The North West Company Inc. (OTCPK:NNWWF) Q4 2021 Earnings Conference Call April 13, 2022 3:00 PM ET
CompanyParticipants
Dan McConnell – President & Chief Executive Officer
Amanda Sutton – Vice President of Legal & Corporate Secretary
Conference Call Participants
Michael Van Aelst – TD Securities
John Vincent – RBC Capital Markets
Operator
This conference is being recorded. [Foreign Language] All participants, please standby, your meeting is ready to begin. Please be advised that this conference call is being recorded. Welcome to the North West Company Inc. First [ph] Quarter Results Conference Call.
I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead.
Dan McConnell
All right. Well, thank you very much, and good afternoon, and welcome, everybody, to the North West Company fourth quarter conference call. I’m joined here today by John King, our Financial — Chief Financial Officer; and Amanda Sutton, our VP of Legal and Corporate Secretary.
So, I’m going to start the meeting today by asking Amanda to read our disclosure statement.
Amanda Sutton
Thank you, Dan.
Before we begin, I remind you that certain information presented today may constitute forward-looking statements. Such statements reflect North West’s current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements. For additional information on these risks, please see North West’s Annual Information Form and its MD&A under the heading Risk Factors.
Dan?
Dan McConnell
All right. Thanks, Amanda. Let’s start with an overview of our fourth quarter. As done in previous calls, we’ll also provide a comparison on a 2-year basis just to provide context to these results when it’s relevant. So sales in the quarter increased 2.4% to $579 million, led by same-store sales in international. Excluding the foreign exchange impact, consolidated sales actually increased by 2.9%. Same-store sales were up 0.1% on top of a 16.8% increase in the fourth quarter last year. Our diluted earnings per share increased 12.7% in the quarter to $0.71, and that’s more than double the $0.33 from Q4 of 2019.
Adjusted net earnings, which includes the impact of after-tax insurance-related gains and after-tax share-based compensation costs, increased $1.9 million or 6.1% compared to last year. During these last couple of years, our teams have really taken to heart our values, particularly being customer-driven. This is especially important because as circumstances around us change, we have to be resilient, adaptable and enterprising. During the quarter, government consumer income support funds continue to dwindle, particularly in Northern Canada, and travel restrictions are less severe compared to what they were just last year.
With a customer-driven focus, we have been able to retain and grow our market share in both our Canadian and international markets in spite of this shift in tailwinds from the COVID-19. We have focused on maintaining our in-stock positions [ in order ] to navigate supply chain challenges. As an essential food service provider, our vendors do understand that we need to prioritize fill rates to guarantee food security in our communities. It hasn’t been easy or smooth. We have felt some — we have felt some vendor shortages and delays as well as weather issues this winter that slowed our flow of goods. However, our teams continued to adjust by procuring inventory earlier to account for extended lead times, which definitely was successful for us coming into the holiday season. This includes increasing our inventory levels compared to last year, as we take a more aggressive position in sealift and winter road stores in Canada to navigate supply chain constraints and rising costs due to industry-wide inflation. In fact, we secured additional warehouse space, furthering our ability to move heavily — heavy products and optimize high cube freight on the winter road network. All right. So having set the context, let’s talk a little bit now about Canadian sales.
In Q4, sales increased 1.3% to $333 million, building on an exceptional sales gain of last year. Same-store sales were down 3% compared to a 21.2% increase last year. On a 2-year basis, same-store sales were up 17.7% compared to the fourth quarter of 2019. We were able to hold our ground on food sales in Canada despite lower income support as the — as they remained flat to last year on a same-store basis compared to the 15.7% increase in 2020. However, these factors had a larger impact on general merchandise sales, which decreased 12% on a same-store basis coming off of a 41.6% increase last year.
That said, overall food and general merchandise same-store sales have remained strong over a 2-year period, with increases of 15.7% and 25.1%, respectively, compared to 2019. On the other hand, our international operations sales continued to have a healthy growth trajectory. In Q4, they increased 5.7% to $194 million and were up 16.4% compared to 2019. Same-store sales remained strong, increasing 5% on top of a 10.7% sales gain last year. Across the different international jurisdictions, a strong in-stock position also allowed us to capture sales.
