Operator: Good morning, ladies and gentlemen. And welcome to the Loblaw Companies Limited Fourth Quarter 2021 Earnings Call. At this time, all lines are in a listen-only mode. And following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, February 24, 2022.

I would now like to turn the call over to Mr. Roy MacDonald. Please go ahead.

Roy MacDonald: Great. Thank you very much, Kelsey.

Good morning, everybody. Welcome to the Loblaw Companies Limited fourth and full year quarter 2021 results conference call. As usual, I’m joined here this morning by Galen Weston, our Chairman and President; and by Richard Dufresne, our Chief Financial Officer. And before we begin the call today, 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 and the impact of the ongoing COVID-19 pandemic. These statements are based on assumptions and reflect management’s current expectations.

As such, are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectation. These risks and uncertainties are discussed in the company’s materials filed with the Canadian securities regulators. And any forward-looking statements speak only as of the date they are 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 referred to today.

So please refer to our annual report and other materials filed with the Canadian securities regulators for a 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 Dufresne: Thank you, Roy, and good morning everyone. Our Q4 results continue in the path of consistency we have been working towards in 2021. Stability in our gross margins coupled with solid sales performance, focus on market share and careful management of our expenses are our daily focus.

Our strong Food and Drug Retail platforms coupled with our main strategic initiatives, namely loyalty and e-commerce, are adding to our financial performance. The pandemic continues to impact our year-over-year comparisons. As such, we’ll continue to share some two-year average data points to help provide further insight into our operating performance. I also want to remind everyone that Q4 last year included an extra week versus this year. To make a more meaningful comparison to last year’s performance, financial highlights will be presented on a comparable 12-week basis.

Our reported results include a one-time gain of some $300 million related to the result -- resolution of the Glenhuron Bank matter. I highlight this fact as we will recover some $300 million in cash over the coming months. The strong performance of our fourth quarter built on the momentum we saw in the previous two quarters. We began Q4 with restrictions loosening and customers preparing to celebrate the holidays with family and friends. We ended the quarter with another round of lock downs.

Across our mix of assets, our stores and our supply chain network rose to the challenge and our businesses performed very well. On a consolidated basis revenue for the fourth quarter grew by 2.8% to $12.8 billion, adjusted EBITDA increased by 6.3% to $1.32 billion and adjusted earnings per share grew by 35.7% to $1.52. On a two-year basis, we saw average annualized growth in revenue of 4.9%, adjusted EBITDA growth of 9.1% and adjusted earnings per share of 30.1%. Again this quarter, our results outperformed our financial framework. Drug Retail delivered another strong quarter.

Absolute sales increased 6.8%, with same-store sales increased by 7.9% in the fourth quarter, lapping a softer quarter of growth of 3.7% last year. We saw strong performance across both front store and Rx. Front store same-store sales were better by 6.1% led by double-digit growth in cosmetics and OTC benefiting from lighter social restriction throughout most of the quarter. Pharmacy same-store sales grew 10.2%, benefiting from the strength of pharmacy services, which grew by over 100% in the quarter, as we supported the Government COVID vaccine and testing programs. On a two-year average drug same-store sales have grown 5.8%, with front store at 4.5% and Rx at 7.6%.

In Food Retail, same-store sales saw growth of 1.1% lapping a strong quarter of 8.6% last year. Although, we saw eat-at-home trends coming off last year’s levels, we continue to experience strong demand. Our market banners continue to outperform and post share gains. Discounts began to benefit from the return of price sensitive customers gaining momentum towards the end of the quarter. Traffic momentum continued, improving again in Q4 and is showing signs of beginning to normalize to pre-pandemic levels.

On a two-year average, Food same-store sales reflected average growth of 4.9%. Performance in the quarter was against the backdrop of rising cost inflation and ongoing supply chain disruptions. Supply chains are facing unprecedented challenges around the world. This is leading to higher inflation in every industry and it continues to be volatile. We are monitoring the supply chain situation very closely.

With the largest distribution network in the country, our scale and experience has allowed us to navigate these challenges relatively well. Our teams are doing a great job prioritizing and adapting to these situations as they unfold. Our shelf price is the tail end of a chain of costs. Shipping containers, fuel, farming, ingredients, labor, whether, to name a few. We watch this very carefully and focus on ensuring that our Retail prices are competitive.

During the quarter, we saw high rates of input inflation across the Board. Our job every day is to ensure that any proposed cost increases are appropriate, keep items on the shelf and deliver the best value to our customers. Leading the way with our discount banners, leveraging the price investments that we made last year and driving loyalty offers that really matter personally, we work to deliver value. In 2021, our online business generated more than $3.1 billion in sales, an increase of 14% over last year. In Q4, online sales decreased by 8.4%, lapping last year’s 150% growth rate.

