Earnings Call Transcript - L Q4 2024

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Loblaw Companies Limited fourth quarter 2024 results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, February 20, 2025. I would now like to turn the conference over to Mr. Roy McDonald. Please go ahead.

Roy McDonald, Head of Investor Relations

Thank you, Constantine, and good morning, everybody. Welcome to the Loblaw Companies Limited fourth quarter and fiscal year 2024 results conference call. I'm joined this morning, as usual, by Perbank, our President and Chief Executive Officer, and by Richard Dufrin, our Chief Financial Officer. Before we begin the call, I want to remind you that today's discussion will include forward-looking statements which may include, but are not limited to, statements with respect to Loblaw's anticipated future results. These statements are based on assumptions and reflect management's current expectations and, as such, are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations. These risks and uncertainties are discussed in the company's materials filed with the Canadian securities regulators. Any forward-looking statements speak only as of the day they're made. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise, other than what's required by law. Also, certain non-GAAP financial measures may be discussed or referenced today. Please refer to our annual report and other materials filed with the Canadian securities regulator for a full reconciliation of each of these measures to the most directly comparable GAAP financial measure. And with that, I will turn the call over to Richard.

Richard Dufrin, Chief Financial Officer

Thank you, Roy, and good morning, everyone. We are very pleased to have delivered another year of consistent operational and financial performance. Our businesses continue to perform well, reflecting our focus on retail excellence. On the full year, revenue came in at $61 billion and adjusted earnings at more than $2.6 billion. We delivered improving sales momentum, stable gross margin, and carefully managed our expenses while once again delivering strong earnings performance. In 2024, we repurchased $1.8 billion worth of our shares and increased our dividend per share by 13.9%. We also accelerated capital investments in our stores, adding 52 new food and drug retail stores and 78 pharmacy care clinics, representing 1.1% of square footage growth. We're already seeing a meaningful lift to our absolute sales from these stores. As we announced on Tuesday, we plan to reinvest over $10 billion back into the Canadian economy over the next five years, improving access to affordable food and healthcare services and creating jobs in communities across Canada. This includes opening another 80 stores and approximately 100 pharmacist care clinics in 2025. Turning to the quarter, we continue to see growing momentum across our businesses. On a consolidated basis, revenue growth was solid at 2.9%, reaching $14.9 billion, and adjusted EBITDA increased by 4%. Consolidated revenue and same-store sales were positively impacted by the shift in Thanksgiving, which occurred in Q4 this year compared to Q3 last year. Our sales performance in food improved even when adjusting for this shift and improved from Q3. Adjusted diluted net earnings per share grew by 10% to $2.20. On a GAAP basis, our net earnings decreased by 14.6%, primarily driven by a non-cash charge of $129 million related to the revaluation of our existing PC Optimum program liability. This nonrecurring charge reflects the fact that customer engagement with our popular PC Optimum program is increasing, leading to higher redemption rates in our stores in recent years. We increased this liability based on our expectation that more customers will redeem more of their PC Optimum points going forward, reflecting the long-term success of our program. In food retail, we attracted higher customer traffic and drove tonnage growth. Absolute sales grew 3.7%. Our reported same-store sales increased 2.5%. As previously mentioned, the Thanksgiving shift, our right-hand side performance, and the elimination of multibuys all impacted our same-store sales. Our adjusted same-store sales growth was up 2% in the quarter. Canada's gross retail CPI was 2.4% in the quarter. Our internal CPI-like food inflation measure was lower than CPI this quarter. Looking at our average article price data, which reflects the full basket mix bought by our customers, our internal inflation rate was much lower than CPI. Looking ahead, we're still seeing higher-than-normal pricing increases coming in from our larger global vendors, and many are requesting double-digit price increases. We continue to push back to mitigate these increases. This is compounded by the fact that we are working with a Canadian dollar that trades at the lowest level in over 20 years. A year ago, the Canadian dollar traded at 74 cents US, and we began Q4 at that level. Since then, our dollar has declined by 5% to around 70 cents, and this adds further inflationary pressure at a time when Canada relies on US imports for much of its fresh produce. We see consumers continuing to favor discount offerings. This is clearly demonstrated in our hard discount banner same-store sale performance, which is outperforming our conventional stores. We recorded double-digit growth in absolute sales across our discount network in Q4 and in T&T Canada. T&T Canada is our fastest-growing banner. While the gap between hard discount and conventional has stabilized, growth in hard discount continues to be significantly higher than conventional. Last year, we added 58 hard discount stores to our network through conversions and new builds. These stores continue to resonate well with Canadians, driving strong performance. Q4 was a particularly busy quarter for our teams. We opened 26 new grocery stores, including our first T&T supermarket in Seattle, Washington. In Q4, we also