As I said before, this has not been smooth sailing. Supply chain challenges continue, but we have been able to be even better in stock than our competition, which has allowed us to grow our market share. Higher SNAP payments and native corporation payments helped drive sales in Alaska, and in our tourism-dependent markets, we are seeing a positive trend of revenge travel, although still well below pre-pandemic levels. Food sales in international were up 6.1% on a same-store basis compared to a 7.5% sales gain last year.
On general merchandise, we were able to relatively hold our current ground during the holy season in international, with sales decreasing 0.5% overall. However, note that last year, we had a tremendous performance with a 35.2% increase on a same-store sales basis. Similar to last quarter, supply chain issues and inflationary trends put some pressure on our gross profit, which actually decreased at 1.7% compared to last year due to a 134-basis-point reduction as a rate of sales. The decrease in rate was primarily due to changes in product sales blend, particularly related to general merchandise sales and higher shrink and markdowns compared to last year.
Let me provide some context to these results on a 2-year basis. Because of the high sell-through we experienced in last year in 2020, our turns, markdowns and shrink improved substantially to 2019. Our gross profit rate in Q4 of 2020 was 266 basis points above 2019. Now if we compare our 2021 GP rate to 2019, our fourth quarter rate of 31.9% is still 132 basis points better than 2019.
So when we’re considering all together, we believe this rate is within an acceptable range to deploy a more customer-driven approach. That is what we’re doing in certain key markets, categories and items. Here, our focus has remained on keeping both our customers’ trust and the momentum on market share capture by closely monitoring competitive pricing levels with a balanced approach. We are taking steps to mitigate inflationary cost increases as much as possible to meet our value offer to our customers while not losing sight of driving value for our shareholders. In terms of expenses, we’ve been very focused on finding efficiencies where available.
During the quarter, there was a $3.6 million decrease compared to last year, mainly due to insurance-related gains that offset higher expenses of new store and share-based compensation costs. These are inclusive of $4.1 million in special payments to non-bonus-eligible frontline associates in recognition of their contributions to serve our customers. Excluding the insurance gain and share-based compensation costs, expenses decreased 0.1% compared to last year.
All right, now let’s shift gears and transition to talk about the performance of the airline. The passenger and charter-related business continues to recover compared to last year after the community travel restrictions experienced [ back ] in 2020. However, this trend was somewhat impacted later in the quarter by new COVID travel restrictions related to Omicron. Overall, the improvement in our passenger business partially mitigated the impact of the remote air carrier support program and Canada emergency wage subsidy payments that we did receive last year. On the other hand, the cargo business continues to perform well, providing an edge against the competition to navigate the supply chain constraints as we use it to transport our own cargo to the stores. On top of that, third-party cargo also performed better than last year, as we were able to get some traction with some new clients.
Bringing all of the above together, the company’s net earnings increased $2.8 million to $35.6 million. As mentioned earlier, adjusted net earnings increased $1.9 million or 6.1% compared to last year. A lower interest expense resulting from lower debt levels, as well as a lower effective tax rate driven by higher blend of international operations, supported these results.
Now in terms of our short-term outlook, there are still uncertainties related to COVID-19 and macroeconomic implications as we continue to monitor the development of new variants, the lockdown situation in China and the war in Ukraine. Forecasting in this current macro climate is difficult. But company-wide, overall, we anticipate our same-store sales — same-store 2022 sales to be lower than last year but higher than compared to pre-pandemic levels. On the near term, supply chain constraints will continue to challenge our operations. We expect that the current stock levels and in-stock focus of our teams will allow us to navigate this moving forward. We’re encouraged with the positive trends of tourism and expect this to continue throughout the next year as tourism-dependent markets recover from record 2-year lows on this front.
Income support in our markets, particularly in Northern Canadian and U.S. markets, will be lower compared to last year. Throughout our stores and banners, operational excellence will continue to be a priority, improving execution, assortment and product flow. We will also focus our efforts on continuing to capture market share by investing in our stores for the long term through accelerating store renovations that were postponed during the pandemic. This is going to enhance our customers’ experience. In Alaska, we opened our third store in Gamble at the end of January. Heading into 2022, our store expansion plans will continue, and we’re hoping to announce some new store openings in the coming months.
