Mr. Eric La Fleche reports

METRO REPORTS 2023 THIRD QUARTER RESULTS

Metro Inc. has released its results for the third quarter of fiscal 2023 ended July 1, 2023.

2023 third quarter highlights:

• Sales of $6,427.5-million, up 9.6 per cent;
• Food same-store sales up 9.4 per cent;
• Pharmacy same-store sales up 5.9 per cent;
• Net earnings of $346.7-million, up 26.1 per cent, and adjusted net earnings of $314.8-million, up 10.9 per cent;
• Fully diluted net earnings per share of $1.49, up 30.7 per cent, and adjusted fully diluted net earnings per share of $1.35, up 14.4 per cent.

President's message

"We delivered solid results in the third quarter fuelled by strong same-store sales and good operating leverage. With persistent food inflation, our teams did an excellent job to offer good value to our customers, resulting in market share gains and tonnage growth, driven by our discount food stores. Our loyalty program MOI was successfully launched this quarter and we are pleased with the strong customer response so far. This enhanced program provides even more value to customers by offering multiple ways to earn and redeem points on food and pharmacy purchases in Quebec. We are clearly disappointed with the current labour dispute in 27 of our Metro stores in the Greater Toronto Area given that we had reached a very good agreement that was unanimously recommended by union representatives. We look forward to a resolution and the reopening of our stores as soon as possible, while ensuring the long-term competitiveness of our company," declared Eric La Fleche, president and chief executive officer.

Operating results

Sales

Sales in the third quarter of fiscal 2023 remained strong, reaching $6,427.5-million, and up 9.6 per cent. Food same-store sales were up 9.4 per cent (1.1 per cent in the third quarter of 2022), driven by the continuing shift to discount and high inflation. On-line food sales were up 99 per cent versus last year (flat in the third quarter of 2022), mostly driven by higher partnership sales. Metro's food basket inflation was about 8 per cent, lower than reported food CPI (consumer price index) and lower than the previous quarter. Pharmacy same-store sales were up 5.9 per cent (7.2 per cent in the third quarter of 2022), with a 6.7-per-cent increase in prescription drugs and a 4.1-per-cent increase in front-store sales, with increases across most categories except over-the-counter products.

Sales in the first 40 weeks of fiscal 2023 totalled $15,652.9-million, up 8.3 per cent compared with $14,456.3-million for the corresponding period of 2022.

Operating income before depreciation and amortization

This earnings measurement excludes financial costs, taxes, depreciation and amortization.

Operating income before depreciation and amortization for the third quarter of fiscal 2023 totalled $612.3-million, or 9.5 per cent of sales, an increase of 8.4 per cent versus the corresponding quarter of fiscal 2022. Included in the third quarter of fiscal 2023 are launch costs of $5.1-million related to Metro's loyalty program MOI. Included in the third quarter of fiscal 2022 are $7.7-million of direct costs related to the one-week labour conflict and collective agreement ratification with Metro's distribution centre employees in Toronto offset by a non-recurring gain on the sale of assets of $8.7-million. Operating income before depreciation and amortization for the first 40 weeks of fiscal 2023 totalled $1,521.6-million or 9.7 per cent of sales, up 8.4 per cent versus the corresponding period of 2022.

Gross margin for the third quarter and the first 40 weeks of fiscal 2023 were 19.6 per cent and 19.8 per cent, respectively, versus 19.8 per cent and 19.9 per cent for the corresponding periods of 2022, reflecting the decline in Metro's food margin. Gross profit for the third quarter of 2022 included $5.3-million of direct costs related to the one-week labour conflict with its distribution centre employees in Toronto.

Operating expenses as a percentage of sales for the third quarter and for the first 40 weeks of fiscal 2023 were 10.1 per cent versus 10.3 per cent in the corresponding periods of 2022. Operating expenses in the third quarter of fiscal 2023 were impacted by $5.1-million of launch costs related to Metro's loyalty program MOI as well as fees related to higher on-line partnership sales. Included in the third quarter of fiscal 2022 are $2.4-million of direct costs related to the one-week labour conflict with Metro's distribution centre employees in Toronto.

