Empire Company Ltd. (EMP.A) Q4 2016 Earnings Conference Call June 29, 2016 7:00 AM ET
Clinton Keay - EVP of Finance
François Vimard - CFO
Marc Poulin - President and CEO
Mark Petrie - CIBC World Markets
Derek Astley - TD Securities
Jim Durran - Barclays Capital
Kenric Tyghe - Raymond James
Peter Sklar - BMO Capital Markets
David Hartley - Credit Suisse
Patricia Baker - Scotiabank
Keith Howlett - Desjardins Securities
Vishal Shreedhar - National Bank
Michael Van Aelst - TD Securities
Good morning. My name is Michelle, and I'll be your conference operator today.
At this time, I'd like to welcome everyone to the Empire Company Limited Fourth Quarter Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question‐and‐answer session.
[Operator Instructions] I would now like to turn the call over to Mr. Clinton Keay; Executive Vice President of Finance for Empire Company. Please go ahead.
Thank you, Michelle. Good morning and thank you for joining us today.
Our comments today will focus primarily on the financial results of the fourth quarter and fiscal year ended May 07, 2016. Following our comments, we will then be open to your questions. This call was being recorded in live audio on our website at www.empireco.ca.
Joining me on the call this morning are Marc Poulin, President and Chief Executive Officer and François Vimard, Chief Financial and Administrator Officer.
Today's discussion includes forward-looking statements. We want to caution you that such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. I refer you to our news release and MD&A for more information on these assumptions and factors.
I will now turn the call over to François, who will provide a review of Empire's financial statements. Marc will then discuss Sobeys.
Thank you, Clinton, and good morning everyone.
Before I begin to review the financial results, I would first like to speak to the additional impairment charge that was recorded in the quarter. The poor results of our Western business unit, including the impact we will discuss related to gross margin and EBITDA, deepened throughout the fourth quarter with impacts felt across additional banner in the West and as a result management determined it would be again required to review and perform the appropriate financial analysis of the value and use of the assets of the Western business unit.
The specific assumption of this analysis has been disclosed within our financial statement and MD&A. As a result of this analysis, management determined that an additional impairment charge of $1.3 billion would be required.
Management and the Board continue to believe that our Western business unit will be successful piece of our strategy for the future and remain confident in our business and store employees throughout the Western business unit. And buyer considered sales in the fourth quarter were $6.8 billion, an increase of $512.7 million or 8.9%.
The additional week of operation in fiscal 2016 account for approximately $461.2 billion or 8% of the 8.9% increase in sales. Sobeys same-store sales excluding few, decreased 1.28% for the quarter as compared to last year. Our internal food inflation for the quarter was calculated at 2.2%.
Calculated sales for fiscal 2016 were $24.62 billion, an increase of $690 million or 2.9% compared to last year. The additional week of operation in fiscal 2016 account for 1.9% of the increase in sales. Same-store sales decreased 0.2% for fiscal 2016 compared to last year.
As previously discussed, following the close of Canada Safeway acquisition, we began the integration of the Safeway business with existing operation, which had resulted in number of the personal issue that had impacted financial results.
As previously discussed, merchandizing issues such as our private label conversion, produce supply chain issue and people transition effort, proved distracting and presented considerable short-term challenges to the business.
The economic environment mainly in Alberta and Saskatchewan continues to put further pressure on our sales and margin erosion, which is being felt across all banners in the Western business units.
All of these factors combined to negatively impact our customer experience and resulted in same-store sales for the West business unit, excluding few of the negative 3.6% in Alberta 14 weeks and the negative 1.5% for the 53 weeks ended May 7, 2016.
Excluding this fuel sales end of retail West business unit, same-store sales for the 14 and 15 weeks ended May 7, 2016, would have increased 0.2% and 1.5% respectively. Gross margin for Sobeys' fourth quarter gross profit increased $90.3 million or 6.2% related to the same period last year.
This increase is mainly the result of the additional week of sales in the current quarter. Gross margin decreased 60 basis points to 24.6% compared to 25.2% last year.
For the full year, Sobeys' gross profit decreased $4.9 million or 0.1% compared to the prior year. Gross margin decreased 70 basis points to 24.2% compared to 24.9% last year. The decrease continues to be the results of the impact of lower customer spend and more aggressive merchandizing and promotional activity combined with higher promotional penetration, especially in Western Canada.
Consolidated EBITDA in the fourth quarter was negative $1.05 billion compared to $236.3 million in the fourth quarter last year, a decrease of $1.28 billion. The decrease in EBITDA was primarily the result of the goodwill and long-lived assets impairment noted and the factor affecting sales. The provision related to manufacturing purchase price adjustment also impacted EBITDA.
After adjusting for certain items to better analyze trend and performance and financial results, consolidated adjusted EBITDA for the fourth quarter was $269.6 million, a decrease of $69.7 million or 20.5% over the fourth quarter last year.
Adjusted EBITDA margin in the fourth quarter was 4.3%, down 160 basis points or 5.9% in the same period last year. For the full year, consolidated EBITDA was negative $1.94 billion compared to $1.22 billion last year, a decrease of $3.17 billion.
