The North West Company Inc. (NWC), a leading retailer to underserved rural communities and urban neighborhood markets, reported a mixed set of financial results for its second quarter. The company saw a 4.6% increase in consolidated sales and a 7.5% increase in gross profit, but net earnings fell by 3%.
The decline in net earnings was attributed to several factors, including lower earnings from the company's investment in Transport Nanuk, increased expenses, and the implementation of a global tax. Despite these challenges, the company experienced a robust 5.6% increase in sales within Canadian operations, bolstered by strong food sales and consumer demand driven by First Nations settlement payments and initiatives for access to nutritious food. However, international operations only saw a marginal 0.8% increase in sales amidst a tougher economic environment.
Key Takeaways
- Consolidated sales increased by 4.6%, with a notable 5.6% rise in Canadian operations.
- Gross profit grew by 7.5%, while net earnings saw a 3% decrease.
- Factors affecting net earnings included lower returns from Transport Nanuk, higher expenses, and a new global tax.
- International sales growth was limited to 0.8%.
- The Next 100 program is expected to drive operational excellence, with one-time related costs being offset by incremental EBIT.
- Inventory levels remained flat despite sales increases, with strong vendor relationships ensuring product availability.
- No significant changes in competitive dynamics within the Canadian market were reported.
Company Outlook
- Continued consumer demand in Canada is anticipated.
- Commitment to operational improvements through the Next 100 program.
- Expectation of one-time costs associated with the Next 100 program, which should be balanced by increased EBIT.
Bearish Highlights
- Decrease in net earnings by 3%.
- Challenges faced by international operations with only a slight increase in sales.
Bullish Highlights
- Strong sales growth in Canadian operations.
- Positive impact of settlement payments and food programs on consumer demand.
- Optimism about the Canadian business and plans for international growth.
Misses
- Net earnings were negatively impacted despite sales growth.
Q&A Highlights
- Inventory levels are flat due to a strategic approach to business readiness.
- Positive sales growth in general merchandise linked to settlement funds influx.
- Strong vendor relationships support inventory needs.
- Competitive dynamics in Canada remain steady with a focus on improving capabilities.
- The company is looking forward to providing more detailed information later in the year and continuing its growth trajectory.
In summary, The North West Company Inc. is navigating through a complex economic landscape with a strategic focus on growth and operational excellence. While net earnings have dipped slightly, the company's resilience in Canadian operations and strong vendor relationships position it well for the future. The management remains optimistic about the company's direction and its ability to manage one-time costs associated with its Next 100 program. Stakeholders are expected to watch closely as The North West Company continues to expand its footprint both domestically and internationally.
Full transcript - None (NNWWF) Q2 2024:
Operator: Welcome to The North West Company Inc Second 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.
Daniel McConnell: Thank you, very much, and good morning and welcome to The North West Company second quarter conference call. I'm joined here with John King, our Chief Financial Officer; and Alexis Cloutier, our VP of Legal and Corporate Secretary. I'm going to start the meeting by asking Alexis to read our disclosure statement.
Alexis Cloutier: Thank you, Dan. Before we begin today, I remind you that certain information presented 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 performance and actual financial results in the future to vary materially from those contemplated in the forward-looking statements. Any forward-looking statements are current only as of the date they are made, and the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise, other than what's required by law. For additional information on these risks, please see North West's annual information form and its MD&A under the heading Risk Factors.
Daniel McConnell: Thanks, Alexis. I will begin by providing a brief overview of this quarter's results. I'll then provide some additional color on sales within our Canadian and international operations, before making some comments on the key factors impacting our consolidated gross profit and expenses. Finally, I'll wrap up with a few comments on our outlook in Next 100 program, before opening call up for some questions. All right. Let's dive right in. Overall, we are very pleased with the results this quarter, especially considering the impact of some non-comparable factors this year and the fact that we are up against the 17.5% increase in net earnings in the second quarter of last year. Our second quarter results this year were driven by strong top-line growth with consolidated sales up 4.6% and gross profit up 7.5% for the quarter. However, the strong sales and gross profit results did not fully translate to the bottom-line in the quarter, and that's primarily due to three factors. First, earnings from our investment in Transport Nanuk, which is a Canadian shipping company serving the Arctic, were down $1.8 million compared to last year due to higher vessel repairs, which also temporarily delayed the start of the sealift season in Canada. Second, a $1.8 million net increase in expenses resulting from two non-comparable expenses, which include higher share-based compensation cost and this year partially offset by the loss of our compared to last year due to wildfire. Third, the implementation of our global tax, that resulted in a $1 million increase in tax expense for the quarter. The net impact of these factors resulted in a 3% decrease in net earnings this year compared to the strong net earnings last year. That said, within this backdrop, we are very pleased with the results that delivered increases in adjusted EBITDA of 6.1% and adjusted net earnings of 1.6%. With that context provided, let me unpack the operational results. Sales in Canadian operations increased 5.6% for the quarter and were up 6.8% on a same-store basis led by strong food sales. Sales were positively impacted by increased consumer demand arising from First Nations drinking settlement payments to individuals. However, the volume of these payments in the second quarter relative to the total settlement