In Canada, we are advancing price optimization focused on controlling costs and mitigating inflationary impacts. We are enhancing our procedures and systems to be able to calibrate opportunities where we can access price elasticity on an ongoing basis to tackle opportunities that will help us better serve our customers and gain market share, always with gross profit dollars at top of mind.
As mentioned on previous calls, this is an ongoing process of being a better retailer, doing discrete tests and pilots before deploying banner-wide. Okay. Let me finalize by saying that I’m extremely pleased with the financial results in the quarter for fiscal 2021. I would like to, again, thank our people and teams. We are moving with purpose towards the future, and their everyday actions are the foundation upon which the trust of our customers and communities is built. I’m confident that by aligning our business model to the value proposition we have for our people, customers, communities and shareholders, we will be able to keep the great momentum — we’ll be able to keep the great momentum that we have and position our North West Company for success in the years to come.
With that, I will now ask the operator to open up the call for any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Thank you. The first question is from Michael Van Aelst, TD Securities. Please go ahead.
Michael Van Aelst
Hi, good afternoon.
Dan McConnell
Good afternoon, Michael.
Michael Van Aelst
A couple of other questions. So just to start off, your 2022 guidance where you say you expect your EBITDA to decline year-over-year. It’s not clear to me whether you’re talking about adjusted EBITDA or just reported EBITDA, because you do call out the — the insurance case gained as a key reason for the drop?
Dan McConnell
Yes, it would be reported, Michael, our reported EBITDA. And I don’t think we said — did you say year after year? We said next year.
Michael Van Aelst
Year-over-year, Yes. So 2022 over 2021.
Dan McConnell
Yes, yes, that’s right. Yes.
Michael Van Aelst
Okay. And do you care to comment at all on adjusted EBITDA, since that’s what people focus on more?
Dan McConnell
No, we typically don’t comment on adjusted EBITDA.
Michael Van Aelst
Okay. All right, you mentioned that — you were a little static-y there on your comments, but they’re pretty thorough. You did mention gross margin of 31.9%. Did you say that, that is better — that’s the better level going forward, given your balanced approach?
Dan McConnell
That’s correct. Yes.
Michael Van Aelst
All right. All right. So I guess when you look at the in-market spending increase that you got during COVID. Some of that was forced upon consumers during Covid, but some — how much of that do you think has turned more permanent considering your better pricing in your in-stock positions?
Dan McConnell
That’s a big question. Obviously, we’re expecting to be more than less. I mean we’ve — we think we have some great momentum behind us, Michael, and we’re going to continue to keep our customers’ trust that we’ve gained over the last 2 years. But it’s really hard to put a number to it. It’s — especially with all the volatility in the markets now, with all the things that are happening. So it’s really tough to quantify.
Michael Van Aelst
I guess as you’ve seen the travel restrictions come off at different times over the past couple of years, and I don’t know if they’re starting to ease in the North now. But are you starting to see any kind of leakage in your market share?
Dan McConnell
We are starting to see… Sorry, go ahead, Michael. I didn’t let you finish.
Michael Van Aelst
Just yes, mostly back to destination shopping, I’m assuming?
Dan McConnell
Yes, exactly. No, you’re exactly right.
Michael Van Aelst
Because I know I started this year?
Dan McConnell
Yes.
Michael Van Aelst
All right. And just finally, before I get back in the queue, there was a comment on acquisition opportunities and your outlook in the annual report. And just kind of curious what type of businesses you’re looking for and what geographies are your focus?
Dan McConnell
The same type of markets that we operate in today, and they would be predominantly retail, if that’s the nature of your question.
Michael Van Aelst
Okay. So just standard, like food retail, general merchandise retail?
Dan McConnell
You got it. Yes.
Michael Van Aelst
Are you more interested in filling in some holes within your Caribbean Cost-U-Less type markets or more so in the North?
Dan McConnell
If you ask more interested, currently more in Northern Territories, simply because that’s where we see the opportunities present themselves. So that would be in Alaska and in Canada.
Michael Van Aelst
Perfect. All right. Thank you.
Dan McConnell
Thanks.
Operator
Thank you. The next question is from Mark Petrie, BIBC [ph]. Please go ahead.