concluded our network optimization initiative in Quebec. We now have 187 hard discount Maxi stores in Quebec, leading to market share growth in that province. Going forward, we will continue to expand our hard discount presence by adding approximately 50 new stores across the country in 2025, bringing more quality and value to more communities across Canada. Hard discount is still gaining tonnage market share, and our conventional stores are performing well. In total last year, we added 58 hard discount stores across the country. In drug retail, absolute sales increased 1.3% and same-store sales grew 1.3%. Pharmacy and healthcare services grew same-store sales by 6.3% again this quarter, driven by broad strength in prescriptions and new healthcare services. Our specialty acute and chronic prescription growth led our pharmacy numbers. Patients continue to respond very positively to the convenience and expanded level of primary care we offer at our more than 1,800 pharmacies across the country, including our 152 new in-store clinics. Our front-store same-store sales declined 3.1%, primarily driven by the month-long Canada Post strike and our decision to exit electronics categories. We see ongoing pressure in convenience categories like food and household items. That said, we have continued strength in prestige beauty. Cough and cold was also weaker than planned, largely driven by a mild fall. Looking ahead, our decision to exit certain low-margin electronics categories such as laptops, computers, TVs, cameras, and games and consoles will have about a 1% impact on front-store sales in 2025. That said, we remain pleased by the underlying strength, profitability, and sales momentum of Shoppers Drug Mart's front-store business. Online sales in the quarter increased by 18.4%, carrying on our momentum from Q3. Within grocery, delivery continues to outperform as a channel. We remain pleased with our online sales penetration in both food and pharmacy. Full-year online sales grew 16.9% to $3.9 billion, and our food and pharmacy penetration rate increased slightly. Across our grocery and pharmacy banners, we are proud to see Canadians increasingly choosing our stores for value, quality, service, and convenience. Total retail gross margin was 30.9%, down 20 basis points. The decline was mainly driven by sales mix, the impact of the closure of postal services during the Canada Post strike, and the Thanksgiving shift, partially offset by improvements in shrink this quarter. I'm pleased with the strong shrink improvements in both food and drug this past year. Food is now back to 2020 shrink rates, but we still have work to do across our pharmacies. Turning to SG&A, our spend rate as a percentage of sales improved by 20 basis points, driven by the lapping of prior-year labor costs, including expenses related to the ratification of union labor agreements and some operating leverage. This was partially offset by incremental costs related to the ramp-up of new stores and conversions. Fourth-quarter retail EBITDA increased by $47 million, yielding a margin of 0.8%. PC Financial's revenue decreased 2.3%, driven by lower services growth in our mobile shop, which was partially offset by growth in the credit card portfolio. The bank's adjusted earnings before tax increased by $20 million, with higher interchange and credit card fee income, lower operating costs, and a positive year-over-year impact to the ECL provisions, offsetting the lapping of benefits associated with the renewal of a long-term agreement with Mastercard. We remain very comfortable with the risk profile of the bank's portfolio. We continue to take a conservative position in our provisioning with a strong and well-capitalized balance sheet. On a consolidated basis, adjusted EBITDA increased by 4% to $1.7 billion. Our retail free cash flow was $828 million, and we repurchased $352 million worth of common shares. On a full-year basis, our retail free cash flow was $1.5 billion. We grew our common share dividend by 13.9%, and we repurchased $1.8 billion worth of common shares. Our balance sheet remains strong, and we continue to improve our key return metrics. Our return on equity sits at 23.6%, and our return on capital at 11.8%. Looking ahead to 2025, we have a solid plan in place to keep on delivering consistent financial and operational performance while advancing our growth initiatives. We plan to open approximately 50 hard discount stores, approximately 30 Shoppers Drug Mart stores, and two T&T stores in 2025, bringing quality, value, service, and convenience to our customers. These new stores will grow our retail square footage by less than 2%. This year, we will also begin migrating operations to our new 1.2 million square foot fully automated distribution center in East Gwillimbury, Ontario. This facility will further enhance our best-in-class supply chain, delivering efficiencies once fully operational. Please note that in 2025, we will have an extra week. We estimate that the resulting incremental impact on our EPS will be approximately 2% for the full year. Excluding the benefit of the extra week, we expect our retail business to grow earnings faster than sales, and adjusted earnings per share growth in the high single digits. We plan to invest approximately $2.2 billion in capital expenditures and $1.9 billion net of proceeds from planned property disposal. Again, we plan to return most of our free cash flow to shareholders through dividends and share buybacks. We begin the new year encouraged by our early results in Q1. Same-store sales in both food and drug retail are off to a strong start, including positive same-store sales growth in Shoppers stores. Looking ahead, our focus on retail excellence and on the execution of our strategic initiatives will allow us to keep on delivering value to our customers and strong performance to our shareholders and sets us up well for the future. I will now turn the call over to Per.

