointed out to sales blend improvements in both Canada and international. Can you talk a bit about where the improvements are coming from in both divisions, Particularly in international where general merchandise sales decreased and Food sales increased and would have thought that would have led to an unfavorable sales went.

Speaker 2

Executive Officer.

Speaker 1

Okay. Evan, just to clarify your question, because I think you indicated that we had we didn't actually and you mentioned at the end. So our sales blend It was actually positive in Canada with both food and general merchandise. But in the international division, we actually had a reduction In our general merchandise sales and it was still along the same trends of previous quarters stronger in the food categories.

Speaker 4

Okay. Thanks. Yes. And have you seen like within food, have you seen an improved sales blend, Executive with the general merchandise.

Speaker 1

Okay. I would say, you know what, in Canada, we did see some more favorable food blend Executive. Improvements, just for the reasons that I mentioned just recently or just earlier. But in the international division, I would say it was pretty Consistent with previous quarters.

Speaker 4

Okay, great. Thanks. And then on the of Grocery Rebate. What would be your estimate of what it contributed to same store sales in Canada in the quarter?

Speaker 1

Executive Officer. You know what, we don't typically venture into that because it's pretty hard to track. But we do know that it was one of the contributing factors Executive Officer, to provide the positive impact for some of our sales momentum shift.

Speaker 4

And do you think that people had time to spend it all in the quarter or will it be something tax and that will be in next quarter?

Speaker 1

No, I don't think they spent it all, Evan. I think they have they still got some that we're seeing kind of trickle on Into this quarter as well.

Speaker 4

Okay. So next, I just want to dig in a little bit on the gross margin rate. Executive Officer. So in the Q4 of 2021, you had a gross margin rate of 31.9 percent. And at that time, I think you believe that it was roughly the right level long term given your balanced approach.

Speaker 4

Executive Officer. And then throughout 2022, each quarter you're basically around that level plus or minus 10 bps or so. And then now you just reported 33.1%. So do you now believe that that 31.9% Is too low based on your current approach? And if so, what has changed?

Speaker 1

Okay. So just to kind of circle back to your comment. I think in so Q let's talk to speak to Q1. Executive Officer. We anticipate, we felt that it was, we were too low.

Speaker 1

So our efforts were to obviously try to improve mix And find different ways in which where we could bring it up. Where we're at right now, we're hoping that we can maintain. So I would say this is probably more in the realm of normal than an expectation than would have been last quarter.

Speaker 4

Okay. So just to reconcile that with some of your comments In the outlook statement, you point to inflationary cost pressures in the near term. Executive Officer. So based on that comment, you're still expecting Gross margins to be at roughly the current level assuming no further ramp up in inflation.

Speaker 1

Executive Officer. I think that's a pretty good summary. Yes, I think it's a good summary. Like this is our expectation. This is our efforts are put towards trying to maintain this.

Speaker 1

However, you know it's a volatile kind of industry and economic environment currently. So we anticipate Executive Officer and are using our best efforts in order to maintain it. But there is some there has been and is known to be different inflationary The one that we're probably keeping an eye on fairly closely is Not as much as in the freight on the ground and on the sea, but more so and in the air. So we see there's been some Executive Officer, there's been some cost inflation and some cost pressures in that area, but we're doing our best to try and mitigate those the best we can. So to answer your question, Our efforts are in line to try and stabilize this rate that we're at right now.

Speaker 1

Executive Officer.

Speaker 4

Okay, great. And then I guess one last question. So in terms of the wildfires in the North, So as it stands now, assuming there's no further fires or evacuations, how much of an impact do you expect to see in of Q3 Profits. And other than the Fox Lake store, is it all isolated in Q3 or is there anything beyond that?

Speaker 1

Isolated, you mean in Q2?

Speaker 5

Or do you mean

Speaker 2

I think

Speaker 1

you said or is it you guys would isolate it in Q2 or do I foresee it Having further impact into Q3 and Q4, is that your question?

Speaker 4

Yes. So other than the Fox Lake store

Speaker 2

Yes.

Speaker 1

Got

Speaker 4

Is the impact from the wildfires going to be isolated in Q3? Or is it going to extend beyond assuming that there's no further wildfires.

Speaker 1

Okay. Yes, I would say that that's an accurate comment. It will be isolated in Q3.

Speaker 4

Okay. And any rough estimate as to what the impact on profits would be Executive Officer. In Q3?

Speaker 1

No, not right now. No. Okay.

Speaker 4

All right. Thanks so much, guys.

Operator

Thanks, Ev. Thank you. Executive Officer. Next question is from Kunal Ghedwani from CIBC. Please go ahead.

Speaker 2

Executive Officer.

Speaker 4

Hi. Thanks for taking my question. I just wanted to follow-up on your commentary where you discussed higher pass rate of inflationary costs in the quarter. And I want to know if you would be able to discuss that in a little bit more detail. Specifically, is this a reflection of Your competitors taking price or your own work around price optimization or a bit of both?

Speaker 4

Thank you.

Speaker 1

Executive Officer. I think that's very astute. You're right. It's a bit of both. The pressures, as you know, have been high and our competitors are Definitely taking more of the cost increases as well as some of our internal efforts to try and mitigate the impact on our customers.

Speaker 4

Executive. Okay, that's great. Thank you. I'll pass it on. Thanks.

Operator

Thank you. And there are no further questions registered at this time. I would now like to turn the meeting over to you, Mr. McConnell.

Speaker 1

Okay. Well, thank you very much, operator. And I think with that, we'll conclude the call.

Operator

Executive Officer. 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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Key Takeaways

  • 6.8% sales increase in Q2 was driven by Canadian same-store gains (7.2%) and strong airline performance, while international general merchandise lagged amid inflation and reduced government support.
  • Gross profit dollars grew on a 128 basis point rate improvement thanks to a favorable sales mix, higher pass-through of inflationary costs, and better airline margins from expanded third-party cargo and charters.
  • The company took a $3.7 million charge in Q2 for the Fox Lake store write-off following wildfires, an impact management expects to be isolated to the quarter if no further evacuations occur.
  • A strong in-stock position—especially in motorsports and snow machines—helped capture demand, and inventory levels are being recalibrated with targeted assortment and ordering adjustments.
  • Cost control initiatives remain a top priority, focusing on labor planning, transport optimization, shrink reduction, and enhanced analytics to drive productivity and offset ongoing inflationary pressures.
AI Generated. May Contain Errors.
Earnings Conference Call
North West Q2 2023
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