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Edited Transcript of EMP.A.TO earnings conference call or presentation 18-Jun-20 5:00pm GMT

Q4 2020 Empire Company Ltd Earnings Call

STELLARTON Jul 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Empire Company Ltd earnings conference call or presentation Thursday, June 18, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Katie Brine

Empire Company Limited - Director of IR

* Michael Bennett Medline

Empire Company Limited - President, CEO & Director

* Michael H. Vels

Empire Company Limited - CFO

* Pierre St-Laurent

Empire Company Limited - Executive VP & COO - Full Service

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Conference Call Participants

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* Christopher Li

Desjardins Securities Inc., Research Division - Research Analyst

* Emily Foo

BMO Capital Markets Equity Research - Senior Associate

* Irene Ora Nattel

RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst

* Karen Fiona Short

Barclays Bank PLC, Research Division - Research Analyst

* Mark Robert Petrie

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst

* Michael Van Aelst

TD Securities Equity Research - Research Analyst

* Patricia A. Baker

Scotiabank Global Banking and Markets, Research Division - Analyst

* Vishal Shreedhar

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Empire Fourth Quarter 2020 Conference Call. (Operator Instructions) This call is being recorded on June 18, 2020.

I would now like to turn the conference over to Katie Brine, Investor Relations. Please go ahead.

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Katie Brine, Empire Company Limited - Director of IR [2]

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Thank you, Joanna. Good afternoon, and thank you all for joining us for our fourth quarter conference call. Today, we will provide summary comments on our results, what we are seeing in the industry today and then open the call for questions.

This call is being recorded, and the audio recording will be available on the company's website at empireco.ca. There is a short summary document outlining the points of our quarter available on our website.

Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer; Michael Vels, Chief Financial Officer; and Pierre St-Laurent, Chief Operating Officer, Full Service.

Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors.

I will now turn the call over to Michael Medline.

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [3]

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Thanks, Katie. Good afternoon, everyone. These are truly unprecedented times. Our thoughts are with all those affected by COVID-19. We at Empire are doing everything possible to ensure the health and safety of our teammates and customers, to keep our shelves stocked and to support charitable organizations across Canada.

I'm incredibly humbled by the efforts of our frontline grocery and pharmacy heroes and of our teammates in our distribution centers. We've asked so much of them over the last few months, and they have shown up every day determined to serve Canadians.

Today, I want to talk to you about a few things. The emerging trends as a result of this pandemic, our performance this quarter, and our strategic initiatives, FreshCo, Farm Boy and Voilà. This pandemic has fundamentally impacted how Canadians shop for food and force grocers to rethink how to serve our customers. In the 3 months since we last spoke, we have seen so much change. The most noticeable difference we have seen is the increased safety protocols in our stores, such as plexiglass, occupancy limits and one-way aisles. For as long as we are without a vaccine, and probably even when we do find one, we believe customers will shop stores that continue to invest in safety and sanitation. Retailers that do the right thing and don't let up on their important protocols will be preferred by customers. We are committed at Empire not to let our guard down.

We have seen consumption shift from restaurants and hospitality businesses to grocery stores as physical distancing requirements made it difficult for these industries to operate, and people are encouraged to stay at home. Grocery sales won't be as high going forward as during the first portion of the pandemic, but we believe this trend will continue. Canadians are also shopping less frequently by consolidating their trips to reduce exposure to COVID. These shifts in shopping behavior have basket sizes way up and transaction count down. We have seen the number of customers with a basket size over $100, triple since the pandemic began.

We believe that the days of many individual customers visiting many grocery stores in the span of a week, are over for the foreseeable future. All of the trends I speak about today are more pronounced in areas of the country that have been most hit by this terrible virus. Many Canadians are gravitating towards one-stop shop stores that meet all of their household needs. As we head into uncertain economic days ahead, we know that the discount format has historically performed well in such times. But in our view, this is not 2008.

First, discount already makes up a much greater percentage of grocery stores than 2008. There is a good balance between discount and full-service stores. Second, full-service grocery stores are much more sharply priced now. And third, a pandemic-induced recession maybe be different as Canadians seek out safe and healthy places to complete their one-stop shop, while also receiving value for their money.

Now we don't profess to know everything. We're not soothsayers. But it's our belief that many Canadians will continue to favor one-stop shops more than at any time in the recent past, making the future look quite different than the past. That's all to say that we believe safe, well-stocked and customer-friendly grocery stores will thrive, whether they be full-service or discount. But we believe that full-service will grow faster than discount in at least the short to medium term.

We have also seen a shift to online grocery, which was a relatively nascent industry in Canada before the pandemic hit. Online grocery penetration has seen an increase in 3 months to levels we anticipated in the next 3 years as the pandemic caused Canadians to trial grocery e-commerce. E-commerce has been supercharged because of COVID, but it is, of course, still a relatively small percentage of the total market and definitely will not be the death knell of stores.

Overall, online grocery sales in Canada have more than tripled. But let's put this growth into perspective. It's off such a small base, probably at 1.5% penetration before the pandemic. We think it could triple over the next few years and could comprise about 5% or so of the market. So still small, well below U.K. and U.S. penetration rates, but high growth. Canada is basically catching up to where the rest of the world was. Bricks-and-mortar will continue to rule in terms of market share for a very long time, but online will become more and more important and will grow the fastest. Online, executed well, will also put a halo over the bricks-and-mortar brand.

Now we applaud all grocers who serve customers through store pick over the crisis. There will continue to be opportunities for store pick, as opposed to a central fulfillment model in certain regions of the country, but it's just not as customer friendly. It disrupts the store, isn't easily scalable and is very difficult to be meaningfully profitable. E-commerce has to be really well done. Done badly, it can cause brand damage. And consumers will not put up with a poor e-commerce experience in the future the way they did in the middle of a pandemic.