Perbank, President and Chief Executive Officer

Thanks, Richard, and good morning, everyone. Looking back on 2024, I'm so pleased with our progress and performance. We maintained an unrelenting focus on providing quality, value, service, and convenience to our customers to help Canadians live life well. We ended the year with revenue growth of 2.5%, surpassing the $60 billion mark for the first time, and we delivered adjusted EPS growth of 10.3%. The strength of our performance allows us to reinvest back into the business to support our future growth and set us up to continue to deliver consistent financial performance. In 2025, we will invest another $2.2 billion into the Canadian economy, reflecting Loblaw's commitment to enhancing its store and distribution network, creating job opportunities, and improving accessibility to affordable food and healthcare services for communities across the country. A year ago, I talked about traveling the country, listening to customers, visiting colleagues, suppliers, investors, and all important stakeholders. This remains an important part of my job. Customers are not shy to tell me that they continue to feel stressed from affordability pressures and economic uncertainty. We focus every day on how we can deliver against those expectations, and we continue to work hard to reduce the impact of global food inflation on Canadians. We launched several net-new initiatives to demonstrate this with innovative features like 'Heat of the Month' and programs like 'Marvel' and 'Collect and Save.' We brought more specials and everyday value across our business, and we removed multi-price in hard discount. Customers responded positively to these initiatives, rewarding us with our best full-year food market share growth in more than a decade. Alongside our focus on understanding and meeting customers' needs, we have fostered a cost-management mindset within the business and put programs in place to drive savings across our organizations. Our colleagues are doing a great job serving our customers while at the same time working to reduce costs and find ways for us to be even more efficient. Let me give you a couple of examples. We made some difficult decisions in exiting low-margin categories like electronics. These decisions will set us up well for the future but will be headwinds to our front-store sales growth over the next year. We're realizing more value from existing assets and creating new market and accretive businesses in services. This year, we joined a large European buying group to lower our purchasing costs on certain commodities and control-brand products. Digital engagement grew at a strong rate in 2024. Our weekly engaged digital user growth reflected a new level of personalization in our PC offers, more members-only pricing, and gamification of our app. Hopefully, many of you have won the prize wheel in Q4 and took home some free products. If not, stay tuned. You can expect to see even more excitement with greater frequency this year. Customers can also use our 'Swap and Save' feature as a digital tool to save on everyday groceries. Based on recent customer feedback, within a few days we added 'Swap and Shop — Canadian' to allow customers to easily find products prepared in Canada. As we continue to expand this feature, we are already seeing a significant uplift in sales of products identified as prepared in Canada. Our digital business continues to grow. In addition to enhancing the customer-facing features, we added free delivery to our No Frills stores in the fourth quarter, introducing new customers to our digital offer. Refreshing the right-hand side of our superstores is another initiative that has created a lot of customer excitement. We have put together a new layout for those sections, with better navigation for customers, extended our range across many categories, and introduced new and exciting brands, all underpinned by action-oriented offers. We have three pilot stores, and we expect to roll this upgrade to many more stores this year. The uniqueness and strengths of our pharmacy and services at Shoppers Drug Mart continue to impress me. This is an incredible asset, unlike any pharmacy I have come across in my career, and we're investing to grow our network and better position it for the future. We are bringing customers more value to convenience-focused shops and strengthening our leadership position in cosmetics, adding new brands and targeting younger customers. We're improving our processes, rolling out central fill capabilities, and improving app-based scheduling for pharmacy appointments. By the end of 2025, we plan to have built over 250 new in-store customer care clinics where our pharmacists can offer private patient care. Last year, our pharmacists provided 3.1 million prescribing services, and we expect demand to grow as provinces expand the scope of care for pharmacists. For a decade, our new-store growth across our food and pharmacy business has outpaced Canadian population growth. Our team has now developed a very strong pipeline. In 2024, we opened 50 new stores, growing our retail square footage by 1.1%. We're now even better positioned to meet the growing demand for hard discount groceries with the addition of 12 new No Frills stores, the conversion of 30 stores to Maxi, and the opening of five new Maxi stores in Quebec. These stores are performing very well. Looking ahead, we plan to accelerate our growth, adding approximately 80 new stores this year, focusing on hard discount and on pharmacy. In December, we proudly celebrated a very successful opening of our first T&T store in the U.S. You might have thought T&T was only a Canadian thing — I can tell you it's not anymore. In our first of two planned stores in Seattle, our new T&T is just exciting customers and setting a new sales record. Just two months in, this 55,000-square-foot store continues to outperform every store in our network. Just last week, we also opened our second T&T store in downtown Toronto, just steps away from Yonge and Dundas Square. I'm really proud of what the team has accomplished, and I can't wait to see what the new stores bring us. This month, we will begin shipping frozen products from our fully automated 1.2 million-square-foot distribution center outside the GTA. This DC will deliver improved capacity and efficiency for the future. This year will demonstrate a carefully planned ramp-up of volume in frozen, then fresh, and finally ambient products. I'm proud to note that the DC will be equipped with a massive array of solar panels, expected to be the largest rooftop solar array in Canada. Our ESG principles remain embedded in everything that we do. Today, we are providing an early release of our 2024 ESG disclosures. We hope you'll visit our website to catch up on some of the great work we have accomplished against our two main pillars of advancing social equity and fighting climate change. I would like to acknowledge the importance of the work of the PC Children's Charity and the Shoppers Foundation for Women's Health. Together with our customers, colleagues, and suppliers, we collaborate on dozens of initiatives and raised more than $35 million in the year. We have put that money to work, feeding almost a million children in our local schools, and provided more than $12 million in support of initiatives that improve women's access to care in Canada. Just last week, the Shoppers Foundation for Women's Health announced a $10 million donation to the Manitoba government's new healing and empowerment funds. Our everyday focus remains on retail excellence, executing well across our operations, and maintaining an unrelenting focus on our customers. This is what allows us to continue to invest in our business and in growth. We are really excited and optimistic entering the new year. Our portfolio of businesses remains strong and well-positioned to deliver for Canadians who are increasingly turning to us for quality, value, service, and convenience. I'd like to extend a heartfelt thank you to all our colleagues for their pursuit of these goals every single day and for what they are doing for our customers. Thank you.