Our digital platform is now deployed and available throughout Canada. Q4 2021 was a quarter with less COVID restrictions than in 2020. We are pleased with our omnichannel performance as it continues to operate at penetration levels well above pre-COVID rates. Omnichannel is a key pillar of our service offering. We continue to enhance our customer shopping experience through our digital platform, while offsetting its cost through optimizing operational efficiencies, deploying new technology, refining our delivery offering, and seeking out promotional and advertising opportunities.

Retail gross margin in Q4 was 30.9%, up 150 basis points compared to last year. We continue to see traction leveraging our unique data to deliver effective Food pricing and promotional strategies. Both our Food and Drug Retail businesses benefited from a continued rebound of higher margin categories consistent with performance from the previous quarter. Pharmacy Services were a key contributor to gross margin growth, as COVID vaccines and testing peaked during the holiday season. Comparing to 2019, we have recovered from the challenges of 2020.

Gross margin have improved by 80 basis points, with similar improvements in both our Food and Drug businesses. Focus on stability of our gross margin, while driving our sales performance is a priority. We remain confident regarding our gross margin performance going forward. Retail SG&A as a percentage of sales was 20.9%, with the rate higher by 120-basis-point compared to last year. The increase was driven by corporate one-time items, lapping austerity measures, such as lower store hours in Shoppers, and increased labor costs associated with growth in Rx services.

Corporate items included a $19 million charge related to the optimization of our store network that we discussed on our last call, which was not considered an adjusting item. Also know that COVID cost came in at $8 million in a quarter in line with our expectation. When we include -- when we exclude, sorry, our one-time costs, we are pleased with our performance in the quarter. Compared to 2019, our Q4 Retail SG&A rate increased by 20 basis points driven by higher labor costs to support growth in Rx services and some COVID costs. Adjusted Retail EBITDA increased by $60 million or 5.1% in the quarter.

At PC Financial revenue was up $40 million, driven by higher interchange income, as we’re benefiting from increased spending on PC MasterCard. Adjusted EBITDA at the bank increased $18 million year-over-year, primarily driven by favorability and interchange income and lower credit losses and included a $27 million -- $27 million gain related to the reversal of prior year commodity tax remittance. This was partially offset by higher points costs for redemptions, more normal marketing spend compared to last year and ECL provision released of $11 million last year. On a consolidated basis adjusted EBITDA margin was 10.4% in the quarter, up 40 basis points compared to last year. In the quarter IFRS net earnings available to common shareholders was $744 million, up $434 million and fully diluted earnings per share were $2.20.

These include the $301 million recovery related to the Glenhuron Bank income tax return. Retail free cash flow was at $460 million in the quarter. For the full year, we increase Retail free cash flow by over $400 million. Our cash flow generation is strong. Our cash balance is high and increasing.

In Q4, we repurchased $200 million of common shares, finishing the year at $1.2 billion, representing 15.6 million shares. Looking ahead to 2022, volatility will remain. We expect inflationary pressures to continue and supply chain to remain challenging. The pandemic will continue to impact sales trends and year-over-year comparisons. That said, we are very pleased with the mix and positioning of our businesses, and our focus on retail excellence will continue to generate positive operational and financial performance.

So, for full year 2022, we expect our Retail business to grow earnings faster than sales. Earnings per share growth in the low double digits, with higher growth in the first half of the year, we plan to invest approximately $1.4 billion in capital expenditures net proceeds from property disposals, reflecting incremental store and distribution network investments, and to continue to return capital to shareholders by allocating a significant portion of our free cash flow to share repurchases. In the fourth quarter, we again demonstrated steady consistent performance. As we continue, our focus on retail excellence, and on a few key strategic initiatives, our unique set of assets positions us very well for the future. I’ll now turn over the call to Galen.

Galen Weston: Thank you, Richard, and good morning. I’m pleased with Loblaw’s performance in the fourth quarter, as we ended the year in a position of strength. Our results were driven by retail excellence, with a focus on the fundamentals, topline growth, margin expansion and cost control. This took place amid complex circumstances as the communities we serve move through various lock downs and re-openings, and the country felt the impact of repeated supply chain disruptions including several remarkable weather events. Our ability to respond to those extraordinary conditions was enabled by scaling up several of our strategic growth areas, our ecommerce platforms stretch beyond the $3 billion mark, as we kept our customers fed and well.

We did so while providing uniquely personalized offers to PC Optimum members. Our loyalty program has become an increasingly effective merchandising tool for driving sales. The most recent illustration has been our Point Stays Event which provided Canadians with exceptional value across our supermarkets, drugstores, digital businesses and partners, such as Esso gas stations, a remarkably powerful campaign that drove results for the entire enterprise. This is a testament to the level of engagement in the program, which was recognized by Ipsos as one of the country’s top 10 Most Influential brands, the highest ranked Canadian brand on the list. It is just one data point which reaffirms that digitally enabled personalized connections to customers have significant runway as we look ahead.