Now changing topics. I can finally say what I've been waiting to say for the last 3 years. Our 3-year transformation strategy, Project Sunrise, was successfully completed this quarter. The changes we made positioned us well to not only navigate this crisis, but to be able to optimize our business for the emerging trends. We have accomplished so much through Project Sunrise. We have reset our foundation, transitioning from a regional to a national structure. We have sharpened our leadership and developed a more accountable culture with a team that is results-oriented and strives to win. With the new structure, we have leveraged our purchasing scale, adopted best practices and have standardized our operational processes across the country, contributing meaningfully to our bottom line.

And the final piece of Sunrise was our category Reset program. We assessed every single category to put our underlying cost base on an even playing field with our competitors, and to ensure our shelves are stocked with the items customers want most. This took us nearly 2 years and was one of the most difficult and successful projects in our company's history.

Through all of this, we removed over $550 million of cost from our business and executed our transformation even beyond our expectations, all initiatives on time, meeting or exceeding all financial targets. And we didn't stop there. We delivered these cost savings and positive same-store sales while setting ourselves up for long-term growth by expanding our discount banner FreshCo to the West; partnering with Ocado to bring a game-changing grocery e-commerce solution to Canada; and acquiring Farm Boy, the fastest-growing grocery retailer in Canada. There are very few Canadian retailers that have executed the transformation of this size with this level of success.

So now let's get to our performance this quarter. Same-store sales, excluding fuel this quarter, were at an unprecedented 18%. The solid momentum we saw in the second half of the third quarter carried into the fourth quarter and was obviously really amplified by the impact of COVID. At the end of February, we began to see significantly higher same-store sales that peaked at 50% growth during the March 8 through March 21 period in all formats, excluding fuel, as customers stocked up in preparation for possible stay-at-home requirements.

Sales, excluding fuel and the impact of the Easter period, then stabilized at a lower level of approximately 23% for the quarter. As stay-at-home restrictions were put in place, consumption shifted from restaurants and hospitality businesses to grocery stores. According to Nielsen, the Canadian grocery industry grew $3.7 billion in the 16 weeks ending April 25, and we were able to gain a significant portion of this market share. We believe, based on the data, that we gained the most market share over the past 3 months in both full-service and discount.

I'm not going to give you a number, but to put into perspective, we saw market share gains over the back half of the quarter that we would have been happy to achieve over the next 5 years. We plan to protect a good portion of these share gains as we move forward.

Our market share gains can be attributed to 4 things. One, our full-service format outperformed other bricks-and-mortar food retail formats throughout this pandemic. As many customers sought to minimize their grocery store visits, they gravitated toward one-stop shop grocery stores that met all their household needs. This clearly favored Full Service. Given that our store network is more heavily weighted toward full serve, we were positively impacted by this shift in behavior.

Two, the resilience of our supply chain. Our highly automated distribution centers have enabled high velocity restocking of store shelves, ensuring a broad assortment is available to our customers.

Three, our in-store execution. We moved with urgency to invest in increased safety and sanitation procedures to ensure our customers and teammates felt protected while shopping and working in our stores. And we did not let up on these protocols. We continue to closely monitor the impact of the pandemic on food retail around the world and to implement even better processes and best practices.

Four, significant gains in discount. We finished refreshing all of our Ontario stores to the evolved FreshCo 2.0 branding in the fall. We also launched an ad campaign at the beginning of the quarter to reintroduce customers to FreshCo, and it was a big success. Improved customer satisfaction and awareness resulted in very strong same-store sales gains at FreshCo early in the quarter, and combined with the impact of stock ups and increased baskets, positively impacted our discount business.

Through the pandemic period in these times of high demand, we've been focused on ensuring cost to consumers are held in check and that prices continue to be competitive. Our flyers are still operating, running the promotions we can, and we are spreading them over an entire week to continue doing what we can to smooth traffic in our stores. We will continue to be vigilant in our attempts to avoid passing on costs increases to our customers.

Our gross margin dollars were significantly impacted by increased sales. When we look at the underlying gross margin rate improvement of 50 basis points over last year, our margin strength can be attributed in large part to Project Sunrise, which we were able to complete amidst the pandemic. The customer shift towards Full Service, a slightly less promotional environment due to supplier stock availability and higher private label penetration also positively improved margin.

Over the last 2 years, we have been working hard to improve our private label business through the rebranding of our entire complement portfolio, increased product innovation and the reset of key categories. We are now beginning to reap the benefits of these improvements. Our penetration of private label has been growing faster than the industry for all of fiscal 2020, which has only been further amplified in the past 15 weeks during the pandemic. We will continue to improve our private label brand portfolio as it will become increasingly important in uncertain economic times.

EBITDA margin rate, our most closely watched number, improved by 70 basis points, excluding IFRS 16. Sunrise savings and improvement in core gross margin positively impacted the rate. We continue to make strong progress closing the gap between us and our 2 major competitors. EPS of $0.67 is the highest in our company's history. It reflects the success of Project Sunrise, the impact of COVID and the hard work of all 127,000 of our teammates across the country. Our teammates in our stores and distribution centers came through for Canadians. They are the reason we could put food on the nation's tables, why our stores were safe and clean. They became essential workers, they were and will continue to be heroes.

We are now halfway through our first quarter. Our store operations have started to return to a more normal state, if you can even call it that. All of our service counters are up and running, our garden centers are open, and most stores have returned to their normal operating hours. During the first 6 weeks of Q1, as provinces gradually started to ease restrictions, we have seen same-store sales, excluding fuel, range from 9% to 17%, averaging 13%, slower now than at the beginning of the quarter. All of our grocery banners are performing well, but sprawl service stores continued to lead the way in same-store sales growth by a large margin. Pharmacy has rebounded very well, and we are seeing fuel beginning to recover.