The decrease in EBITDA was largely due to impairment recorded for goodwill and long-lived assets and the provision related to the manufacturing and purchase price adjustment. This was partially offset by the factor affecting sales.
After adjusting for certain items to better analyze the trend in performance and financial results, consolidated adjusted EBTIDA for fiscal 2016 was $1.16 billion, a decrease of $160.5 million or 12% over last year. Adjusted EBITDA margin for fiscal 2016 was 4.7%, down 80 basis points for the 5.5% in the same period last year.
Investment and other operation reported operating income of $24.7 million in the fourth quarter versus $29.6 million in the same period last year, a decrease of $4.9 million. Equity accounted earnings from Genstar were $2.8 million in the fourth quarter, a decrease of $8.3 million compared to $11.1 million recorded in the same period last year. The decrease relative to last year was primarily due to stronger operations result last year.
Equity accounted earnings for the Company investments in Crombie REIT were $18.1 million, an increase of $11.1 million over the same period last year. This increase is due to an increase in operating income from Crombie as a result of the group of properties sold in the first quarter of fiscal 2016. We refer you to Crombie REIT Q1 News Release on May 4 for details of its most recent quarterly results.
At the end of the fourth quarter, the fair value of our 41.5% equity accounted ownership interest in Crombie REIT was $786 million, on the carrying value of $366.8 million.
Subsequent to May 7, 2016, Sobeys entered into an agreement with Crombie REIT to sell and lease back the portfolio of 19 retail property and 50% interest in each of our three automotive distribution center as well as the sales of two parcels of development land owned by Empire.
The transaction will result in a net cash proceed of $324.6 million, which is expected to be used to repay senior unsecured notes coming due and the receipt of approximately $93.4 million value of Class B LP unit of Crombie.
For the fourth quarter, our finance cost net of finance income to remain consistent with the same period in the last year. During fiscal 2016, finance cost net of finance income decreased $17.7 million to $137.4 million. The decrease is probably due to debt repayment in fiscal 2015.
The company effective income tax rate for the fourth quarter of fiscal 2016 was 21.5% compared to 28.1% in the same period last year. The reduction is largely due to a change in estimates regarding the rate at which the tax effect consequence of the impairment of goodwill and long-lived assets will be realized.
The company effective income tax rate for fiscal '16 was 17.3% compared to 25.6% in the same period last year. This reduction also is the consequence of the impairment of goodwill and long-lived assets. The effective income tax rate, excluding this impact would have been 27% compared to 25.6% in the prior year.
In the fourth quarter, Empire recorded adjusted net earning net of controlling interest of $95.3 million or $0.35 per diluted share, compared to $136 million or $0.49 per diluted share in the same period last year, a decrease of $41.4 million or 30.3% related to same period last year.
For fiscal '16, Empire recorded adjusted net earning net of controlling interest of $410.2 million or $1.50 per diluted share, compared to $511 million or $1.84 per diluted share last year, a decrease of $100 million or 19.7%.
With respect to our overall consolidated financial condition at the end of the fourth quarter and Empire consolidated ratio of funded debt to total capitals was 39.4% compared to 27.6% last year. Cash and cash equivalent at the end of the fourth quarter equaled $264.7 million.
Free cash flow for the fiscal 2016 was $422.8 million versus $1.4 billion last year, a decrease of close to $1 dollars. The decrease in free cash flow was attributed to a decline in cash flow from operating activity and mainly by a reduction in proceeds of the divestiture of non-core assets related to the same period last year combining an increase of property, plant and equipment purchase in fiscal 2016.
I will now turn the call over to Marc Poulin.
Thank you, François and good morning, everyone. Cleary a very disappointment quarter for our organization driven by continued challenges in our business in Western Canada that we've documented over the past three quarters.
While we have made progress in executing our integration plant for our Western business and we believe that the significant part of the integration destruction is nearing an end, our results continue to be impacted by these effects of the operational challenges we have in our West business and what remains a very difficult economic climate particularly in Alberta and Saskatchewan.
With the completion of our people transition phase of the integration completed in the fourth quarter, we are now operational as one team in the West. This is an important milestone that cannot be underestimated and that will ensure that the right focus is now placed on the day-to-day operations of our business.
In the fourth quarter, we saw early evidence of a softening sales trend in our regions of the country. Although Management remains focused on reversing these negative trends like consuming in all the core strategies of cost reduction and for renewal and relative pricing for our customers, the stabilization and eventual return to acceptable level of growth in our business is still going to take time.
We know the overall market continues to experience a significant shift in customer mindset, which only serves to reinforce the approach we're taking in making significant structural changes to our business.
With that, I would like to provide you with an update on our three key areas we're focusing on that strengthens our business across the country, pricing structure, network renewal and driving efficiencies, so let me start with price.
As we mentioned last quarter, we are currently in the process of redefining our relationship with suppliers and our retailers under a program called Simplified Buy & Sell or SBS, which is designed to simplify, standardize and organize the buy and sell structure across all the facilities.