Roy McDonald, Head of Investor Relations

Thank you, Per. Would you remind those dialed in of the process for asking questions?

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please make sure to lift your handset before pressing any keys. Your first question comes from the line of Irene Nattel from RBC Capital Markets. Please go ahead.

Irene Nattel, Analyst, RBC Capital Markets

Thanks, and good morning, everyone. From everything that you just said, it sounds as though you exited 2024 with accelerating momentum across the platform, putting aside the issue of the lower sales in electronics and front store Shoppers. Can you talk to us a little bit about what is driving that momentum? What is your PC Optimum and PC Financial data telling you about your share of customer wallet? Is it really— you said conventional is up, but what is it doing versus discounts? How should we think about that unfolding in 2025? Thank you.

Richard Dufrin, Chief Financial Officer

If I could start, Irene, I think we finished the year quite strongly from a share perspective, as Per mentioned, and that momentum is carrying through. As we discussed, we've opened many, many stores last year, and typically those stores open more later than at the beginning of the year, and so as we start 2025, we're benefiting from the full momentum of all of these stores. So that is definitely a factor. On front store specifically, you probably remember that in the fall we had a pretty mild season. We did mention that cough and cold sales were pretty weak in the fall compared to peak periods we've experienced. But if you look outside now, here in Toronto, it's very cold and snowy, and cough and cold sales since the beginning of January have been very, very strong, and they continue beyond what is typically the normal season. So we're getting a benefit in front store. That's essentially what was a delay. So those factors along with new stores are what's giving us momentum as we start the year.