As provinces execute their reopening plans, other retailers open and consumer behavior shifts, we felt this was a natural time to end our temporary Hero Pay program and did so on June 13. We also provided our frontline and distribution center teammates with a onetime bonus equal to 2 weeks of Hero Pay based on average hours worked per week from March 8 to June 13. We also pledged to our teammates that we will institute a meaningful teammate discount program in the fall.

Now I want to take a few minutes to speak about 3 of our key strategic initiatives, FreshCo, Farm Boy and Voilà. FreshCo same-store sales growth this quarter ended up pretty well equal to our full-service banners. Discount in big box formats did very well in the first few weeks of the pandemic, but as time progressed, Full Service's growth outpace these other formats. FreshCo's business outperformed other discounters and took market share from their discount competitors in the markets where they compete. FreshCo has a great price position but is also viewed by customers as a very clean and safe store to shop.

Farm Boy continues to be a weapon for winning share in urban markets in Ontario where we are underpenetrated. At the outside of the pandemic, Farm Boy faced some challenges as a large portion of their offering is focused on prepared foods, which meant their same-store sales weren't as high as usual. However, the exceptional leadership team at Farm Boy was able to think creatively to adapt their stores and offerings to continue to serve their loyal customers. Farm Boy's private label products are now being offered on Voilà soon, allowing customers another way to access this tremendous brand.

As I noted earlier, online grocery penetration in Canada is growing dramatically. Our own e-commerce businesses in Québec through iga.net and in BC, through Thrifty Foods, have experienced exponential growth and have set toppled their sales since the crisis began. To put this in perspective, there was one 5-week period where we hit the anticipated sales we had forecasted for the next year in Québec and British Columbia. We continue to have the #1 market share in Québec for grocery e-commerce.

The customer launch of Voilà, our game-changing online grocery home delivery service, has been accelerated to meet these increasing demand from customers for delivery. Voilà will launch in areas of the GTA starting this month and will continue its phased rollout to customers across the GTA over the next several months.

While everyone is seeing spikes in their e-commerce grocery solutions, customers will ultimately stay with the online providers that deliver an exceptional experience. The world has turned in our direction automated centrally picked grocery e-commerce is the future. I am so glad we made the decision nearly 3 years ago to partner with Ocado and obtain exclusivity in Canada over their world-leading grocery technology. It is safe with very little human contact, and it is profitable over the long term. Ocado's end-to-end technology, combined with our freshness guarantee, affordable prices and white glove delivery service, bring the best online grocery solution in the world to Canadians. We are well positioned to win grocery e-commerce in Canada.

Now with the successful completion of Sunrise, we removed more than $550 million of costs and have a solid foundation to build on. But we know we still have substantial value that we can extract from our business. Our strategy for the next 3 years positions us well to take the offensive and win the next-generation of grocery retail. We are almost ready to unveil our new strategy. The launch was delayed from early May in light of the current environment and the focus that all our teammates have in keeping stores filled and serving customers and to allow us the time to adapt our strategy slightly to address the social and behavioral changes resulting for the pandemic.

In July, we'll unveil the bold ambition we have set for our next chapter. I think it's fair to say that we are better set up to succeed going forward than we were even 3 months ago.

And with that, over to Mike.

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Michael H. Vels, Empire Company Limited - CFO [4]

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Thanks, Michael. Good afternoon, everyone. Three years ago, we discussed Project Sunrise with you for the first time, which also happened to be my first Empire conference call. It was a big goal and many doubted that we could achieve it.

The COVID impact to fourth quarter sales does distort our fiscal 2020 results somewhat. So although we, of course, had Sunrise benefits in Q4, looking at our Sunrise progress up to the end of the third quarter is more accurate.

Over the 3 years, our gross margin rate increased by 80 basis points; our SG&A rate, excluding IFRS 16, improved by 90 basis points; and our sales trends were consistently positive as we went from negative to positive same-store sales and so our same-store sales metric grew 430 basis points. This led to growth in our adjusted EBITDA margin of 160 basis points, closing a significant portion of the gap to our largest peers.

Our compound average growth rate in adjusted earnings per share over this period was 47%. If we add in the fourth quarter performance exiting COVID, these numbers would have been higher as the fourth quarter does include material amounts related to Sunrise benefits.

It's important to remember that all of these positive metrics were achieved in spite of some material headwinds and some internal strategic reinvestment. We invested in a new strategic sourcing team to build our cost management muscle, our project management team to accelerate our execution capabilities, and built a full e-commerce team that will launch Voilà to customers this month.

We also felt the headwinds of the significantly increased minimum wage in Ontario and negative results from drug reforms over the past 3 years. And although we called Sunrise a 3-year program, the positive momentum will follow through into this and future years, continuing to provide benefits to margins and costs.

For our fourth quarter, gross margin rate improved 30 basis points from last year. Sunrise benefits were a large part of the growth, along with the customer shift towards higher margin Full Service sales, a less promotional environment due to many suppliers finding it difficult to keep up with production demand, and higher private label penetration.

These margin improvements were partly offset by approximately 35 basis points as we needed to close high-margin service counters in the store, like deli seafood and meat, and some regulatory changes that impacted our pharmacy. We also made a concerted effort to hold the line on pricing even as underlying costs increased, particularly in meat, poultry and produce.

SG&A as a percent of sales improved by 50 basis points over last year, excluding the IFRS 16 accounting standard. Improvements in SG&A were offset by higher payments to our teammates, both via our Hero Pay program for frontline employees in stores and distribution centers, and higher incentive bonuses paid to front-of-store management.