Unidentified Analyst
Hi, good afternoon. This is Kunaal [ph] filling in for Mark. Thanks for taking our questions.
Dan McConnell
No problem, I was going to say that doesn’t sound like Mark.
Unidentified Analyst
No. So given the various elements of your company, could you talk about the impact of higher oil prices on your business? So you’ll have higher freight costs impacting the airline, but then a boom to the Alaska economy. So can you share with us how you’re thinking about that through the course of 2022?
Dan McConnell
Okay, it’s good. Obviously, we do, and as I indicated in my discussion just earlier, we do and have tried to purchase — prepurchase a lot of our product to the extent that we could, just given our concentration [indiscernible] and our winter road that was just, I guess, coming to an end now. So that’s — a lot of that product has been accounted for. As far as the — it’s going to be obviously the same impacts of it in the inflation in the oil that we see right throughout the entire market. But when I look at the Alaska example, typically, the higher price of oil has a positive correlation to the economy and to the market in Alaska. So that could be an opportunity for us, obviously. And we don’t know what the PFD, for example, is going to be, but we think that it could be a positive gain for Alaska as far as their economy is concerned. And everywhere else, we think it’s going to be a bit of a drain on the business. So it’s — there’s a bit of a hedge. We get a checkmark in Alaska, and we — obviously, in some of the other markets, it’s something that we’re going to have to work through as we’ve had some hedge just by the nature of our business of [ prefiling ] our product before the increases came through, but then later on in the year, it’s something that we’re going to have to mitigate.
Unidentified Analyst
Okay, great. That’s helpful. And then as a follow-up, can you comment on the price optimization initiatives and how they’ve been progressing? And also what has the customer response been so far, given the previous question about more drainage from in-market shopping?
Dan McConnell
It’s really — it’s too early to really raise our arms, but I can say that obviously, as I indicated, it’s going to be something that we test. We’ve had some wins, but we are by no means at a place where we think it’s a blanket rollout that’s going to have yet — as of today, it won’t have a significant benefit, but it’s definitely our outlook, and our expectation is that it will have a significant benefit as we continue to build that competency through the latter half of 2022.
Unidentified Analyst
Okay, great. That’s helpful. Thanks very much.
Dan McConnell
All right. Thank you.
Operator
[Operator Instructions] And the next question is from John Vincent, RBC Capital Markets. Please go ahead.
John Vincent
Hello, good afternoon. Congrats on the quarter. I just have a quick question on capital allocation. On the $120 million of CapEx for next year, should we expect to see that go entirely to store new builds? Or where do you — where do you see that going next year?
Dan McConnell
Well, there’s a mix of different projects in there. Some of it is through the acquisitions that we talked about in Alaska Commercial Company. Some of it is some new store rebuilds and a lot of it is actually to renovating existing under, I guess you can call it plants or facilities that are in need of investment. So it’s kind of a really good kind of hedge or mix of all those things.
John Vincent
Okay, got it. And then just on inflation more generally for the business. I understand the sort of ongoing pricing optimization efforts. Just wondering if there are any other levers in the business that you see as a good way to deal with inflation maybe on the cost structure? I know you mentioned there were some wins in sort of costs being down a little bit year-over-year. But just wondering if you have any thoughts on that going forward?
Dan McConnell
You know what, obviously our cost optimization is something that we think about regularly. We do have some initiatives that we’re well into to try and reduce some of the drainage costs on our business, such as our shrink, increase our turns and obviously make our — through some of the programs we developed in our labor to make our labor much more efficient [ and effective ]. So I would say amongst those triggers, we’re hoping that we can offset, I wouldn’t say entirely for sure, but take a chunk out of it and just create that thrift throughout the entire chain as everybody feels the inflation. This isn’t something that’s just exclusive to industry. Obviously, people are feeling it individually in their homes. So it’s no surprise to anybody. So yes, we do have initiatives that we’ve coincidentally started and are well underway to be able to optimize some of our expense reduction.
John Vincent
Got it. And then maybe just one more for me since you mentioned labor. I’m just wondering, we’ve heard from some other retailers that they’re having trouble attracting talent and retaining labor within their stores. Just wondering if you’re seeing any of those impacts? Or has that kind of been a nonissue for you so far?