Our goal is to increase the cost transparency and enable better category management, ultimately allowing us to strategically improve shelf price competitiveness and overall price perception across the country.
By rebalancing customer spend from promotional to a reduced regular price; we expect to fulfill a greater share of our customer grocery shopping. In April, we introduced SBS into our Quebec stores and the early results are starting to show a customer shift to the lower regular prices and a drop in promotional penetration.
Clearly, we remain in the early stages of this important structural change to our business model and I acknowledge that's a significant amount of heavy lifting remains to ensure traction with our customers over the long-term both in the Quebec market and as we systematically roll the program across the country throughout fiscal 2017.
We continue the rollout of our new concept stores across the country with renovations to our Albert Street Sobeys in Regina and Safeway Oliver Square in Edmonton as well as I mentioned to the facilities at Urban Fresh at Queens Quay in Toronto and the opening of the relocated IGA Extra in [indiscernible].
We're pleased with customer response to the new concepts, both in the West and across the country and we'll continue to aggressively rollout these and start moving forward. The new concept stores opened as part of the broader investment we're making in renewing our overall store network across various formats and banners that in Q4 included seven new stores, three expansions and three relocations.
And while we continue to seek ways to grow our business, we remain unwavering in our focus on driving efficiencies and taking costs out of our business. Our focus and single largest opportunity right now remains on the work we're doing to integrate our distribution and logistics network in Western Canada and Ontario.
In the fourth quarter, we finalized the future strength of our entire distribution network in Western Canada with the announcement of the closure of two facilities in Calgary and Edmonton. The process to define and integrated network began more than two years ago.
When completed in the fall of 2017, we will have a total of 10 distribution centers down from current 18 that we've pulled through Canada Safeway acquisition, providing us with the most efficient food distribution network in Western Canada.
We remain on schedule with the expansion of our augmented distribution center at Vaughn that will support the distribution of frozen dairy and dairy categories in the Ontario province. The facility will be fully operational in January 2017 and will result in the closure of our Milton Distribution Center. Please note that work continues in our automated facility in Rocky, New Alberta, scheduled to open in the spring of 2017.
We continued to strengthen our leadership talent through the addition of Beth Newlands Campbell who joined us in Q4 to lead our Flanagan, Ontario business unit. Beth has more than 30 years of food retailing experience, including experience as President of Food Lion in the U.S. And Monday we announced the appointment of Lyne Castonguay as Chief Merchandising Officer for Sobeys. Lyne will be responsible both for all aspects of our go-to-market strategy.
For the past 14 years, Lyne has held Senior Merchandising, marketing and operation roles in the Canadian business of Home Depot as well as their U.S. business.
We are delighted by the addition of both these experienced and passionate retailers and know that they will have a [audio gap] for this type of business.
So in closing, let me simply say this. We are disappointed with our Q4 results and overall results for the year. Having said that, we're confident that we have the right strategy to compete and succeed in the Canadian food retail and market life and that our ability to successfully execute our strategy requires significant structural change for our business model.
We're making those changes and the associated investment, but it will take time for those changes to impact the business and be sustainable.
We're now happy to respond to your questions.
[Operator Instructions] Your first question comes from Mark Petrie from CIBC. Your line is open.
Hi. Good morning. So first I guess with Western Canada, I guess maybe you could just talk about specifically what worsened to lead to the write-down? Was it basket? Was it traffic? And how does the Reg promo balance shaping up out there?
Maybe I can give some sense in term of from the write-down period to deepen and then in turn if you look at our total comp store sales as we've mentioned back in Q3, the comp store sales for the West was negative $2.7 million and in Q4, they were close to $3.7 million negative.
So clearly we saw it deepen in the trend in our negative sales out West. And like we also said on the press release it did touch also our other banners out West. So the momentum that we have out West was -- the trend was even more negative. So that's the cause.
In term of pure business I would say overall it depends -- the reaction by banner and by market are a bit different. You can understand Mark that depending if it's on oil or old part of the country clearly and customer can go down quite a lot because it's less people, but they have also basket size impact in some of our store mainly because people are looking at pricing as even more than usually.
And so those two have clearly have an impact to our sales the most and it's a bit different by different banner or a different part of the country, but the overall market is affected.
Okay. And then I guess when you look at the first, the earlier results of your price action at IGA and Quebec, obviously a pretty complicated shift to execute, but what variable or piece of the equation to balance gross margin came in differently than perhaps you anticipated and did you get the volume growth in that market?
So we're actually, its early stages and especially in the quarter was only four weeks in this quarter and we -- so let's take that in perspective. What we're saying is that the customer acceptance of the new pricing strategy is in line with our expectation.
Obviously it's a long term process for people to integrate the venue competitiveness of their regular price bucket, but with its building up nicely, we're seeing that the -- that the customer behavior is already shifting to greater acceptance of their regular price bucket.
What is also important to note is that as we negotiate with suppliers the way we go to market, this is also starting to drive changes in the category strategies that the supplier adapt to their new strategies and that is going to be what's going to have a long term impact as we will optimize each category based on customer reaction and obviously we've clear transparency in our cost followed by the way we're going to market.