We also made investments in increased sanitation, safety and protective equipment to ensure the safety of our teammates and customers, and will continue to invest in whatever measures are necessary to keep Canadians safe. The effect of all these investments was an increase of approximately $80 million in SG&A costs in the fourth quarter.

EBITDA margin, excluding the impact of IFRS 16, improved this quarter by 70 basis points. As Michael said, we chose to hold the line on prices in store through this period to the benefit of our customers. However, the mix of sales in our stores changed materially, with many more sales at regular store pricing and elimination of sales in areas like deli and other service counters. As a result, any internal inflation calculation is not meaningful, and we have not disclosed an inflation number. We don't think that implied tonnage calculations are meaningful as a proxy for market share at any time and certainly not this quarter.

Equity earnings were lower than last year, primarily due to a prior year gain in Crombie REIT on a disposal of a positive assets. Other income was comparable to the prior year and included a gain on the surrender of a lease in Western Canada in order to enable redevelopment and construction of a new store on that site.

The effective income tax rate for the quarter was 26%, consistent with our expectations and slightly lower than the statutory income tax rate. The effective income tax rate for the year was 26.4%. Excluding the effect or the impact of any unusual transactions or differential tax rates on property sales, we're estimating that the effective income tax rate for fiscal 2021 will be between 26% and 28%.

We had previously disclosed an estimate of capital investment for fiscal 2020 of $600 million. However, due to the shutdown of nonessential construction in some provinces, several real estate projects were put on hold. And as a result, our capital spending for the year was slightly lower than our expectations at $575 million. Having said that, we still managed to refresh a number of our stores. We converted 10 stores to FreshCo, opened 3 new Farm Boy stores and completed the construction of the first Voilà CFC in Vaughan.

COVID did cause a slight delay in 2 FreshCo store openings in BC, but they're now open, and we're pleased with their early results. And our team should be commended for safely opening new stores during this pandemic to serve our customers. We recently announced an additional 6 locations, including our first 2 stores in Alberta. We opened our 18th FreshCo store in Vernon, BC earlier this morning, which includes 3 ethnic-oriented Chalo! FreshCo stores. We have 10 stores that are in different stages of design and construction, all expected to open by the end of fiscal 2021.

We are planning to announce our next 3-year strategy, as Michael said in July. We are finalizing our revised capital plans in the context of delays caused by COVID, and we will provide a capital investment estimate for fiscal 2021 at that time. The returns generated from our strategic initiatives, operating earnings and capital spend discipline have resulted in a strong cash flow position with free cash flows of $595 million for the quarter.

Our strategy of returning cash to our shareholders continues to be a priority. Today, we announced an 8.3 share -- 8.3% increase in Empire's quarterly dividend. This marks the 25th consecutive year of Empire dividend increases.

We also continue to believe that share buybacks are a good use of cash flow in addition to reinvesting back into our business. In fiscal 2020, we repurchased $100 million of Empire shares. Today, we announced that we have renewed our normal course issuer bid to repurchase up to 5 million shares. We will continue to repurchase shares on a disciplined basis, taking into account our liquidity expectations, market conditions and our outlook on fiscal 2021.

Fiscal 2020 ended with a successful completion of Sunrise and the employee testing launch of Voilà, our online grocery home delivery service. We expect Voilà will be dilutive to earnings per share by approximately $0.05 in the first quarter of fiscal 2021. Due to the current high demand for online grocery, we do expect that ramp up for Voilà will be faster than we initially forecasted. We will be able to let you know what we think the full year effect will be in fiscal 2021 when we update you on our next 3-year strategy next month. But high level, the remaining 3 quarters of fiscal 2021 won't be materially different from the first quarter.

Fiscal 2020 ended on a note none of us expected, but we've adapted and continue to move quickly to keep our teammates and customers safe while operating in this different environment. We're almost halfway through our first quarter of fiscal '21 and same-store sales have slowed down since Q4, and in the first 6 weeks, averaged 13% with a range of 9% to 17%. Our temporary Hero Pay program was in effect for part of the quarter. And we estimate that, combined with the cost of maintaining our sanitation and safety measures, these costs will increase our selling and administrative expenses by approximately $60 million in the first quarter of fiscal '21.

In total, since the start of COVID, we've invested over $140 million, mostly in extra employee pay in addition to safety procedures and equipment.

And with that, Katie, I'll hand the call back to you for questions.

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Katie Brine, Empire Company Limited - Director of IR [5]

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Thank you, Mike. Joanna, you may open the line for questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Karen Short from Barclays.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [2]

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I wonder -- a couple of questions. First is you gave that dollar amount, the $3.7 billion, I think, shift into grocery. But can you maybe just frame your comp relative to what you think the overall industry would have been on the like-for-like time frame? Because I know you obviously have gained share, but just curious to get a sense of actual on a comp basis.

And then if you could parse that out on discount versus regularly conventional?

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Michael H. Vels, Empire Company Limited - CFO [3]

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Karen, we're not going to disclose our total number for market share gains, as Michael said, and I understand you'd like us to provide the statistics to back into it. I think we'd just like to leave it there that our market share gains were healthy. And as Michael said, we're -- something that we're going to strive to retain and continue to hold on to for the rest of the year.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [4]

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Okay. And then in terms of the e-com growth comment, I'm curious, why do you think that the Canadian e-comm growth rate might be or percent penetration may be lower than it would be in the U.K. and the U.S.? Just philosophically, just curious.