Depreciation and amortization

Total depreciation and amortization expense for the third quarter of fiscal 2023 was $159.5-million versus $154.7-million for the corresponding quarter of 2022. For the first 40 weeks of fiscal 2023, total depreciation and amortization expense was $400.2-million versus $383.5-million for the corresponding period of 2022.

Net financial costs

Net financial costs for the third quarter of fiscal 2023 were $37.1-million compared with $35.8-million for the corresponding quarter of 2022. The increase is mostly due to higher debt partly mitigated by higher capitalized interests on Metro's distribution centre automation projects. For the first 40 weeks of fiscal 2023, net financial costs were $92.5-million compared with $92.3-million for the corresponding period of 2022.

Income taxes

The income tax expense of $69-million for the third quarter of fiscal 2023 represented an effective tax rate of 16.6 per cent compared with an income tax expense of $99.6-million and an effective tax rate of 26.6 per cent in the third quarter of fiscal 2022. The corporation recorded tax assets of $40.7-million in the quarter ($8.2-million of current tax assets and $32.5-million of deferred tax assets) with an equivalent reduction of the tax expense following a favourable judgement at the Tax Court of Canada. Capital losses previously disallowed by the Canada Revenue Agency (CRA) on the disposition of shares of a subsidiary in the years 2012 to 2014 have now been granted. The CRA subsequently accepted that the corporation amend a rollover form filed for the tax year ended March 3, 2018, resulting in an increase in the tax base of intangible assets.

The 40-week period income tax expense of $232.3-million for fiscal 2023 and $246.6-million for fiscal 2022 represented an effective tax rate of 22.6 per cent and of 26.6 per cent, respectively.

Net earnings and adjusted net earnings

Net earnings for the third quarter of fiscal 2023 were $346.7-million compared with $275-million for the corresponding quarter of 2022, while fully diluted net earnings per share were $1.49 compared with $1.14 in 2022, up 26.1 per cent and 30.7 per cent, respectively. Excluding specific items, adjusted net earnings for the third quarter of fiscal 2023 totalled $314.8-million compared with $283.8-million for the corresponding quarter of 2022 and adjusted fully diluted net earnings per share were $1.35 versus $1.18, up 10.9 per cent and 14.4 per cent, respectively.

Net earnings for the first 40 weeks of fiscal 2023 were $796.6-million compared with $680.8-million for the corresponding period of 2022, while fully diluted net earnings per share were $3.39 compared with $2.81 in 2022, up 17 per cent and 20.6 per cent, respectively. Excluding specific items, adjusted net earnings for the first 40 weeks of fiscal 2023 totalled $777.8-million compared with $702.7-million for the corresponding period of 2022, and adjusted fully diluted net earnings per share amounted to $3.31 versus $2.90, up 10.7 per cent and 14.1 per cent, respectively.

Normal course issuer bid program

Under the current normal course issuer bid program, the corporation may repurchase up to seven million of its common shares between Nov. 25, 2022, and Nov. 24, 2023. Between Nov. 25, 2022, and July 28, 2023, the corporation has repurchased 6,219,700 common shares at an average price of $72.23, for a total consideration of $449.3-million.

Dividends

On Aug. 8, 2023, the board of directors declared a quarterly dividend of 30.25 cents per share, the same amount declared last quarter.

Outlook

Metro remains focused on offering quality products at competitive prices as higher-than-normal inflation and market challenges persist. While the company is not able to predict how the current macro-economic environment will evolve, it is seeing some moderation in food inflation, although it is still elevated compared with prepandemic levels. With this backdrop, Metro remains resilient and committed to providing the best value for its customers while delivering on its strategic priorities. In this respect, the company looks forward to the launch of its state-of-the-art, automated distribution centre north of Montreal in the coming weeks.

Conference call

Financial analysts and institutional investors are invited to participate in a conference call for the 2023 third quarter results at 9 a.m. (EDT) today, Aug. 9, 2023. To access the conference call, please dial 416-764-8651 or 1-888-390-0620. The media and investing public may access this conference via a listen mode only.

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