So that will facilitate the implementation and better strategies in the long term and that's the long term impact we're looking with the program is actually building better category plans that's our marked customer focus and that's our mark driven by an overall customer desire about their expectations in the category.
Okay. And then I guess connecting those two questions, how important is the rollout of that type of change to the West in terms of turning around the trends in the Western Canadian business and maybe you could just give what you think are the key things that you guys need to execute on over the next couple quarters or whatever timeframe you want to put on to be able to stabilize the Western Canadian business?
Clearly structural nature of this are important to re-launch the Western business and this is going to be part of the effort and we're clearly working on it. I would like to mention that in the Western business, we've reformed the produce that we will go-to-market and produce by lowering regular prices and overall prices in produce.
We did that in January and in May to the timeframe we also launched in the industry, lower meat prices around the campaign, better meat at lower prices that we launched in the May timeframe and as you can imagine grocery is part of the equation as well.
So we need to reposition our Western business in the way it competes and takes acknowledge actually the significant shift in the economy out there and got some customer reaction that follows with that. So that's clearly very important that we do so and working hard on that.
I guess the other things that are very important in the next quarter for us as we operate now as one team, we believe that we'll be more agile than we've been in the past to in the way we operate the business.
On the cost side of things in the business we are also putting the final touch on all the systems that allow us to manage the business at a certain level, things such as engineered labor standards are -- and all the processes associated with managing shrink and computer assisted ordering.
So all these systems were introduced in the Safeway business as part of the system launch. Some took a bit of time to be implemented that we needed to introduce first the overall central system and then went to stars and they need to be appropriate if I want to use that word, by the people at store level, and we're seeing traction on that part too.
So for us getting good controls of the basic operational systems at star level especially on the safe way side of things as we change those systems is very, very key and that's key in the next few quarters that will allow us to have full control of our business.
And obviously we, when the market conditions are right and we're going to keep investing in the renewal of the network, but even in markets where we're not putting investment, we also work hard at enhancing the offer for our customers by the introduction of new commercial programs and harmonizing the programs that are between Safeway and Sobeys benefitting, that's the reason in both cases.
We're introducing successful programs that are in the Sobeys business and Safeway and introducing successful programs that are in Safeway business into Sobeys. So those elements in place are key to success in the Western business.
Okay. Thanks. And then I guess just to follow-up on that last point, do you have a timeline in terms of when you would expect to put more material capital into the Western business, or is that just deferred at this point?
No, it’s on an ongoing basis and we do have started currently that are in renovations and with a particular focus on making those changes successful, but and so it’s an ongoing process.
Okay. I’ll pass it along. Thank you.
Your next question comes from Michael Van Aelst from TD Securities. Your line is open.
Good morning, everybody. It's actually Derek standing in for Mike. I'll limit my questions to a couple. Then I'll re-queue. Just maybe going back to the simplified Buy and Sell initiative in Quebec, I just want to know whether you guys think that it's been effective enough to roll out to the rest of the country.
It is a structural change in the way we go to business that we believe is necessary for the company tool to the next phase of evolution and therefore we rule out. You got to realize that Simplified Buy & Sell plays at multiple levels. It plays in simplifying our relationship and negotiations with suppliers giving greater cost transparencies to be carrying manager so that they can make appropriate category management decisions and at the same time Simplified are back on infrastructure, so that we can work more efficiently with our suppliers and therefore derive cost out of the business.
So it also goes to the way we go to market in changing the regular price file and the competitive of the regular price file and its interaction with the promotional program.
So it impacts the business in more than one way and that’s why we say it is a structural change in the way we look to business that will have short term implication on the way you communicated initially with the customers, but it will keep changing the business afterwards as we -- as it impacts the way we plan each categories in the business.
Okay. And that's very helpful. Has this structural change started to take in out West or to the other banners, sorry?
Right now, we are in Quebec with it and obviously we're in discussion with our suppliers about the rest of the business.
Okay. You guys have -- you’ve implemented promotions, you've lowered shelf prices in some cases. Has there been any thought given to rolling out the fresh co-banner outside of Ontario?
Clearly this is top of mind for management. As we always said, we felt that we needed a couple of years after the aggressive launch in Ontario to tighten up the loose end about how the concept operates, make sure that was very efficient and because that's the only main, that's the only way you can be successful and discount if you get the right decision because of your concept.
And we’re pleased to report that we’re very pleased with the overall performance of the fresh co-banner in Ontario. I think the team rose to the challenge of tightening up their concept to a point where we are -- we have a concept here that has life and that we truly understand now.
So you think it's exportable outside of the province, the model?
It’s a concept we're quite pleased with.
Okay. And may be just one final one before I re-queue, anything you can share with us your rational behind the sales leaseback transaction, just wondering why Sobeys is actually selling the units to pay down debt rather than just to refinancing?
It’s not a question of timing. If you look at the value on the Columbia REIT side, their unit price, the valuation we could get on that side, I think we would rather than Empire, we were creating value by doing this. So we look at different options and that option at the end was the one was creating the whole value.
Okay. Thanks for that.