Perbank, President and Chief Executive Officer

Thanks, Irene. We ended the year very strong on market share again, and we had the best market share gain in a decade. We also expect to have another record year on market share this year. Many of the initiatives we put in place last year are now embedded in our stores and are working in our favor. For example, removing multibuys in certain areas and harmonizing our Real Canadian Superstores with Atlantic superstores — we now have 180 superstores from coast to coast, allowing us to harmonize and get synergies. Our hard discount expansion is creating even more momentum. The small-format stores we opened last year are doing really well. As one example, a coupon promotion for cookware sold four years' worth of cookware during that campaign. Our T&T format was the fastest-growing format last year and is continuing to outperform. With our superstores, convenience stores, hard discount, T&T, and Shoppers, we have a good store portfolio that caters to all of our customers' needs.

Irene Nattel, Analyst, RBC Capital Markets

That's great. Thank you. And just one follow-up note: we're talking about new stores. I've been getting a lot of questions from investors about the drag on gross margins and performance. As you accelerate new-store openings and also as you open the frozen DC, can you talk about how we should expect to see this in your financial results? And the degree of confidence you have in delivering on your financial framework notwithstanding those headwinds. Thank you.

Richard Dufrin, Chief Financial Officer

Good question, Irene. These two specific events are quantified and have been incorporated in our plan and form part of the guidance we're providing today. We know what the impact of earnings drag from these new stores will be, and we know the impact of the ramp-up of the East Gwillimbury DC. All of this is included in our guidance. East Gwillimbury started operations in January, and we're on plan — we're on plan. So we definitely feel good on that, and we've already opened two new stores since January.

Perbank, President and Chief Executive Officer

I would add that you should see new stores as a guarantee for the future. Adding 50 last year and 80 this year provides tailwind. A new store often grows several times the normalized same-store growth of an established store as it matures, so over the years you'll see leverage to sales and costs. Our strategy is to grow sales and get leverage on cost, keeping our cost base efficient, and that's all in our plans. I believe our strategy allows us to deliver in the short term, medium term, and long term.

Irene Nattel, Analyst, RBC Capital Markets

That's great. Thank you.

Operator, Operator

Your next question comes from the line of Mark Carden from UBS. Please go ahead.

Mark Carden, Analyst, UBS

Good morning. Thanks so much for taking the questions. To start, you're planning on adding another 80 stores in 2025, including 50 hard discount stores. When you look out over the next few years, how do you think about the longer-term opportunity for unit growth? Could this pace be sustained beyond 2025 even if population growth slows? Just your general thoughts there.

Perbank, President and Chief Executive Officer

It's hard to say exactly how many stores we'll build in 2026 at this stage, but we don't build stores solely based on population growth. We find white spots in cities where we don't have significant sales penetration today, and often those stores generate incremental sales — typically 90% to 95% incremental for us. Building new hard discount stores can create more footfall for both our conventional stores and the new hard discount stores. We're growing less than 2% in square footage; 80 stores sounds like a lot compared to recent history, but in the context of other countries and the size of Canada, it's not that many. We have ambitions to continue to grow our topline, and the tailwind from new stores will be important for sustaining growth going forward.

Mark Carden, Analyst, UBS

Great. That's helpful. Thanks. And then with respect to potential tariffs, how much exposure do you have to imports from the U.S.? You talked about fresh produce. How do you think about exposure on the packaged goods front, and how would you pivot your sourcing?

Perbank, President and Chief Executive Officer

Thanks. That's a very good question. It's less than 10% of our COGS that we buy from the U.S., and it's mostly in produce. If tariffs are applied on produce, that's where we'd be most impacted. We are looking at mitigation strategies and have options to manage some of the exposure. For packaged goods, for example household and cleaning, we have more than 30 vendors coming from the U.S., but we also have a very strong control-brand portfolio in those categories — our No Name and President's Choice brands. If tariffs were applied on household and cleaning products, those branded products sourced in Canada would become more competitive and likely gain share. So we have a detailed mitigation plan, but overall U.S. exposure is under 10% of our cost of goods sold.

Mark Carden, Analyst, UBS

That's really good context. Thanks so much, and good luck, guys.

Operator, Operator

Your next question comes from the line of Michael Van Elst from TD Cowen. Please go ahead.

Michael Van Elst, Analyst, TD Cowen

Hi. Good morning. I want to follow up on square footage and store economics. As you plan out your real estate expansion, have you changed your return on invested capital parameters and hurdle rates as you add an increasing number of new stores?