At the same time, as Richard mentioned, the growth of Pharmacy Services was an important part of how we served patients and reaffirmed our conviction that the convenient, connected and local delivery of care will be an increasingly important part of how we will grow. That relentless focus on our core business paired with scaling up our strategic avenues for growth builds upon an enduring commitment to the communities that we serve. That commitment also exists in our efforts to advance both social equity and sustainability. In that spirit, we’re proud to announce Loblaw’s commitment to achieve net zero carbon emissions by 2040. Having already surpassed our pledge to reduce our corporate footprint by 30% in 2030, we are squarely focused on this next challenge.

It will see us deploy electric trucks, better lighting, more efficient heating and cooling, and other new and innovative measures. The need for action is as clear as our ambition and reflects the long-term view our company has held across generations. We’ve remained focused on serving our customers ever through the highs and lows of the pandemic, look forward to building a better, more resilient country and business together. As we do so, our purpose, helping Canadians live life well, is the core of how we will create enduring value for shareholders. I’ll now open the call for questions.

Roy MacDonald: Thank you, Galen. Kelsey, if you please introduce the Q&A process.

Operator: Thank you. [Operator Instructions] And your first question does come from Michael Van Aelst from TD Securities. Please go ahead.

Michael

Van Aelst: Thank you. I just want to start off by asking you about the inflation rates that we’re seeing right now and hitting highs at least in this -- in the last decade or so. And how are you seeing customers react or even adjust to these higher prices in both, I guess, within your banners and then within different categories?

Galen Weston: Yeah. Thanks, Michael. No question at 5% in the quarter inflation is significant and there continues to be significant pressure, as we look forward, especially over the next couple of months.

And this is a result, as Richard said, very real cost pressure, all the way through the value chain. So when it comes to the customer, I’d -- at the moment, we’re not seeing a ceiling, that’s being reached by consumers in terms of prices at Retail. However, they are becoming increasingly price sensitive. There’s no question about that. And we see it most notably in the accelerating performance of our discount business and that’s been particularly notable in the last couple of months.

And then, of course, the strength of our control brand, you probably would have seen, especially in January, a strong emphasis around are known in control brand in our stores and we’ve seen very significant uptake on that front. And then, probably less significant, but still notable has been the increase in engagement in our loyalty program, where of course, there’s substantial value available to customers who engage in the program proactively. In terms of categories, what categories are customers trading in and out of -- nothing really notable, it’s the usual things, people will trade down, from beef into pork or chicken. But that stuff we would expect to continue and not yet at any form of extreme level. Now, does that kind of give you a flavor of it?
Michael

Van Aelst: Yeah.

It does. Thank you. And I guess that inflation being higher in the first part of the year is part of the reason why you have earnings growing and your guidance hot more in the first half and then in the second half?

Galen Weston: Yes, Michael. But also, like, inflation started in the second half of last year. So we’re going to be cycling that towards the second half.

So when we cycle that with the performance we also had in the second half, we think it’s not going to be as high as it’s going to be in our first half. Michael

Van Aelst: Okay. And then the other question I had was, with respect to Robert Sawyer’s focus, because he’s been with us now for, I think, it’s about a year almost roughly and I know he’s been very, extremely active. I’m wondering, after all the work he’s done so far, what are the narratives focused on to try and improve operations over the next year or two?

Richard Dufresne: Yeah. So I think the general theme and we use the term retail excellence, is what Robert has been focused on and what he will continue to focus on.

And that is -- it’s the fundamentals, its relentless focus and attention to detail on Retail operations and merchandising. And Robert works very, very closely with the divisional presidents and their merchandising and operations teams. And so, simply put, I think, we’re tighter and paying much closer attention to some of that stuff than perhaps we have in the past. And I hate to use that, well worn maxim that Retail is detail, but that is the case and that’s what Robert brings, and he will continue to bring looking forward. There are a few places that we’ve talked about before that, he is particularly focused on when it comes to driving kind of incremental performance, network optimization.

It’s certainly one of them. We’re spending more money on new stores and renovations in 2022 than we have in the last couple of years and seeing really strong indications of the contribution that those are going to make. We’re also very focused on making sure that we have the best cost in our relationships with our vendors. While that continues to be collaborative, it is another important area of focus for him. Michael

Van Aelst: And is there anything on private label that you could point out in terms of the penetration and profitability that you might be working on?

Galen Weston: Well, we’re always focused on looking for avenues to improve customer engagement and to improve profitability.

Yeah, and do we see disproportionate amount of opportunity in control brand, if that’s the question? I don’t think so. Not yet. But it is certainly an area that Robert spending considerable time.

Richard Dufresne: Yeah. Michael, with this installation that we’re seeing, like, I think, we’ve been trying to showcase our private brand more in our store, so that our consumers see the value and we’re seeing some traction with that.

Michael

Van Aelst: Okay. Thank you very much.

Operator: Thank you. Your next question comes from Irene Nattel from RBC. Please go ahead.

Irene Nattel: Thanks and good morning. Just following up on the inflation discussion, we just got off the Maple Leaf call and they were talking about price increases that are coming through late March, early April. Can you talk about what you’re expecting, would you -- and I guess the magnitude of the inflation that you’re being faced with and the kinds of discussions you’re having with suppliers at this point?