remains low. That said, we expect to see these payments continue throughout the remainder of this year and into 2025. We also experienced increased consumer demand in certain markets from First Nations Child, Family Services and the Jordan's Principle, programs that help provide greater access to nutritious food. The positive impact of these factors was somewhat muted by higher sales in the second quarter last year, resulting from the impact of the government inflation relief payments, including the grocery rebate made to individuals to help mitigate higher cost of living. Underneath these financial drivers is a good in-stock position and improved execution at store level, particularly in fresh categories, as we remain focused on operational excellence as part of our Next 100 program. In contrast, our international operations had a more challenging economic environment, which contributes to a softer performance in the quarter. Sales in our international operations is increased by 0.8% and were up 0.9% on a same-store basis as the sales increase from new stores was partially offset by lower wholesale sales. Weaker economic conditions, particularly in tourism dependent markets in Alaska and the South Pacific and a slower start to the commercial efficiencies in Alaska reduced discretionary spending in certain markets. The shift in discretionary spending is evident in our sales mix with food sales up 1.1%, while general merchandise sales decreased by 2.5%, compared to last year. Let me transition here and talk about consolidated gross profit results. Our gross profit rate for this quarter increased by 91 basis points, largely as a result of two key factors. First, a shift in sales plan, which includes a decrease in sales in our lower margin wholesale business. And second, we also experienced an improvement in markdowns and shrink compared to the prior year and an increased focus on being in stock and execution in fresh departments. I will now briefly touch on the key factors that contributed to higher expenses in the quarter. During the quarter, expenses increased by 10.1% and were up 127 basis points as a percentage of sales. This increase was mainly driven by non-comp expenses I noted at the beginning of the call, which included the higher impact of vessel repairs in Transport Nanuk and the increase in share-based compensation, partially offset by the $3.7 million loss in our Fox Lake store destroyed by wildfires last year. In addition to these factors, inflationary headwinds and labor costs, an increase in depreciation and the impact of foreign exchange on the translation of international operation expenses also contributed to the increase in expense for the quarter. As mentioned on previous calls, we have highlighted our efforts to control expense at the store level through the Next 100 initiatives. This includes reviewing store resources and launching initiatives to optimize labor scheduling to align with customer demand using a data driven approach. With that overview of our results, I will finalize by speaking briefly about our outlook for this year and provide a few remarks on the Next 100 in our program. The macroeconomic term really looks uncertain, particularly in our international operations and tourism dependent markets and countries that do not have government income support programs for individuals. As it relates to water settlement payments in Canada, we'd expect an increase in consumer demand, particularly towards the end of this fiscal year and on into 2025. Longer-term, the impact of government and Canada transfer and settlement payments combined with higher infrastructure and services spending is expected to benefit indigenous peoples in the communities we serve. Through the Next 100 program, our teams are driving operational excellence, expanding our capabilities and pursuing value for our customers, our employees and our shareholders. The outcome of this work in the Next 100 program is expected to drive annualized incremental EBIT, which is anticipated to start later this year and continue to accelerate through 2025 to 2026 as these initiatives reach maturity. As we lay the groundwork for these improvements, we anticipate incurring some one-time costs for professional fees and other expenses. These one-time costs are expected to incur in the back half of this year and continue into 2025, as the Next 100 initiatives are operationalized. Our expectation is that the incremental EBIT from these initiatives will more than offset the one time costs. However, there will be a timing difference as these one-time costs will be occurring before the full annualized benefits are achieved. We'll provide further information on these one-time costs in our quarterly reports, as they are incurred. On that note, let me wrap up by highlighting that, we are very proud to have received from the Canadian grocer an impact award in the diversity, equity and inclusion category for our indigenous procurement strategy. Diversity, equity and inclusion are core principles of who we are as a company and this award is reflective of our promise to indigenous peoples. With that, I will now open it up for any questions.
Operator: [Operator Instructions] We will now take questions from the telephone lines. We have a question from Michael van Aelst from TD Cowen. Please go ahead.
Michael van Aelst: A few questions for you. Just looking at the higher same-store sales in Canada, particularly on the food side, it was quite strong. And you did highlight some areas, where they had higher access to nutritional foods. Is this part of the $48 billion child welfare reform that's supposed to come over the next 10 years, or is this something separate?
Daniel McConnell: Hi, Michael. It's Dan here obviously. I believe it is, it's more part of Jordan's principle, but it hasn't been necessarily identified as such, but I think it's just along the whole emphasis behind providing more healthy living options in Northern Canada. But I can't say particularly if it is part of the settlement, but it is definitely aligned with the Jordan's principle that has some other buckets that have been reached into.
Michael van Aelst: I guess this is hard because they don't describe in detail where that $48 billion is going to be spent. I don't think they give a lot of detail on how they're going to fund, how they're going to change their approach with Jordan's principle. But do you feel that the spending and the increased access to nutritious foods in certain communities is actually sustainable or do you think that this was something that might have been more one time in nature for some reason?