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [5]

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I think it's structural. It's that the Canadians have not been afforded as many good alternatives for grocery e-commerce and -- as have the U.K. and the U.S. and that we believe, over a long period of time, that it should be equal. There's no reason it shouldn't be. But it's really that we just don't have as many choices. And now with what we're going to offer and then with our growth in e-commerce, we'll be able to offer that and will help drive e-commerce penetration in this country, but it will take a little bit of time to get to where the others are.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [6]

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Okay. And then last question. Just in terms of the gross margin, do you have a basis point number excluding fuel? And I know you've been clear that you've held on -- in terms of promotions, but obviously, there's been puts and takes there. But any color on what that -- because I think fuel is a negative impact on gross margin.

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Michael H. Vels, Empire Company Limited - CFO [7]

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Could you just help me -- I didn't catch the first part of your question. You'd like to know the margin number, excluding fuel, is that what you said?

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [8]

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Well, the basis point change in gross margin ex fuel because I believe fuel was actually negative for you. So the expansion would have been higher without fuel. Or if I'm right on that or wrong and then clarify? But I...

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Michael H. Vels, Empire Company Limited - CFO [9]

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I wouldn't know because the margin rate for fuel is lower. So the fact that we had a significantly lower sales and bleaker than fuel from a mix perspective would have been marginally positive to our margin rate.

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Karen Fiona Short, Barclays Bank PLC, Research Division - Research Analyst [10]

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Right. But do you know what the gross margin basis point change would have been when you exclude the gas profit like per liter versus excluding the gas sales in the numerator and -- or sorry, denominator and the gas profit in the numerator?

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Michael H. Vels, Empire Company Limited - CFO [11]

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Yes, that's not a number that we have right to hand right now, Karen. I'd rather not guess, I think.

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Operator [12]

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The next question comes from Patricia Baker from Scotiabank.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Firstly, Michael, when you look -- when you start thinking about the supermarket industry in Canada, and beyond the real accelerated push to digital that's a result of COVID in 2019, are there other things that you think other profound changes to the industry long term that will come from this?

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [14]

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Yes. I think -- I mean, there will be. I mean the emphasis on even more safety and health, at least at Empire, and I'm sure at many of our competitors. And got to give them a lot of credit to for how they conducted themselves during the pandemic, that's going to be an uptick.

I foresee, not right now but soon, that we'll see more and more prepared foods being purchased at our grocery stores. We have seen people baking, I've said once before, at the level we haven't seen in decades and that's continuing now. But we're also seeing more and more people wanting to come to our stores and have prepared to -- or easy to prepare foods. And so that's something we're going to be really emphasizing.

I think that as we go forward, private label has been growing at a good clip through COVID, and will continue to do so. And I think we have a real opportunity to grow private label business there. It's -- list goes on and on, but maybe I should ask Pierre whether he had anything to add to that list that I just said.

Pierre, we can't hear you. As many of you have heard over the last number of months, going on to talk to you is a trial.

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Pierre St-Laurent, Empire Company Limited - Executive VP & COO - Full Service [15]

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All right. No -- I think we'll continue to see less store shop to do the weekly groceries. So it's something that will remain at a certain degree. Sanitation and store will remain key, I think. Frictionless customer experience will remain as well. So this trend will continue for sure.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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Okay. And just another question, and it might be difficult for you to answer, but obviously, with the sales level that you had in Q4, it's obvious that you're attracting, to a certain degree, customers that you've never had before.

Do you have any insight, Michael, into whether that is the case, that you're attracting people who've never shopped the Sobeys or FreshCo banners in the past? And any kind of indication how big that impact might have been?

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [17]

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Let's point into 2 things, and one, yes, of course, we're attracting new customers. And I think part of that is attributable to our store operators and our teams who have made it very, very safe and healthy to shop in our various banners. And so yes, we're attracting people who feel safe and who can get the full shop, but secondly, what we're also seeing is that our most loyal customers are turning to us for more of their basket, and they're also finding as we have really done a great job in keeping prices down, that we're not only a great and safe place to shop but our value is superb across all of our banners including, of course, our Full Service banners.

If those -- that's the 2 -- that's the combination we saw in Q4 and that we continue to see even last week. That's continuing. And so it's a combo.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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Okay. And just a quick one for you, Mike Vels. As the sales levels have tapered off and are you able to scale your labor hours pretty easily as you see that happening?

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Michael H. Vels, Empire Company Limited - CFO [19]

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Yes. That's a discipline in all of our stores, both corporate and franchised engage in every day. And we -- there are elements of our store staffing that we have put in place that we won't change so to the extent that we have extra employees who are helping customers navigate the store or helping with lineups and occupancy limits and that sort of thing, those people have become a more permanent part of our stores and they're there to make sure that our customers feel comfortable and welcomed. But with that exception, we are able to be flexible and adjust as sales increase up and down.

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Operator [20]

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The next question comes from Mark Petrie from CIBC.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [21]

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So obviously, Sunrise and the category resets brought a significant amount of change to your assortment. But I'm curious just to hear how you think about the assortment today given the shifts by many suppliers to concentrate production on key SKUs and also the growth in private label that you talked about. So like I know there's obviously still shifts and evolution going on in the market today, but I'm just sort of curious to hear your thoughts about how the assortment evolves from here, how that affects the store experience overall and what that means for your business?

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Michael H. Vels, Empire Company Limited - CFO [22]

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I think it's a temporary basis, we have been able to adjust our planograms based on product capability with suppliers. Obviously, pressure has been on many categories. So it's where we have been able to adjust our assortment. But once again, it's -- like we said, the first 2 week was crazy at 50% growth. And then I think we're more in the new normal. So we are in a position to readjust our planogram based on the job we did through category reset.