Richard Dufresne: I guess you saw in our press release, Irene, that inflation we experienced in the quarter was around 5% and so that’s what we’re seeing now. The number and volume of an increase is definitely higher than we’ve seen historically. And right now, our job is to sift through it as efficiently as we can.

Irene Nattel: I understood. And have you seen you -- sort of you mentioned the trend from sort of the growth in discount? Are you seeing it accelerate and same thing with the trade down to private, oh, not the trade down, the move to private label and are you also seeing the other typical behaviors frozen versus fresh and that kind of thing?

Galen Weston: So, Irene, it’s a -- it’s an interesting dynamic here, because we are now kind of in the 5% inflationary range. This is usually the place where you start to see meaningful behavior change. But we’re also coming in and out of COVID. And, of course, there was a shift away from discount, as you know, that was a result of the COVID dynamic.

And while we’re not seeing yet the kinds of behavior changes that would be typical of this type of inflation rate. So it’s hard to pin down. It’s not as extreme as you might expect it to be, but it’s there. And it’s manifesting itself most explicitly in the growth of discount. And as I said, that is been particularly notable in the last kind of couple of months, six weeks or so, where we’ve really seen that surge.

We also talked about the price sensitivity algorithms that we use with DI&A [ph], those are getting more potent, which is another indication that price sensitivity is more important to customers today than it was this time last year. But the noise here is that COVID shift versus the inflationary pressure, both of them are shaping the consumer behavior, I’d say.

Irene Nattel: That’s very helpful. Thank you. And if I could just switch gears for a moment to Shoppers, which is a big chunk, I think, it’s about 40% of your EBITDA.

Where do you think Shoppers is today in terms of Rx, putting aside the Pharmacy Services, Rx volumes and sort of pre-COVID levels of Pharma store demand, particularly in those high margin categories like cosmetics?

Galen Weston: Yeah. So, again, because we’ve been in and out of lockdowns, quite -- in quite a volatile way over the last two years. It’s hard to say explicitly. But when we’re out of lockdown, the Shoppers Drug Mart front store categories surge and when we go back into lockdown, those front store categories come off quite considerably, and we were surging in the fourth quarter and we’re seeing some headwinds at the very end of the quarter and through this sort of latest phase of the lockdown. And then yet, again, in some of the provinces, where we see things opening up again, we see the Shoppers Drug Mart front shop business come right back.

The other place that we see a little bit of volatility, it’s maybe more sustained performance is around our base script volume, which is doctors, perhaps, not writing the same number of scripts that they would typically. Doctors are not yet working as GPS at their full capacity. So we expect that also to line up pretty directly or to correlate pretty directly to increased openings.

Irene Nattel: That’s great. Thank you.

Operator: Thank you. And your next question comes from Mark Petrie from CIBC. Please go ahead.

Mark Petrie: Yeah. Good morning.

Just wanted to ask mostly on the Retail gross margin performance, clearly all the work on retail excellence is paying off. But could you just give a sense of the magnitude of the biggest contributors via procurement or private label mix? And are you able to quantify or at least roughly the impact of Pharmacy Services in Q4?

Richard Dufresne: Yeah. So if I start on the Food side, essentially the performance and gross margin on the Food side is just driven by better efficient merchandising and promotion activities. I think that would be sort of the bulk of the benefits that we’ve seen so far. On Rx services, the gross margin is higher than the average Shoppers business.

But the SG&A aspect of it is also higher than Shoppers SG&A rate. So, net-net, it’s accretive to shoppers as business, but like it’s creates a bit of volatility in both of those fingers.

Mark Petrie: Okay. Helpful. And how does Loblaw Media fit into the Retail margin performance today and how important is that to your margin outlook for 2022?

Galen Weston: So the Media business is still quite small, but growing rapidly.

It’s a business where we feel that as -- is going to have significant strategic advantage and financial advantage going forward to our business. It’s definitely going to help in 2022. But it’s more after that that we’re probably going to see the significance of that business. And that business from a margin and sales perspective is at the significant premium to the -- to our Retail business. So to be able to replicate the same dollar or margins in that business that would require like, significant dollar on Grocery or Drug sale.

Mark Petrie: Yeah. Understood. Okay. And that sort of dovetails into my last question, which is, in the outlook and in your commentary, you sort of highlighted the opportunity for margin expansion this year. I think the longer term framework typically is more about stable margins.

So I understand retail excellence work is the driver here, and obviously, Loblaw Media as well. But do you think there’s an opportunity to see margin expansion over the medium-term, so call it, three years?

Galen Weston: Tough -- it’s tough to predict what can happen to the future. What I can tell you, our focus at is and has been stability of gross margins. If we can maintain our gross margin stable, if we can manage our as generate well, we should be able to deliver decent performance to the business year in, year out and that is our daily focus. Not forgetting sales, we need sales performance to align with that.