Your next question comes from Jim Durran from Barclays. Your line is open.
Good morning. Marc, I was just wondering like with respect to this broadening of weakness, do you view that as your pricing positioning in the marketplace or is that more of an industry-wide change in consumer spending?
We haven’t seen strong economic weakness outside of the oil producing markets obviously. So is this just you guys needing to reduce the spread or is this more of an industry-wide dynamic?
I think it’s an overall industry-wide dynamic to be honest. That being said, we’re challenged by maybe more challenged than other players. So we will acknowledge our own weaknesses through the statement, but you currently have a market growth in various parts of the country that is first unequal that’s for sure.
But the customer that’s clearly facing challenges on their ability to set disposable income in the country is clearly not growing at the same pace as the economy.
We’re seeing taxes being increased on various charges and increases on the consumers and therefore I think that's underlying is pretty good across all provinces and again in Brunswick not being now a driven province has increased taxes recently and so we’re seeing that pressure on the consumer and I think it’s impacting the consumer psyche whether we like it or not.
And would you attribute this partly to like we've obviously had above average food inflation for several years now and at the same time the gas fuel price savings have now gone to almost zero in terms of the consumer's wallet?
I think those two elements you mentioned are clear factors, while the inflation we had in the business in the last two years had a positive impact on sales. It also had an impact on how consumers look at their food basket and so we somewhat benefited at the time of above some bottom being put on the pressure, but at the same time customers starting to react differently to how they shop food and so -- and the psychological impact will remain or that's not what we're seeing while the impact of inflation on food is starting to subside.
And at the same time like outside of Alberta and Saskatchewan, would you say that the discount segment has started to move prices down and so that’s widening the spread versus conventional at the same time?
I am not sure I would say so now.
Okay. Last question just a clarification question, I think François at the beginning of his opening comments referenced some I think comp store sales numbers and I just didn’t get them properly. So if that was like minus 3.6% in Alberta was the comment?
Yes, it wasn’t Alberta. It was the total West business.
Okay. And the minus 5.4 ending May 7, was that for what period overall?
Minus 5.4 let me check Jim, I’m not sure which number you’re talking about.
Yes it was all part of the same commentary.
Okay. I will go back to it and come back to you Jim.
Great. Thank you.
Your next question comes from Kenric Tyghe from Raymond James. Your line is open.
Thank you. Good morning. I wonder if I could just switch back to Western Canada for a minute, if we were to strip out the macro discussion for a minute and look at the couple of the other backups you’ve previously highlighted, the challenges in private label merchandising and the experience and recognizing that those are all very closely linked, if you were to have to rank order or how should we think about how those three have impacted and continue to impact the performance in Western Canada?
I'm trying to handicap the sensitivities around the Western Canadian business and how you're going about or how you're progressing in terms of addressing those stepping away from the very obvious macro challenges for a minute?
Well, I think it's the problem of one compounding on the others and we're going to take it in the sequence of how things happen. In March of last year we've basically turned to switch on to the new systems. When we did so, we started to experience issues in produce procurement and those were related to the fact that in the past safe we use to procure to the U.S. systems and also to our U.S. buying office.
And as the transitional agreement expires, we took over that and therefore we had a bunch of new buyers for produce in the Safeway business in Western Canada and to be honest, transition didn’t go as smoothly as we anticipated and they were literally associated with that.
We basically have for a number of months a difficult replenishment of our stores in produce, the quality of what we were putting for the customers was impacted as a result of that. And then I think started to be a little bit better from our own internal process point of view.
We had a pretty tough growing season last year with quality being impacted not only for us, but for the market as a whole. But those -- that prolonged to a certain degree the self inflicted wounds to a certain degree. If we look at the produce situation, now we're -- the team is a lot stronger doing and it shows up in the quality of what we’re presenting to our customers and the service levels until rates are at very acceptable level at this stage in line with what we would in the rest of the country.
So to a certain degree that took a while, but it got results and around the fall time let’s say. In regard to private label, we introduced the Compliments Brand to the customers and substituted the like-for-like items between Safeway and Sobeys towards confidence and we saved some customer initial reaction to it not knowing exactly or not to hear about what was in the product even though in most cases it was exactly the same product.
Or in some cases, we had to switch the Compliment formulation to a Safeway formulation, but that being said, we -- customer reaction was not what we anticipated and was a little bit -- was more difficult to the introduction.
But again we put programs and promotions to get customers to look at the brand and how -- and now we’re in a position where we can say that for like-for-like guidance our sales in private label have actually are actually increasing higher than what they used to be.
So customer's acceptance of the private label is getting there, but again this happened around the spring of last year timeframe and to be honest we -- so we had a pretty though spring and summer last year as those two things combined to create a store experience that was not at the level our customers were expecting from us.
Then in the fall it's stacked when we just started clearly to see signs of the Western economy impacting the way customers were behaving at the start. So we saw increase promotional penetrations pretty certain to be honest and an overall customer that was really changing the way they were shopping.
So that came at the time where we were stabilizing the business and it compounded the issues we had to and it started to take the forefront of the -- on the overall customer experience.