So that temporarily, obviously, we have been in a position that the assortment was different. But every week, we're making progress to come back in the new normal and come back to what we did before COVID in terms of assortment and planograms.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [23]

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So not materially different kind of 6 months from now than it was 4 months ago, I guess?

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Michael H. Vels, Empire Company Limited - CFO [24]

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There's still a couple of categories to continue to work on. But I would like -- I think I will say that we are at 75% where we were before COVID. And then depend on how the situation will evolve, we'll be in a position to come back to where we were 6 months ago.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [25]

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Okay. And then just regarding e-commerce, I mean, obviously, the focus is Voilà, but that's just serving one market for you guys and the one where you have, I guess, the smallest -- your smallest presence in the country. So could you just talk about how you can seize the e-commerce opportunity in your other regions? And I guess, most specifically, I'm interested in Western Canada.

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [26]

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Yes. So great question, Mark. And by the way, I hope all of you asking questions are doing well and are safe and healthy, and your families are.

Yes, Mark, it's a great question. Obviously, right now, as we prepare to go live, all our energies are on the GTA and to open strongly and successfully, which I know we will led by Sarah Joyce and her team. We are working at Montreal, but I don't think I'm going to ruin anything to say that when we talk about accelerating e-commerce, we're talking about accelerating e-commerce in all portions of the country in the best way we can serve customers in those markets. And so our strategy for e-commerce was always aggressive, but we are looking at ways we can accelerate it. Because we know we have the best mousetrap, and we know we can win. Just getting to the customer and thrilling the customer, that's what we want to do. And I think we can update you more when we talk in July about Sunrise 2.0.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [27]

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Okay. We'll leave that for them, then, I guess. And then just the last question, I guess, Michael, in the past, you've talked about investing in the company's analytical capabilities. And obviously, Voilà presents a new opportunity on that front. But could you just talk about the investments you've made thus far? And what still needs to be done, recognizing that it's obviously never completely over. But what still needs to be done and most material opportunities you see over the next 24 months?

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [28]

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I'll let Mike start off.

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Michael H. Vels, Empire Company Limited - CFO [29]

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So it's a good question, Mark. And you're right, the Voilà ecosystem comes with a very, very good database and an ability to segment an end market on an individual basis to customers. It's one of its strengths.

In the rest of the business, we have been spending material time to work through optimizing the data across the business, accessing the data that we have access to via our loyalty programs and other sources. And starting to do some very, very high-end analytics on finding ways to add value through -- in the store. But at the same time, still maximize the value of our promotions.

We've also started digging into some pretty advanced work that we're excited about. Around productivity throughout the store, both sales and profit productivity, and impact on adjacencies and some -- at the margin space allocations. So we've been working on it for some time, but it's -- we were -- we've seen good positive outcomes. I think we're still in the early stages, though, and I think there's a significant amount of future potential we can tap from that work.

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Operator [30]

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The next question comes from Irene Nattel from RBC Capital Markets.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [31]

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If I may, I just want to continue a little bit on the e-commerce side of things. And coming back to what you -- the comments you made about the rest of Canada, it sounds from what you're saying is though your preference really is to stick with the Ocado model as opposed to, let's say, the IG model that you have in Québec.

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [32]

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We'll pursue market share and customer satisfaction in all ways across the country in the best way we can.

How is that for giving you an answer? So I think you should read into that, that we're looking at all sorts of possibilities right now, and some of them are quite interesting.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [33]

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Okay. And just a question. Does -- so the Ocado CFC need to be a purpose-built physical building? Or can you convert an existing building?

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [34]

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It's an interesting question. It's probably better purpose-built. It can be -- you could convert at an existing building, but difficult. In Toronto, it was half and half. There was a building that was -- had its some basic infrastructure already going up, and we caught it just in time, which saved us, oh Lord, I don't even know how many months.

So there's 3 different ways you can do it, but it's mostly purpose built.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [35]

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That's great. And just before I leave the subject of e-commerce. Actually, 2 questions. Number one, in the $0.05 that you called out on the cost in fiscal Q1, can you walk us through what that encompasses, please?

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Michael H. Vels, Empire Company Limited - CFO [36]

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Can I walk you through what, Irene?

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [37]

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Well, what's in that $0.05 impact of Voilà? Have you -- what are the elements that go into that number? What are you including there?

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Michael H. Vels, Empire Company Limited - CFO [38]

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So well, the assumption is that it's a beginning of a ramp-up. But in order to deal with the significant demand and to ramp up as fast as we can, what you'll see in that number is, firstly, the amortization of our building of our infrastructure and of our -- and the fees that we pay to Ocado to manage the facility. So those are all now -- the facility is now operating and so all of that is payable and is being charged to earnings. In addition to that, we are -- we have taken receipt of a significant number of delivery vehicles, and we are hiring and training drivers at a significant rate.

And so what occurs is that we have material investment in advance of the sales. And through this quarter and every quarter following, we're going to keep doing that because we want -- we really want to avoid running out of capacity as we go up the curve as we get towards scale. We have accelerated our hiring, and we've accelerated that investment because of COVID. We do expect that the ramp-up or the curve will be steeper than it would have been otherwise.

So in addition to all of the back office, which has been in place this last fiscal year, the most significant increase in costs and what you're seeing in the $0.05 is really all of our associates and teammates that we're hiring in the facility, the vans and trucks for our delivery fleet and also the drivers who are all on staff now and in the process of being trained up.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [39]

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So then the $0.05 doesn't include any incremental spend that you might have on marketing or -- marketing and promotional spend to gain trial?

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Michael H. Vels, Empire Company Limited - CFO [40]

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Yes. Thank you. That's a great point. Yes, there's definitely some marketing spend in there where we are going to, particularly on social media and other means, we're not going to go out totally silent. But at the same time, as we have said before, we think one of the COVID impacts, at least in the early going, is that we would not require as much of a heavy marketing investment in the early days.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [41]

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Yes. Built in demand as it were.