Richard Dufrin, Chief Financial Officer

No. Mike, our plans for 2025 are all approved, and we're approving stores for 2026 now. The dozen small-format stores we opened last year helped us fine-tune our model, and that became the basis for our 2025 site selection. We are not lowering our return expectations or lowering our returns hurdle; the economics remain disciplined and vetted.

Perbank, President and Chief Executive Officer

And Mike, while 80 stores sounds like a lot, many of them are small-format — not 80 superstores. Many are Shoppers and small hard discount stores with footprints of 8,000 to 10,000 square feet. They don't cost as much and don't require the same CapEx, so put that in perspective when you look at square footage growth.

Michael Van Elst, Analyst, TD Cowen

Yeah. It sounds like not quite 2% square footage growth. Most peers are adding around one to one-and-a-half percent at a time when there's no population growth expected. I wonder if you're moving into other white space but you've got competitors moving into your territories — how are you modeling that in your guidance?

Richard Dufrin, Chief Financial Officer

We model that. In real estate you can see where others are expanding, and we take that into consideration market by market. We're not basing store decisions on future population growth; we make decisions based on the population that is here today. The small-format experiences we had influenced where we planted the roughly 50 food stores and roughly 30 Shoppers in our 2025 plan.

Perbank, President and Chief Executive Officer

From an international perspective, it's not a large number of stores. It may seem large compared to recent history, but it's reasonable in the context of the Canadian market, and many smaller formats mean less square footage growth overall.

Michael Van Elst, Analyst, TD Cowen

Okay. And then on the competitive environment and gross margin performance — you had tonnage gains in the quarter, but your implied inflation rate seemed closer to 1% while CPI was over 2%. With flat gross margins and tonnage gains, is the market more competitive, or is the lower inflation you record more related to trade-down into private label and other factors?

Richard Dufrin, Chief Financial Officer

Mike, the market continues to be rational and stable overall. Gross margin as we start this year we expect to be back to normal — our outlook for 2025 is for a modest increase in gross margin. Q4 had some blips: the Canada Post strike was a surprise and had a notable impact because we have over 800 Canada Post outlets in Shoppers Drug Mart, and traffic and sales were affected. We believe that impact is largely behind us now as we move through Q1.

Michael Van Elst, Analyst, TD Cowen

Okay. Great. Thank you very much.

Operator, Operator

Your next question is from the line of Tammy Chen from BMO Capital Markets. Please go ahead.

Tammy Chen, Analyst, BMO Capital Markets

Thanks. Good morning. I want to wrap up the discussion on food inflation. How are you thinking about food inflation this year versus last year? You talked about the exchange rate, and you said less than 10% of buys from the U.S. You also mentioned vendor price actions. How are you expecting food inflation to trend through this year versus last year?

Perbank, President and Chief Executive Officer

If I start, Tammy, we're pleased to say we've seen normalized inflation for almost nine months now and into January. We're focused on keeping prices low — pushing back on supplier increases where possible, expanding discount offerings, our control brands, and promotions. If the Canadian dollar continues to weaken, that will be inflationary; if it strengthens, that will be positive for consumers. On tariffs, it's too early to say, and if tariffs are applied on specific products, customers can mitigate by buying Canadian or other products without tariffs. We're doing a lot to help customers navigate those choices and make Canadian products more visible.

Richard Dufrin, Chief Financial Officer

To add some specificity: CPI in the quarter was 2.4%. Our internal measure, which mirrors CPI using our product set, was slightly lower than 2.4%. Our average article price — what customers actually buy — was significantly lower, and that's the number that feeds same-store sales. We've seen stability in those figures through most of 2024, but as FX started to turn, with the Canadian dollar weakening to the high 60s, that is inflationary, and we've started to feel that in recent weeks. It's definitely starting to show, but it's hard to predict exactly where it will go from here.

Tammy Chen, Analyst, BMO Capital Markets

Okay. Thank you for that. My follow-up: the small-format No Frills and additional Maxis — how quickly do you expect sales to ramp to maturity based on what you've seen with existing stores of those formats? Specifically on the small No Frills, most of the stores you've opened so far are in downtown urban locations. What have you learned, and do you expect this format to resonate in suburbs and rural regions as well?