I am not saying that we're perfect in the way we manage the stores and we felt we're still living to a transition at those stages, but I would argue the combined impact of both that really created the situation we’re in and the economic crises really in our business at the time where we were clearly vulnerable in the way we were operating.
Great, thank you. And then just two quick follow-ups, Mark highlighted earlier the price investments you're making in fresh and I was curious as to how effective that’s been in terms of the share trends in Western Canada?
Have the initiatives actually positively impacted your tonnage? Have you been able to recoup the tonnage you've perhaps lost with your procurement issues early last year or how is that trending to the extent you can comment?
So we’re pleased with the way the produce initiative played out. I think, Safeway we started with saying tonnage increases. That being said, the overall business is impacted by -- the overall produce business is impacted by the trends we're seeing for the overall start.
So that’s an issue, but we’re clearly making progress in produce and seeing some benefits to the initiatives we launched is a perfect no, but I think customers are starting to realize that we have a very good produce program with a high quality and very competitive prices.
And was there any ripple or contingent from the disruption out West in the supply chain into your Ontario base or all the Sobeys stores?
No, no impact between the Western and Sobeys, Ontario is their self contained business.
Great and just a final one for me if I could, just with respect to the store experience and the renovation, is there -- what’s the single biggest reason you wouldn’t look to really ramp the renovation and the pace of renovation there?
What’s your mind is the biggest barrier to really accelerating the pace of renovations of the Safeway footprint given current market dynamics and given all these moving parts here or ways that the moving part would preclude your wanting to accelerate the renovation of the actual critical footprint?
We’re actually doing an acceleration of our renovation in the Western business where although focusing our renovations in markets where the conditions are right for it and therefore we got to make sure that we can benefit at the maximum from those investment both in terms of ability to deliver great experience for our customers. At the same time to as the right cost structure to do something.
Thanks so much. I'll leave it there.
Your next question comes from Peter Sklar from BMO Capital Markets. Your line is open.
Thank you. First question on same-store sales, I believe you disclosed at your national same-store sales, same-store sales were negative 1.8%, but you also typically disclosed your national same-store sales. I believe that included fuel. I’m just wondering if you have that number…
You're right Peter and I said that in the script and that was 1.28% excluding fuel. So like you said, minus 1.8% everything included and minus 1.28% excluding fuel.
That’s negative 1.2%.
Yes okay. I noticed that in the performance of the grocery business looking at the margins that your SG&A margin was up quite a bit relative to previous quarters and I was wondering why that’s playing out. Is that store labor or what is going on there?
I would say Peter, I would say the biggest impact is clearly the negative leverage with the sales clearly because as you know in our business, close to 80% of our costs are fixed as many as the store level as you can imagine. So there is a bit of negative leveraging going on, on the SG&A when you look at percentage. So that has been a big part of it.
Okay. And I have a question on the simplified Buy and Sell program, I believe as you implement the program through IGA and Quebec that Management anticipates it would be initially somewhat margin neutral until you’re able to change consumer behavior and encourage the consumer and see the consumer buying more on shelf, less on promotion.
And if that’s true and I’m just wondering why the program is not initially margin neutral because my understanding of the program is you’re renegotiating all the allowances that you receive from your suppliers rather than accepting those allowances over time, rather you’re initially buying it into -- you’re initially incorporating that into the shelf price.
So I’m just wondering if you can talk a little bit about how the mechanics work and whether or not the impact is neutral on margin or you need to see some change in consumer behavior.
Okay. So I will take the supplier side first. So for suppliers, we’re not trying to get a different cost overall on if you want to use on a net-net basis and what we used to have, but we are asking suppliers to -- asking the suppliers to fund a promotion and fund regular price in a different fashion that we used to.
So from that perspective, that’s what’s happening and it results in a regular price and yet the overall objective with simplified, the relevant pricing part of our initiative is to actually rebalance the mix between regular price and promotional price and this is -- it's how customers react that influences that part.
But we -- I don’t know where you picked up that we were suffering in margins because I don’t think we said anything of that nature. We’re actually -- seeing that things are pretty much reacting, that we were expecting in our model on that front and we're seeing raise in -- on shelf sales, which is obviously long-term as we want to do.
The next phase as I mentioned is that now we've redesigned the way we go to market, what we’re seeing -- we’re starting to see our suppliers coming to us with a change in how they want to go, they want to go to market too on a category by category basis.
And that’s obviously going to bode well I think for our future growth in grocery as we will optimize the sales opportunity with this and that's clearly the long-term benefit of this, enabling better category management and our ability to respond to customer changing expectations.
Okay. And I just have a question about your loyalty programs and Club Safeway card I understand that in the Safeway business that although they had Club Safeway and Air Miles, the primary way they were collecting customer data and executing their loyalty program was through the Club Safeway card.
So now that the Club Safeway Card has been eliminated, do you still have access to all the historical loyalty data that was obtained through the card and I'm just wondering what the impact has been in terms of the execution of your loyalty programs in terms of sending offers to your most loyal customers etcetera, now that you've gone strictly with Air Miles.