But that’s sort of the metrics we’re focused on. And I would be remiss to not include market share, like, to me those are the four things we’re focused on and that’s what we focus on a daily basis.

Mark Petrie: Okay. I understood. Thank you for the comments.

All the best.

Operator: Thank you. And your next question comes from Vishal Shreedhar from National Bank. Please go ahead.

Vishal Shreedhar: Hi.

Thanks for taking my questions. Loblaw continuing to perform, amidst all these significant challenges that you’re seeing coming at you from a variety of angles, I am wondering how management feels about the in-stock positions in store and is that something that’s getting tougher through time or is it stabilized now? And if it has stabilized, should we anticipate that in the near-term?

Galen Weston: Yeah. We’re feeling a lot better about our in-stock position today than we were, say, three weeks or four weeks ago, where it was particularly difficult. And that’s a combination of both the structural challenges related to the supply chain, the ability for us to de-stock product, receive product at the ports and then transport that product across the country, that has been challenged and disrupted over the last number of months and then that was compounded by some particular weather events that affected our distribution channels in a, I don’t know, if a disproportionate way, but certainly a way that resulted in unsatisfactory conditions in stores. So we were in much better shape now and see ourselves staying in that shape moving forward.

But it isn’t like it was pre-COVID and those supply chain challenges are still lurking there. And so we would expect to be slightly behind our best standard for a little while longer.

Vishal Shreedhar: Okay. And a different flavor of this question that’s already been asked, but looking forward to 2022, management highlighted a variety of initiatives to deliver continued growth, it comments on strategic buying, leveraging customer loyalty and promo effectiveness. Solid results through 2021, management’s looking for another solid results through 2022.

So I was hoping, in those buckets, if you can help us understand, which ones are the major buckets driving that growth?

Richard Dufresne: Yeah. I think it’s all the buckets, like, it’s a whole, like, Retail, as Galen mentioned, and so we need to perform on all of these metrics and it’s our ability to perform well on all of those, that will allow us to continue to deliver consistent performance. We are very focused on consistency. It’s hard to do. But that’s our area of focus and that’s what we want to be continuing to deliver going forward.

Galen Weston: And Vishal, maybe, if I was to pick one, where we are feeling particularly optimistic. We’re not even feeling it, we’re seeing it, is on the use of our data to enhance the decision making really across the Board. And I know we’ve been talking about that, you know, and it’s potential for some time. But we are really beginning to see that impact showing up in our sales results each week. And the way to think about that is, we built a set of tools, those tools were not sub-optimal during COVID, because there was less price sensitivity.

There’s now more price sensitivity. Those tools are as a result much more effective. And so -- and now we are scaling up the use of those tools. And in my remarks I touched on the PC Optimum Points Day Event as a big picture example of that and just to kind of repeat the concept, that’s a single event that’s organized at an enterprise level, designed to drive sales at the item level, like, a bag of cookies. Also at the category level, say, perhaps, across an entire fresh department and at the program level, which would be hot new businesses or adjacent businesses, whether it’s e-commerce, whether it’s financial services or even something like Joe Fresh.

And we just came off our most recent, and probably, best executed event from a total enterprise integration point of view and it drove meaningful topline results in a very efficient manner from an investment perspective. So that’s happening at the micro level in day-to-day decisions in the merchandising desks and we’re learning how to mobilize it at the macro level to move the needle in particular weeks and months quite significantly.

Vishal Shreedhar: Are you able to measure the benefit delivered from those programs on gross margin versus base case?

Galen Weston: Yes.

Vishal Shreedhar: Okay. And maybe just one more question.

Obviously, a lot of media discussion related to some of your discussions or media chatter relate to some of your discussions with vendors and the difficult conversations regarding pricing. I am hoping -- I am wondering, management can find context on, if some of these discussions we’re having with vendors is part of a broader way to think about the space allocated to certain sectors and the positioning of private label was that media discussion more of the isolated events with one-on-one discussions with you guys?

Galen Weston: Okay. So we don’t want to comment on the specific discussions about our relationship with our vendor. They are our partners and we really value our relationship with all of them. But as to how we manage these cost increase requests coming from them, we have a team of experts.

And what they do is they deconstruct the cost of each skew into its components, such as, the raw ingredients, the packaging, the labor and transport, and look at what’s been happening to the cost of all of these components. And using their analysis, we’re now we’re now well positioned to assess the requests that are sent our way. Also, we deal with a large number of vendors and this also provides us with a very strong perspective on what’s happening on cost increase. So that’s how we’re dealing with this at the moment.

Vishal Shreedhar: Thank you.

Operator: Thank you. And your next question comes from Kenric Tyghe from ATB Capital Markets. Please go ahead.

Kenric Tyghe: Thank you and good morning. Galen, I heard your comments earlier in the call with respect to beauty and sort of the ebbs and flows.