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Michael H. Vels, Empire Company Limited - CFO [42]

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Yes.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [43]

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That's great. And then just turning for a moment to FreshCo. Commentary just indicated that it's doing very well. Can you talk about what kind of acceleration in sales you saw in the FreshCo stores in Toronto that have been converted for a little bit longer? And what you might have seen in Western Canada, where it was not perhaps as well-known coming into this?

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [44]

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Yes. It's Michael. I think no good comes out of COVID, but I guess we were fortunate that we were already rebranded and made so many amazing improvements in the store, in all the stores in Ontario and then moved into Western Canada. I'd say it's a change all across the board. This is a very -- it's a great value proposition for customers, and it's a great shopping experience. I think that the rebranding, as I noted in my script, we were already seeing a meaningful growth and market share at FreshCo. And I'll just talk about Ontario because the West is smaller and newer.

But in Ontario, because of that rebranding, then we had a lot of customers trialing FreshCo because of COVID-related reasons. And because FreshCo is not only amazing value, but is seen by customers, and almost actually always has been seen by customers in our customer and brand studies is a very clean, safe shop, I think it gave them a certain advantage.

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Operator [45]

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The next question comes from Vishal Shreedhar from National Bank.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [46]

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You had the Voilà pilots going on. I'm wondering what you saw in that pilot? And if there are any learnings or anything that needed improvement through that pilot?

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [47]

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Yes. Mike, do you want me to take it? Or do you want to take it?

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Michael H. Vels, Empire Company Limited - CFO [48]

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No, maybe we do it together. So the first thing, Vishal, is we're just super thrilled that we made that decision, to go do the friends and family concept. It really did provide us with a rich, rich vein of feedback. And we were able to actually make adjustments to both the web shop and some of our operational procedures that made sense and doing it, obviously, based on some sort of day-by-day and very detailed and constructive feedback from our test group.

In terms of learnings, I think when you put something together, this complex, you learn what, including how to bring potentially differently packaged products into the warehouse, how to deal with data, different UPCs, make sure your back-end works. But we're thrilled to say that the system really operated as designed. It's really been a little bit more -- the training of our drivers and making sure that they're up to speed.

We've recently introduced produce, chilled, frozen into the facility and that's gone very well. We recently delivered some frozen ice cream to one of our suppliers, and I think the comment back was -- this is the best ice cream I've ever had delivered, and well done, guys.

So we're happy with the resilience of the supply chain. COVID has had an impact on suppliers, and so we did make a decision to reduce the assortment at least going out with an intention to increase the number of items in the assortment by significant numbers every month after launch. And that's really just to make sure that suppliers who are still rebuilding the supply chains are able to deliver to us in time, and we don't disappoint any customers.

So I don't know if that helps. I think the takeaway is that we've been through some rigorous testing. We're happy with it, and we're ready to go.

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [49]

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Well said, I don't have anything to add to that.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [50]

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Is it too early to determine if there are differences to the basket size, maybe basket composition, margins and order frequency? Is it too early? Or do you have a sense of that already?

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Michael H. Vels, Empire Company Limited - CFO [51]

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It's way too early. It's been -- it's a test set. As you can imagine, we were ramping up our assortment throughout the test. So it's not a fair comparison.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [52]

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Okay. Just moving on here. In terms of Ocado store pick technology, do you have exclusivity on that as well?

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Michael H. Vels, Empire Company Limited - CFO [53]

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Yes, we do.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [54]

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Okay. And I suppose you'll answer at a different point, whether you intend to use that.

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Michael H. Vels, Empire Company Limited - CFO [55]

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That would also be correct.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [56]

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Okay. FreshCo, you're getting a decent quorum of stores running now, I'm now talking FreshCo in the West. Is that still a drain to earnings? Or is it now inflected?

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Michael H. Vels, Empire Company Limited - CFO [57]

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I think it's still a marginal dilution. The stores that have been in place for some time, are doing very well from a sales perspective, in most cases, better than the store that they replaced. We are starting to get more of a cadence on margins, promotions, pricing. And store labor is becoming much more efficient month by month.

So those stores are starting to turn towards the performance that we had anticipated, but we have new stores coming on all the time. So still marginally dilutive, but nothing material enough to call out.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [58]

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Okay. And just switching gears here a little bit. The comment about conventional and one-stop shopping being more appealing to the consumer was interesting. I'm wondering if as COVID evolved, you call it from March to April to May, I understand the demand for one-stop shop is still strong, but has it faded consistently, perhaps in line with social distancing orders using and a little bit more freedom on behalf of the consumer?

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [59]

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Yes. I mean -- it's Michael here, Vishal. Yes, as I pointed out in the script, it's comp somewhat. I mean it's not the same intensity everywhere and at the same level. At the same time, as I also said, the trend continues that people are doing that more than any time in the past that we know of and then we can expect that trend to continue. And it also depends on how this pandemic evolves. We think there's going to be a strong trend going forward on one-stop shop, at least in the short to medium term and maybe longer.

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Operator [60]

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Your next question comes from Peter Sklar from BMO.

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Emily Foo, BMO Capital Markets Equity Research - Senior Associate [61]

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It's Emily Foo for Peter. Just a couple of questions. Going back on the market share gains that you've had in the recent weeks, do you have any insights as to who these new customers are? And are you able to direct communications or target this sets of new customers? And how do you plan on going forward to try to retain them?

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [62]

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So yes, Pierre, I think half of his time is spent taking market share and retaining that taken market share.