Well, clearly we have the same ability that used to have. We haven’t lost access to data because of it. Club -- the Safeway Card was mainly a pricing mechanism in the Safeway Program where if you had the Safeway card, you had the lower price until we very early in the process of transformation basically applies the Safeway Club card price to all customers. So we did that very early on.
Air Miles as you know has a long story with Safeway. They've been the first, one of the first sponsor of the program. So we have an incredibly rich experience with the -- on the loyalty side and very long string of data. So we clearly are very well positioned to use loyalty data influence the customer behaviors.
Okay. Thanks very much.
The next question comes from David Hartley from Credit Suisse. Your line is open.
Yeah hi. Thank you very much. Just back to volumes and the growth or the weakness in volumes in the quarter, I don't know if it's been discussed yet on this call whether or not you've indicated how much of the volume weakness is driven by just industry shift to discount or perhaps how you've been maybe disproportionately affected by that potential shift? Can you talk to that?
So clearly there is a shift in customer mindset and there is a -- and we’re not going to say that full service has to react to this and the way we're going to market that's needed to be changed structurally.
I'm not sure I can give you exact what is best and what is bad because now as we experienced in the Safeway situation sometimes things combined with one another to create an overall reaction that one feeds on the other. But we're not going to -- there is a need -- we need to structurally change the way we go to business to address a different customer expectation.
And maybe David the way you can look at that also clearly the West overall like I said has an overall comp store of negative 3.6 and the rest of the business even if it's not a good, it’s still 0.2 positive. So you see it’s not a big movement everywhere, say everybody is going to discount.
There's a big element on West and we explained what's going on at West combined with the economy and combined with the challenge we have. So the biggest challenge we have in our sales is still going on at west.
We've mentioned many times that we need to change our structure and pricing structure across the country because we know long term that the right strategy is to bring back customer in the center of the store. We've see softness in the Eastern part of the country a bit and we’re going to work on it, but the biggest challenge we had is sales that's going out at West.
And that 3.6, was that Alberta or Western Canada?
It's Western Canada, total Western Canada of 3.6.
Total Western Canada. Okay, thank you for that. Yeah I guess I'm just trying to get a sense here perhaps like everyone else, how much of the weakness is related to customer shifts and to some of the challenges you're having. So I was hoping to prioritize that.
But in essence to that, if you look at okay 0.2% overall, you've got inflation at 2.2%. Is that just pure volume weakness or a missing piece there or is that a mix shift that's going on that's inside some of your peers. Could you give me a little bit more color there?
There is clearly a mix in terms of greater customer penetration on promotional which obviously signals price sensitivity and there is overall reaction to price inflation. Customers are downgrading to lower price proteins for example and that’s not helping the sales line for sure.
Although -- so there are multiple factors being here, high penetration of promotions, customers shifting to lower price proteins -- are symptoms of a shifting customer mindset being driven by the market as a whole.
So do you worry as we move forward here if this persists and some of the other factors like gas volume prices remain where they are therefore the gains from that to the royalty consumers that aren’t there anymore and each got following the inflation?
What’s the impact do you think that’s going to be on your business going forward? Shall I be worried about that? Should I worry about more price wars in the marketplace?
Well, I’ll focus on what we're doing. We certainly need to address structurally the way we go to market and that’s what we’re doing with the initiatives as such simplifying by themselves.
We're seeing those trends and our read on it as best if this is not a -- this is not something that’s going to last for a little while. We believe there has been a fundamental shift in the way people want to shop their grocery and we need to address that and that’s the new customer demand.
And it's not simple promotional fixes that will get the jobs done. It's clearly more fundamental change in the way we go to business that will impact our business for the future expectations of our customers.
So that’s clearly the way we're approaching it and don’t think we're wrong. We will address structurally the way we go -- we approach the business in order to meet the customer's expectation.
Got it. And how far along are you in that process and when do you -- I know it's an evolving process, but when do you see yourselves coming to the end of that process of discovery and then implementation?
I suspect that you could introduce discount banners, you could increase your -- your service requirements in some of your stores. There is bunch of things you could do. Can you give us a more defined timeframe around that and what we should expect in terms of a weight on your profitability from such initiatives before these things bear fruit?
Well obviously we're trying to balance the changes we need to do to the business with the requirements of profitability and now we usually we'll stay for. So some things are clearly emotion simplified by themselves is in motion wherein execution mode in Quebec where we're obviously and learning quite a bit from that and the learnings will influence the pace at which when we introduce in the rest of the country.
But the direction of negotiating our relationships with suppliers are -- that’s ongoing. Tweaking in the way, the pro-commercial programs that we put in front of the customers is always an ongoing process, but there is a -- there is really -- we really got to ask ourselves which programs are benefiting the expectations of the customers and which programs are not providing enough value for the customers and therefore excited to be eliminated.
I think we shouldn’t de-emphasize the work we’re doing on the supply chain from a cost perspective that will enable lot of the initiatives and that when you think of the initiatives we’re having on distribution, this one by roughly 12 months from now, we will have made significant and very significant advancements in our cost structure and that’s not going to be a one-year thing. It’s going to be for structurally changing our distribution cost structure and that -- and those changes were initiated by the model.