A follow up question to that would be, how do you think or do you think that how consumers shop beauty and how consumers sort of -- will sort of the preferences will evolve in beauty on the back of the pandemic. Are there any insight you could share there, such as any changes you’ve seen in the consumers approach to beauty, beauty spend and the reach that would create for your beauty business?

Galen Weston: Yes. So the consumer behavior pattern, when it comes to shopping pretty much every category is evolving. And there’s no doubt that there’s substantially more beauty sales, for example, online. We just recently introduced a digital tool that allows you to see online what a particular color cosmetic might look like on your face without having to try it on in the store.

But I would describe these as evolutionary as opposed to transformational. And certainly in, what I -- in the shorter term, call it, the next six months to 12 months, the much bigger forces around consumer behavior relate very much to COVID and the end of COVID or lockdowns and the end of lockdowns. And what was -- the point I was trying to make earlier is that, it’s almost like a light switch. When the market opens up, customers come back to the stores and they purchase beauty items very much the same way and the impact on the on the sales volume is meaningful.

Kenric Tyghe: Thank you, Galen.

And then, just with respect to the supply position, you’ve commented, a lot happier with where you were, but not back to where you’d like to be. Is the sort of partly or likely to be fairly lumpy, particularly in the context of the blockade, that they are going to be some puts and takes between sort of here and there, with respect to your in-stock position. Certainly channel check wise that -- it does --it appears that, but that could also just be a bit of a false read from a pretty limited sample setup, any further thoughts there?

Galen Weston: Well, it’s a -- it’s been a volatile year in that respect. So I want to be careful not to predict the future with too much confidence. But as we look forward, we see most of that volatility now behind us.

And we’re kind of back to more consistent structural constraints as opposed to those one-off disruptions that would result in us seeing big gaps or holes on the shelf in a particular week as we have seen in the last month or two. But the pressures are still real. The ability for suppliers to source raw materials remains constrained. There are challenges around on the labor runt in terms of having people able to work in manufacturing facilities and we touched on this, I think, in Q3 or maybe then in Q2. One of the consequences of that is that vendors will focus their production capacity on their highest volume skews that results in the smaller skews or the alternative flavors not being as available and those are the places where we you would expect as a consumer to see, perhaps, less assortment from a particular brand than you might be used to.

We work very confidently and diligently to source other vendors and bring them into the stores to make sure that our customers have the breadth of assortment that they need. But that’s the way we’re managing the business right now. With the caveat that there might still be future shocks, but those disruptions from the last few months are behind us.

Richard Dufresne: Yeah. And if I might add…

Kenric Tyghe: Okay.

Richard Dufresne: If I might add from a financial perspective, you’ve not heard us talk about supply chain being a factor affecting our costs. There’s been a slight impact, but it’s been immaterial.

Kenric Tyghe: Thank you, Rich. And the quick final one for me, and probably, a long shot, any additional color you could provide on that -- to the composition at $3.1 billion? I mean, we know it typically, we knew what the waiting was pre-COVID in terms of Food Retail versus Drug Retail, but any further insight from that one?

Galen Weston: No. We won’t break it down for you.

I mean, I’ll provide a little bit of color on what’s happening in e-commerce. So, I mean, first and foremost, we’re quite comfortable with where that performance sits. And I think as Richard mentioned, in his remarks, we are -- Q4 was lapping up peak e-commerce sales, particularly on the Food and Grocery side and so we’re seeing the consequence of lapping that. We were fully locked down in the fourth quarter last year 2020 and we were almost fully open in 2021. So that’s the largest driver of the discrepancy in the performance.

The one thing I would add just for color, we continue to see robust strength on the delivery side of our business. And if you remember, we launched with enthusiasm, our direct home delivery channel in the GTA and in Montreal, and a couple of other cities over the last few months. And we’re very pleased with the traction and performance that we’re seeing from that value proposition.

Kenric Tyghe: Thank you. Best of luck.

I’ll get back in queue.

Operator: Thank you. Your next question comes from Patricia Baker from Scotiabank. Please go ahead.

Patricia Baker: Yeah.

Good morning, everyone. Thank you. Richard, in the outlook, you indicated that the CapEx in F 2022 would be $1.4 billion. Can you talk a little bit about where you’re spending and what projects you’re going to be executing against in 2022?

Richard Dufresne: Yeah. Essentially, it’s real estate.

So you’re going to see us spend money in our store network. That’s essentially most of the increase.

Patricia Baker: So renovating stores or?

Richard Dufresne: Renovating stores, building new stores, like the whole thing?

Patricia Baker: Okay. Are you willing at this point to tell us how many new stores you expect to build in 2022?

Richard Dufresne: Too early Patricia. Sorry.

Patricia Baker: Okay. Fair enough. And then just on your very strong and quite nice to see gross margin performance in Retail up 150 basis points in the quarter. And if we look back to the performance on the gross margin in the third quarter, it would be fair to say that, it was more balanced in Q4 relative to Q3, in other words that both Food Retail and Shoppers contributed?

Galen Weston: I’d say it’s more or less the same, Patricia. Like, we had strong contribution…

Patricia Baker: Okay.