Perbank, President and Chief Executive Officer

A normal rule of thumb is that a retail store takes about three to four years to normalize sales. That means you'll see incremental same-store sales for about three years after opening. Our new small-format stores are off to a very good start and are achieving expected sales levels, some even better. Regarding the No Frills small format, they typically carry 7,000 to 8,000 SKUs, so customers can do a full shop. You may have less SKU depth in certain lines compared to a large store, but the range is much broader than a deep-discount format like some international discounters. These stores are fast and convenient, and customers appreciate a 15-minute in-and-out shopping trip compared to longer visits, which is one reason they're successful. We monitor weekly sales and are seeing stable or increasing results.

Operator, Operator

Your next question comes from the line of Mark Petrie from CIBC. Please go ahead.

Mark Petrie, Analyst, CIBC

Hey. Good morning. Thanks. I wanted to ask about Shoppers. You've made important shifts to the offering, including the exit from electronics and adjustments to price and promotion in food and consumables. What have you learned about the business and the customer from those adjustments?

Perbank, President and Chief Executive Officer

We're seeing very positive impacts. At Shoppers we've lowered prices on hundreds of food items, so across many aisles you'll see lower-priced items. Customers are seeking more value, and removing electronics is beneficial because it aligns the assortment more closely with what customers expect from Shoppers. This also frees up PC Optimum points to be used on beauty and other categories customers value. We're seeing good momentum from last year carry into Q1. Pharmacy continues to be a strong performer on prescription and services.

Mark Petrie, Analyst, CIBC

Does this response set the stage for other adjustments, or are you satisfied and now pausing?

Perbank, President and Chief Executive Officer

In retail it's never status quo. Many initiatives launched last year need time to resonate. We're monitoring results and will continue to make adjustments as needed, but for now we're satisfied with the changes implemented and are focused on execution.

Mark Petrie, Analyst, CIBC

Following up on the tariff question: in conversations with suppliers, are you seeing changes to how they approach promotions or product innovation pipelines due to trade and supply chain issues?

Perbank, President and Chief Executive Officer

So far, we haven't seen material changes from suppliers. If a large tariff, for example a 25% tariff on a major brand, were implemented, that would shift demand toward our control brands that are produced in Canada. For now, suppliers are operating as usual, but we are preparing for various scenarios.

Mark Petrie, Analyst, CIBC

Understood. One more quick one: you're pleased with the early results from T&T in Seattle. Can you talk more about U.S. growth plans and the opportunity size as you see it?

Perbank, President and Chief Executive Officer

For now, we're sticking to a plan of opening seven stores as a trial. We're very pleased with the success in the U.S. so far, but we remain disciplined and will follow the trial plan closely.

Operator, Operator

Next question is from the line of Vishal Shreedhar from National Bank. Your line is now open.

Vishal Shreedhar, Analyst, National Bank

Thank you. Switching gears to financials and the ECL release: is Loblaw expecting a more constructive consumer environment, or is that more of a reflection that prior provisioning was overconservative and the adjustment reflects more current thinking?

Richard Dufrin, Chief Financial Officer

The ECL is driven largely by unemployment forecasts prepared by economists. Specifically, the buildup of the ECL in Q4 this year was less than the buildup last year, which created a year-over-year benefit. It's a volatile number that moves each quarter. As of Q4, the health of the consumer in Canada was getting slightly better.

Vishal Shreedhar, Analyst, National Bank

Okay. And the PC Optimum noncash charge related to higher member participation and redemption rates — how is management interpreting that increase? Is it a reflection of the offering or consumers seeking more value?

Richard Dufrin, Chief Financial Officer

Let me walk you through what happened. The redemption rate assumption was set when PC Optimum and its predecessor programs were established several years ago, and we hadn't revalidated that assumption for some time. Over the years, we saw redemption rates pick up. After several years, we validated that the prior assumption was no longer appropriate and increased the redemption rate assumption by roughly one percentage point, which led to the one-time liability. We view that as a nonrecurring, noncash charge that reflects higher engagement with PC Optimum. We're happy to recognize this because it aligns our assumptions with current customer behavior.

Vishal Shreedhar, Analyst, National Bank

Are you able to quantify the impact of the postal strike and specifically the electronics exit on Shoppers?

Richard Dufrin, Chief Financial Officer

We know exactly, Vishal, but we won't provide a precise number in this forum. The postal strike affected traffic — stores with a post office saw traffic declines compared to stores without one. The strike also impacted profitability associated with running Canada Post outlets during the busiest season, which was particularly painful for postal services and related front-store items. When the strike ended, customers returned and we saw traffic recover.