Dan McConnell
I wouldn’t say it’s — this is always a big struggle that we have. So it’s something that we put a lot of time and attention to. We have a pretty unique offering. So we try to cater our applications and the people that fit the experience that we have to offer. So yes, we do definitely. We are preparing for it. We have felt it, not too much more than we do typically, but we have some pretty significant plans through our people strategy that we’re trying to combat just churn as it is. We’re trying to keep more people, increase the value proposition for our employees, getting more creative as to how we offer that. And so it’s of high focus for us. But as of right now, it’s been no more than — not significantly more than it has been in previous years, keeping in mind that it always is a challenge for us.
John Vincent
Operator
The next question is from Michael Van Aelst, TD Securities.
Michael Van Aelst
I just want to follow up on some of the cost comments that you made, because I think a number of them were tied to offsetting some of the cost of goods sold inflation, but your SG&A was flat year-over-year, excluding the stock-based comp and the insurance gains, and that’s pretty impressive. You said you decreased your incentive plan costs, but you added a higher store count. So can you kind of discuss the underlying inflationary pressures that you’re seeing in OpEx, and how you’re offsetting them? And then how could this outcome differ, if at all, in 2022?
Dan McConnell
Okay. So there’s a couple of questions there. So your first question is how we were able to offset costs. There was a lot of COVID-related costs. There was not as much, obviously, in 2020, but — so — but we did kind of rein that in a little bit in 2021 despite the payment that we — the incremental payment that we gave our frontline staff. So that was — but otherwise, there wasn’t nearly the expense, obviously, there was for 2020 . As far as how we’re mitigating inflationary costs moving forward, I think it’s the same as everybody. We’re trying to — on 1 part, we’re being very selective on what we pass through, obviously not — trying to keep gross profit dollars strong, but obviously, at some point to the extent of the rate.
As far as really offsetting some of the other inflationary pressures, it’s trying to look at different mix. We have some different programs — we have different programs on the type of product that we’re selling. We’re creating more solutions, less expensive solutions, whether it be private label or other such items that we might be looking at to try and create some choices for our customers. We do have initiatives that are controlling labor. Our labor optimization has been a big one, as I [ mentioned ] to the last question. So that’s probably one of the bigger cost-effective measures that we’re looking at this year, I’d say in labor, and then creating — trying to avoid some of the inflationary pressures by finding solutions for our customers of maybe in the private label kind of sector and lower-cost alternatives.
Michael Van Aelst
Okay. And then on NSA, you talked about the large cargo door ATR. And in the — in your annual report, you also mentioned that it’s kind of being used as a proof of concept. What are you looking at in terms of metrics to determine if it’s successful? And if it is successful, what would that mean for either future fleet expansion or upgrades to what you have now? Like swapping out, things like that?
Dan McConnell
Okay, there’s 2 perspectives there. There’s a premium because of its uniqueness and the lack of supply for this type of option. So for construction materials, other larger-sized cargo, this is an option for that. So you’d get a better — significantly better margin. And there’s also an efficiency play when dealing with North West freight. In fact, it’s kind of along that same line that I was speaking about earlier with the labor optimization. It’s — there’s significant labor savings in the side door and how it interacts with our supply chain and with offloading into our stores. So those are the efficiencies, and the KPIs are correlated to basically identifying the outcomes of those 2 hypotheses, if you will. So really cargo utilization efficiencies and just market value for having such an asset.
Michael Van Aelst
So if it continues to be successful, would you be thinking of swapping some of your existing ATRs into these large cargo door units? Or would you be just adding more planes?
Dan McConnell
No. Well, no, it would be the prior. It would be a conversion of some of our ATRs into optimizing with a larger side door. I mean unless — hey, look, if demand spiked to a point that there was more demand than I forecast then we wouldn’t be adverse [ph] to getting another plane to satisfy that demand. But I don’t see that happening. That’s not our current thinking. Yes.
Michael Van Aelst
Operator
We have no further questions at this time. I would now like to turn the meeting back to Mr. McConnell.
Dan McConnell
No, I think that’s all I have, Operator. So thank you, everybody, very much for attending. And if there’s any further questions, obviously, everybody knows that where we can be reached. So please give us a shout.
Operator
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.
Dan McConnell
Thank you. Bye-bye.
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