Emily, thanks for the question, and it is a good one, but one which we will not give any details on because we have a lot of ideas and plans.

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Emily Foo, BMO Capital Markets Equity Research - Senior Associate [63]

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That's fair. And also, we have another question about flyers and with the drastic changes in consumer behavior and also with supplier issues. And maybe potentially less of a focus on flyers now. I was just wondering if there's been any changes, insider strategies, like say, pre-COVID or so far through the prices. Or any insights would be helpful.

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Michael H. Vels, Empire Company Limited - CFO [64]

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So in terms of flyers, we continue to believe that are important to distribute both paper and digital flyers. There's the way we're communicating also with our customer with different vehicles, but we continue to believe in both. And for us, it's very important to maintaining a good offer to customer. And I think it's one of the reasons why we have success on the market share. It's because we have been able, with agility, I think, to maintain the flyer in place.

Obviously, we had to be agile on adjusting our assortment and flyer and we had the issue with supply. But I think one of the big achievement we have been able to do during COVID is maintaining flyer and continue to being relevant for customer. And I think the flyer is -- remains very, very important for value perception for customer. So we need to be appealing for customer, and paper and digital are both important to maintain our portfolio.

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Emily Foo, BMO Capital Markets Equity Research - Senior Associate [65]

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Okay. Just switching gears now to Voilà. You said that rollout will start in June. So does that mean that it has not begun yet?

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [66]

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Correct.

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Emily Foo, BMO Capital Markets Equity Research - Senior Associate [67]

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Correct. Okay. And also you said the completion of the rollout is expected in a few months. So like do you have a few, more like 3 months or 6 months, more for view...

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [68]

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We have a plan, and we'll be agile on that plan, and -- but we'll be rolling out by certain market by market, which makes a lot of sense to us.

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Operator [69]

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Our next question comes from Chris Li from Desjardins.

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Christopher Li, Desjardins Securities Inc., Research Division - Research Analyst [70]

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A couple of quick ones. So Mike, you mentioned the $0.05 Voilà dilution will be similar in the next few quarters. I'm wondering if that takes into account sort of incremental sales that you should get to partly offset some of the costs that you mentioned. Or is that including incremental sales from Voilà as you scale it up?

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Michael H. Vels, Empire Company Limited - CFO [71]

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Yes. It's hard to -- it is a forward-looking comment for sure. And yes, the basis for that is I think I mentioned to Irene was that the sales is going to ramp up relatively quickly and faster than we thought. On the other hand, we're also increasing our costs by investing forward at a faster rate in personnel and rolling stock -- fleet rather.

So we think that we can manage it that way. But really, the message is we don't anticipate any material incremental costs or difference in impacts that would be materially different from the quarter -- from the first quarter estimate that we provided.

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Christopher Li, Desjardins Securities Inc., Research Division - Research Analyst [72]

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Okay. That's great. And Michael, I know patience is a virtue, but I was wondering if you can give us a preview of what type of financial targets you plan to share with us in July?

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Michael H. Vels, Empire Company Limited - CFO [73]

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Well, we probably shouldn't. We certainly could, but I think that would be -- I got to be a mistake. I think if I did that, I would incur the wrath of quite a number of communications and operating people around the table. So I'm afraid we're going to have to just keep it for July.

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Operator [74]

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The next question comes from Michael Van Aelst from TD Securities.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [75]

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I was wondering -- I was wondering if you've seen the level of promo activity rebound at all as things start to normalize a little bit. And if -- I guess, as the supply chain starts to adjust. And if so, where do you stand with your ability to optimize these promotions with AI?

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Michael H. Vels, Empire Company Limited - CFO [76]

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I think, obviously, our focus is refill shelves and improve service level every single week, and it's exactly what we're doing, and we're making progress every week. Data is data. So the good news is, with AI, we can adjust quickly. We have recent and refreshed data related to COVID behaviors. And we started using AI to optimize our promotion before COVID. So the tool is in place. We continue to use that data and we will -- I'm not seeing -- I don't see any issue of using AI in the current context. It's data and will optimize our promotion.

The good news is we'll be able to adjust our promotion quicker and doing less try and error with that tool than we did before. So no, I think promote optimization is more than ever, alive.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [77]

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Okay. And just a follow-up on that, and this will be the end of my questions. If you're kind of 5 years ahead on your market share gains and you're starting with some promo activity or optimizing your promo activity, what's -- what are the other steps? Like isn't this what you needed to close the gap versus your peers, higher sales and better promo efficiencies?

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Michael H. Vels, Empire Company Limited - CFO [78]

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It's the recipe of retail, I would say. Yes, there is many initiative. I think being compelling for customer it's not only prices and promo, but it's quality, it's assortment. And I think over the last year, we did a lot of progress. And during COVID, I think a lot of customer discovered how deep our, I would say -- how improved is the overall assortment and value proposition for our customer.

So we did stuff before COVID and in some categories. And I think during COVID the customer discovered it on format, on assortment, on quality. I think we made a lot of progress, and now it's just well recognized, and there's still a lot of room for improvement. So yes, promo is one thing, but I think the overall value proposition for our customer made progress over the last year. And we just amplified the speed at which the percept trend is changing.

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Michael Bennett Medline, Empire Company Limited - President, CEO & Director [79]

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Yes. I think, Michael, that in July, we owe you a good discussion on that question. I think it's apropos. So I think we'll talk more about that.

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Operator [80]

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There are no further questions. You may proceed.

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Katie Brine, Empire Company Limited - Director of IR [81]

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Great. Thank you, Joanna. Ladies and gentlemen, we appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by e-mail.

We look forward to having you join us for our first quarter fiscal 2021 conference call on September 10. Have a great day. Goodbye.

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Operator [82]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.