Galen Weston: … in both Q3 and Q4 from both businesses.

Patricia Baker: Okay. And then you emphasize that one of the things that you’re very much focused on its market share. So what can you tell us about 2021 and Q4 with respect to market share?

Galen Weston: Very happy with our progress and I think I touched on this and you can imply market share impact. So the market division, especially since the close of Q4 is facing increasing headwinds, as more and more customers start to shift their behavior towards discounts, which is benefiting disproportionately.

We feel…

Patricia Baker: Okay.

Galen Weston: … we’re very happy with the way market is performing relative to its peers and that continues to be the case as we look forward. And I’d say, really encouraged, especially over the last six weeks or eight weeks around the accelerating performance of our discount business. And so, that’s the context maybe will help you think about market share.

Patricia Baker: Yeah.

No. Absolutely. Thank you for that, Galen.

Operator: Thank you. And your next question comes from Peter Sklar from BMO Capital Markets.

Please go ahead.

Peter Sklar: Thank you. Richard, question for you. So in the guidance -- like your guidance in the first half of 2022 is going to be stronger than the second half. And you said, because we’re at these high levels of inflation and you really don’t, the first half, you’re comping more moderate levels of inflation, but then by the second half, you’re competing against strong levels.

That’s basically the argument. But explain to me how this whole inflation argument wraps into it. Because, yeah, you’re getting more price through on the topline, but also, like you’re facing cost pressures, like I can’t recall, when you’ve ever seen cost pressures, you’re facing like this, not only cost of goods, sales, but everything, distribution, labor, it’s everything. So, like, to me how you’re wrapping in this inflation arguments and how that leads to a stronger first half than the second half?

Richard Dufresne: So far we’ve been successful in passing through the inflation and so if it stays at the levels we’re in now, I think, we should be able to continue to do to do it. So -- and we have good visibility in our business for the next like at least a few months and so we definitely feel more confident about the first half compared to the second half.

And then that -- after that, that stuff, like, we’re coming out of the pandemic, we saw a glimpse of being out last year, but like, who knows how it is going to be this year. So it becomes a little bit more fuzzy for the second half. We do know, though, that we’re going to be cycling this high inflation starting in July. So that so that’s how we built our budget and determined our outlook for 2022.

Peter Sklar: Right.

And how would you characterize your strategy and -- in Loblaw’s conventional and discount banners in terms of price leadership? Like do you feel you provide price leadership or you feel that other banners provide price leadership and you’d like to follow along? How would you characterize your strategy in terms of where you want to be in terms of price leadership, as we go through this really tough inflationary period?

Galen Weston: Well, I think, big picture, we want to be the best. We want to be the best market division store and we want to be the best large box superstore, and we want to be the best hard discount business. If you’re in the heart discount space, you need to have very competitive pricing and we are, as always, committed to that. It’s not just about price, though, it’s the quality of your fresh proposition. It’s the consistency of your store experience.

It’s your control brand program. It’s the sophistication of your merchandising efforts, both from a promotional perspective and an assortment point of view. And so, I say, the way to think about this is, we are watching our price position very, very carefully. We do it every week. But the merchandising teams are seeing opportunities to get more credit for less investment then we were seeing last year and that is what we’re trying to optimize for right now and that’s what you’ve seen the teams do over the last nine months.

And that’s driven a big part of the margin expansion and it’s precisely those same things that give us the confidence that we can sustain that, at least through the first half of the year.

Peter Sklar: Again, would you say your merchandising teams are seeing this opportunities, like, what exactly do you mean, is this were they using data and understanding the demand elasticity better or just seeing gaps where your competitors aren’t playing? What do you mean by that?

Galen Weston: I mean that. So -- and I mean both. Yeah, it’s a little bit, I mean, we can go right down into the detail, which we should -- which we shouldn’t do today. But the way to think about it is, there are opportunities that every element of our go-to-market strategy and the teams have been going through category-by-category, promotion strategy by promotional strategy and that’s what is contributing to the positive results.

Peter Sklar: Okay. And then…

Richard Dufresne: We…

Peter Sklar: Sorry. Go ahead, Richard.

Richard Dufresne: We feel we have a good grip on our gross margin. We feel we have a good grip on our sales performance.

And we feel we have a good grip on SG&A. And so that’s how you run successfully a business like ours. So that’s the feeling in the business right now and so that’s why we have that confidence for the first half.

Peter Sklar: Okay. Okay.

Just changing topics on my last question, it’s on the e-commerce. So you’ll remember in kind of 2020 when e-commerce exploded and you’re just throwing labor at the issue and you disclosed you lost $200 million? Can you talk a little bit about your profitability for e-commerce in 2021? Can you give us some indication of where that $200 million loss went to and what the outlook is for 2022.

Richard Dufresne: So that’s a tough one, okay. Because it’s actually quite volatile, Peter. Like, when we are in lockdown and penetration rates shoots up, puts more volume in the system and profitability shoots up.