Daniel McConnell: I think it's sustainable because I think it's aligned with, again, the overall initiative of the Jordan's principle. I would almost venture to say that, it hasn't really come into the overall benefit of the child welfare benefit. I would say that this is just part of the Jordan's principle. But as far as what bucket of money it's coming out of, Michael, I can't really give you that information because it's not entirely clear.
Michael van Aelst: Okay. So maybe a better way to ask is, are you seeing this continue -- are you seeing the benefits of that continuing into the third quarter?
Daniel McConnell: Yes. The direct answer to that would be, yes.
Michael van Aelst: Excellent. As far as your one-time charges are concerned, how large should we expect these to be? And will you be backing these out of adjusted earnings?
Daniel McConnell: Like I said, we're going to they're going to come in -- as they come in, we'll be very directive as far as what they are. So that will give you an indication on the size. I mean, really it's too early. We don't want to disclose that, at this point, Michael, but we will give a lot more information once they come in. And like I said in the call, we expect some to start coming in later half of this year, of which, I think we will create a sequence if you will as to how we report it and how we expect you to interpret it.
Michael van Aelst: Okay. At this stage, do you expect to remove it from adjusted earnings?
Daniel McConnell: Yes.
Michael van Aelst: Perfect. And then, on the vessel repairs at TNI, you mentioned that, it delayed the start to the sealift shipping season.
Daniel McConnell: Yes.
Michael van Aelst: I guess the question I have is, I know how important you're getting your inventories up into the north at the lower cost. I was wondering, did it shorten the shipping season for you? And did you get the inventory into the north that you wanted to?
Daniel McConnell: Yes, we did. We got the inventory into the north that we wanted to.
Michael van Aelst: Okay. So we shouldn't expect any additional impact from that event in the coming quarters?
Daniel McConnell: Correct.
Michael van Aelst: I think that's it. Other than, it sounds quite positive in Canada, given that sales are starting to pick up already, even though we're not really seeing meaningful, payments being made yet in other water or child reform, welfare reform. And I guess the first question is, does that -- before I get on to national, would you agree with those statements?
Daniel McConnell: Yes, we're optimistic about the outlook in our Canadian business for sure.
Michael van Aelst: And then on the international side, obviously more has been given the macroeconomic conditions. And are you seeing that deteriorate further, because you're still able to grow their sales modestly, which is a positive, given in this environment. Are you still expecting to be able to grow or is there some bigger headwinds coming that you're seeing?
Daniel McConnell: No, our anticipation and our intent is to definitely is to grow.
Michael van Aelst: Yes. And that's on the international side, right?
Daniel McConnell: Correct.
Operator: Thank you. [Operator Instructions] The next question is from Mark Petrie from CIBC. Please go ahead.
Mark Petrie: Yes. Hi there. Good morning. I just had a couple of follow-up questions to Mike's questions. First, just on the inventory levels, like, I know it's flat on a dollar basis sort of year-over-year at the end of the quarter or flattish. How should we interpret that? Is some of that affected from the delay into the sealift season, which you've caught up now in Q3 or how should we think about that?
Daniel McConnell: We've had some -- it's flat and it's flat off some pretty significant sales increases as you know last year. I'd say, it's optimism and it's realism in the point that we feel and we know, we're in stock and ready for business. But it's an optimism for sure, Mark.
Mark Petrie: You would have expected it to be down, if it weren't for the optimism and the build in your inventories around some of these sales opportunities?
Daniel McConnell: That's correct.
Mark Petrie: Yes, okay. Fair enough. And I guess just on that, obviously the food-centric sales growth is excellent to see, but the merch lagged a little bit. Could you just talk about some of the dynamics there and how you expect, those two to sort of move, relatively speaking, as the payments kind of flow through and accelerate?
Daniel McConnell: Yes. I think there's definitely a positive correlation between the general merchandise increase in sales and obviously with some of the settlement money coming into market. The good news is that, we're ready for business and we have strong relationships with our vendors to ensure that, there's a demand cycle in place, where, if we don't have it in stock then we can definitely get it with some of the agreements that we've been putting in place recently with some of our vendors. Fortunately, the rest of our business is doing well, when some of the other customers of some of our major vendors are not having maybe the same increase as we are. It's afforded us the opportunity to kind of help out some of our vendors and some more creative negotiating or more creative deal structures.
Mark Petrie: Yes, okay understood. I guess just on my last question is, just with regards to the competitive dynamics that you're observing in the Canadian market. Just given the flow through of some of these benefits and the expectations, have you observed any changes to how your competitors are approaching the market?
Daniel McConnell: No. I mean everybody is working with the same vigor and obviously, as they always have. We're obviously to the Next 100 really focusing on increasing and improving our capabilities to ensure that we get our share of the business as well. We're really focused on operational excellence, which would I'd say give us our fair percentage of the business that is coming into the markets.
Operator: Thank you. There are no further questions registered at this time. I'd like to turn the call back over to Mr. McConnell.
Daniel McConnell: Okay. Well, thank you everybody who's tuned in and I look forward to speaking with you again in December for quarter three.
Operator: Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
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