Perbank, President and Chief Executive Officer

We can clearly measure the impact because we have about 800 stores with Canada Post outlets and about 500 without, so the differential was obvious in the data.

Vishal Shreedhar, Analyst, National Bank

One last one on the small-format stores: after the trial period, are customers sticking with them? Can customers do a full shop, and are there issues with customer satisfaction?

Perbank, President and Chief Executive Officer

Glad you asked. The small stores carry approximately 7,000 to 8,000 SKUs, so you absolutely can do a full shop. You might have less depth on certain SKUs — instead of three adjacent SKUs you might have one or two — but customers can still complete a full shop. Compared to some European hard discounters that carry 2,500 to 3,000 SKUs, our small-format hard discount stores offer a much broader range. These are convenient, fast trips and many customers value the time efficiency. Weekly sales in those stores are stable or increasing, which shows customers are sticking with them.

Operator, Operator

Your next question comes from the line of John Zamparo from Scotiabank. Please go ahead.

John Zamparo, Analyst, Scotiabank

Thank you. Good morning. I want to come back to same-store sales. You referenced the strong start to the year. What are you seeing from consumers over the last few weeks, both on the shift in sentiment from tariff talk and the theme of buying Canadian brands or products? Can you add more color on this and what you're seeing over the past three weeks or so?

Perbank, President and Chief Executive Officer

Customers are increasingly seeking to buy Canadian-prepared products. When I'm in stores, many customers ask for help finding Canadian products. Our digital 'Swap and Shop — Canadian' feature saw a 75% week-on-week uplift in usage within a few days of launch. In-store, early data showed about a 10% uplift in Canadian product sales even before we put visible flags and signage on products prepared in Canada. We'll roll out flags and signage next week, and we expect further uplift. Otherwise, customer behavior is similar to last year: they engage with promotions and private label, with ongoing shift to discount formats.

Richard Dufrin, Chief Financial Officer

We're seeing good tonnage performance as the year starts. FX is a factor affecting inflation and we are monitoring that closely.

John Zamparo, Analyst, Scotiabank

That's helpful, thank you. A follow-up on retail media: do you expect this portion of the business to reach sufficient scale where you'll provide more disclosure? How did that business perform at the end of 2024?

Perbank, President and Chief Executive Officer

We're seeing a good uplift and double-digit growth in our retail media business. It's growing rapidly, and we hope to reach a scale where we can disclose more in the not-too-distant future.

Richard Dufrin, Chief Financial Officer

Both our retail media business and our 'trade as a service' initiatives are expected to grow double digits in earnings in 2025.

John Zamparo, Analyst, Scotiabank

Great. Thank you very much. I'll leave it there.

Operator, Operator

Your next question comes from the line of Chris Lee from Desjardins. Please go ahead.

Chris Lee, Analyst, Desjardins

Hi. Good afternoon. On the outlook for the year, Richard, you mentioned that you expect gross margin to increase modestly this year. Is that mainly driven by more shrink improvements in Shoppers or other factors?

Richard Dufrin, Chief Financial Officer

Yes. Based on what we discussed, you should expect a little more top-line growth from new stores opened last year and more stores this year in a low-inflation environment, which contributes to the outlook. We're expecting a slight increase in gross margin rate as part of our plan. There will be a slight deterioration in SG&A rate driven by East Gwillimbury and new stores, but overall these dynamics allow us to deliver high single-digit EPS growth, to which you should add roughly a 2% benefit from the extra week in the year. That's our outlook for 2025.

Chris Lee, Analyst, Desjardins

Is the cadence of that high single-digit EPS growth expected to be steady across the quarters?

Richard Dufrin, Chief Financial Officer

Yes. The way we budgeted the year, each quarter looks similar to the others; you should not see much volatility. That's how we've plotted the year.

Chris Lee, Analyst, Desjardins

Perfect. Thanks, and all the best.

Operator, Operator

There are no further questions at this time. I'd like to turn the call back over to Roy McDonald for closing remarks. Please go ahead.

Roy McDonald, Head of Investor Relations

Great. Thanks for your time and the great questions this morning. Give me a shout if you have any follow-ups, and please mark your calendars for Wednesday, April 30th, when we will be discussing our Q1 results. Have a great day, everybody.

Operator, Operator

This concludes today's conference call. Thank you very much for your participation. You may now disconnect.