So that was actually an interesting data point from our perspective, because we see that, as we push more volume into the system, we definitely get improvements in efficiency, which translates into profitability. So it’s helping us to find ways to become more efficient. So but to be able to predict exactly where it’s going to be, it’s very difficult, because tell me where penetration is going to be three weeks from now and I’ll be able to give you a sense. So the business has not yet stabilized. We feel we continue to progress in that business.

It’s probably going to be more like 2023, where hopefully, we’re back to normal and we have a better sense of where that business will lap.

Peter Sklar: And so what’s the read through that, Richard, you would hope the business could breakeven, as you’d like to measure it financially in 2023? Is that kind of where you’re hope is [ph]?

Richard Dufresne: No.

Galen Weston: I think it’s too early to say that. I mean, it depends entirely on the growth rate of penetration, as Richard said, post the -- the post this kind of COVID period. And we -- as long as there is growth, we will invest to maintain the appropriate level of market share and that has an impact on the overall profitability.

But the message that you should take away from Richard’s comments, I think, is that, we have seen a satisfactory economic outcome at certain levels of volume, when we’ve been able to get the line up the costs with the sales in an efficient way. And so we’ll continue to work to optimize, as the business normalizes.

Peter Sklar: Okay. I get that. Thank you for your comments.

Operator: Thank you. And your last question comes from Chris Li from Desjardins. Please go ahead.

Chris Li: Hi. Good morning.

And maybe just first question on digit -- on digital retail. Again, can you maybe just elaborate a little bit on some of the specific opportunities that you see to optimize operational efficiencies as it relates to delivery and the cost of fulfillment? Thank you.

Galen Weston: Well, so, I’m not going to go through the list of initiatives, so -- but start with just better picking algorithms, as you move people through the store. There is always opportunity to improve that. A better -- a more efficient process from the order staging out to people’s cars and then we’ve actually just opened our first full assortment micro fulfillment center and so we’ve talked before about the importance of improving pick productivity by centralizing assortment in these micro fulfillment centers.

And so, you’ll see us continue to make investments like that to improve the economics.

Chris Li: Okay. That’s helpful. And Galen, I think on the last earnings call, you mentioned, that as part of the retail excellence initiative, you guys have identify or has raised prices on certain products, that customers weren’t really giving you the credit for. Just wondering, like, where are you at on that journey, has it largely been completed?

Galen Weston: Sorry.

Chris, could you just repeat that, you’re asking about products that were priced.

Chris Li: Oh! Sorry. Yeah. No. I think on the last call, you mentioned that, as part of your retail excellence, you guys were raising prices on certain products that customers were not really giving you the credit for when you had them on promotions.

So just wondering if you have finished doing those types of pricing analysis?

Galen Weston: Yeah. So, again, I think, to be clear, that’s optimizing our value portfolio within a category and making sure that we are making investments in the products that customers care about most. That really goes in the bucket that we talked about earlier, which is the detailed approach to merchandising strategies, promotional strategies, increasingly using the data available to us to make smarter decisions. It’s an ongoing thing, as opposed to we’re ever going to finish. Let’s say we finish all the categories, which we haven’t done yet.

But if we finish all the categories, as soon as we’re done, we’re going to start at the front of the line again and do all the categories again. So just think about it not as a -- as an initiative with a finite delivery date, but just an ongoing way of doing business that makes sure we’re optimizing our category structures all the time.

Chris Li: Okay. That’s helpful. Maybe just a quick one on the PC Optimum program and it’s already the largest loyalty program in Canada, I think, with 18 million active members.

I guess my question is, has that number grown or is there room for that membership base to grow or is there real opportunity really just trying to increase engagement with your existing members?

Galen Weston: The biggest opportunity by far is increasing the level of engagement within that 18 million person list. We are constantly…

Chris Li: Okay. … bringing new people into the program. We have attrition. But it’s taking our active or not our active base, but our highly engaged base and increasing that week-over-week, month-over-month and the last six months have been pretty encouraging on that front.

And one thing I didn’t talk about it, when I mentioned the PC Points Days Event. Although, it wasn’t intended to do this, it had a secondary consequence, which was driving up overall engagement. So number of people downloading the app, number of people checking their offers in any given week, so it had a pretty synergistic effect on that front as well.

Chris Li: Perfect. And maybe just a last quick one for Richard, the COVID expense run rate of $8 million in the quarter.

Is that a good runway to pencil in for the year?

Richard Dufresne: Yeah. For the moment yes. And we’ll update you every quarter on that one, Chris.

Chris Li: Perfect. Okay.

Thanks and best of luck.

Richard Dufresne: Thank you.

Galen Weston: Thanks.

Operator: Thank you. And there are no further questions at this time.

You may please proceed.

Roy MacDonald: Great. Thanks very much for your time everybody. If you have any follow-up questions, just give me a shout or drop me a line and circle May 4th on your calendar when we’re going to be releasing our Q1 results. Have a great day.

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