So at the end of the day, some initiatives are longer term that I wish that I could flip an automated distribution center in six months rather than 18 to 24 months. It takes clearly but we -- it does take that long to build and to operate.
But the long-term benefits are there and that’s why we embark on those initiatives quite a lot. So it’s not -- we need to -- but as a company, I’ll advance you that we need to be able to be a little bit more agile than we are in addressing the challenges of moving customer expectations.
Thanks and just I'll throw two quick questions at you and get off, did you mention synergies in the quarter anywhere and secondly, gasoline stations should be lot up for sale lately in Canada. Is there any interest in continuing to build that piece of business? Thanks.
On the food side, yes that is in press release. I think for the quarter we said this is on $79 million and if I am not mistaken on that the press release in front of me, but it's in that range. So as we over the trend of the $230 million, I think on the run rate basis.
On the gas side clearly it’s a business for us that we’re quite a few above that, but like we said it’s more as a complement of our food business to understand to create a royalty for our customers and create an even more I would say volume in our stores.
So we're looking at any opportunity to improve our network to support our food business and so -- but at this stage clearly, our focus is to improve our current network as much as we can that will be our focus Michael.
Thanks a lot.
Your next question comes from Patricia Baker from Scotiabank. Your line is open.
Thank you very much. I have two questions François and Marc. The first one just sticking with Western Canada again and you indicated both in the press release and your remarks and you talked about a little bit on the call that you saw weaknesses extend beyond the Safeway banner to the other banners.
So I’m just curious so if I recall correctly as we work through the last three quarters you actually only saw the weakness in the Safeway banner and Sobeys have outperforming Safeway and Western Canada.
Can you talk a little bit about like when in the quarter that started to happen and whether you think that really reflects stuff that’s happening in the marketplace or is there any specifics that you did, I think that you integrated your fliers I think in the fourth quarter. Is any of it related to that or it’s really just extended weakness?
Well we're seeing an overall impact on the business. Some geographies are clearly more impacted than others and depending what kind of starts we have in the geographies, it has a big impact. Sobeys banner for example has more stores in north and rural Alberta, Saskatchewan and you didn’t mentioned the IG Banner that we have in community stores in the West, but there is lot of those stores that are in what you would consider oil count and let's not gear ourselves.
There are some dominant hurdles where operation dropped significantly as people moved out given that there are no jobs anymore related to oil exploration and things like that.
So that's an overall impact. But I think throughout the quarter we’re seeing significant drop in the millions of customers in their purchasing power and things like that. So that’s impacting the Safeway business or the Sobeys business as well in the West and we need to address the way we go to market so that we can -- we can meet the customer's expectation. We launched the pricing initiatives in both produce and now in meat and both banners at exactly for that.
Okay. That's helpful Marc. If I just think about your business generally your whole national business and you know you step back, you're undertaking three, I guess pretty big projects.
So you're completely revamping the distribution and supply chain and you've indicated that you've got another year in 12 months that will be settled. But then the other two big things you've got the other big structural shift of your pricing strategy, which is a very large and long project.
And then of course stabilizing Western Canada, which is a massive project that's going to take time and I know you can't give us an end date on any of those things except for the distribution. On a relative timeline can you just give me an indication of am I right in assuming that if things work according to plan we'll get stabilization in the West before you finish the structural shift or is it the other way around?
I think the three -- you're right about the three being very key projects, let’s start with that. I think the way you’re going to look at the those that the season one another and as if they are totally discrete proposition.
So for example the supply chain efficiencies that we’re getting in the West will not only help from a cost point of view and our ability to be more competitive, but at the same time has an impact on the way we go to business because with the simplified supply chain in the West will be in a better position through higher service levels and has fueled our sales growth in the future.
So as much as it helps to I hope that we don't have an issue here, as much as we like to look at it separately, we actually see them as converging into creating a better food periods for our customers and we shouldn’t consider it to be separate in the -- you got to take it as a whole.
No, that's -- I fully understand that that is an important point that you brought out. But so -- but will there be though different timelines or…
Yeah clearly supply chain is driven by the construction -- but Western Canada as a whole that we go to market is clearly influenced by -- Simplified by it. We're currently modifying the we go to market with meat.
Obviously when we introduced Simplified strategies in the West it will influence the way we go to market for the customer as well. So it’s -- I’m having a tough time saying which is which, but we clearly believe that all these elements and answers as the operational works we're doing and how we get people to fully adopt to the new systems and start, those are all part of the Western integration and so they all feed into this, but we clearly need to integrate all of those with a better food experience for our customer.
Thank you, Marc. That is helpful. Appreciate it.
Your next question comes from Keith Howlett from Desjardins Securities. Your line is open.
Yes, I had a question on the Western same-store sales of negative 3.6%, are you able from your loyalty data to sort of break it down into customers who have left entirely versus customers who are splitting their shopping between your stores and other retailers or have you got any sense of -- I’m sure you do, but can you share any sense of what the customers or behavior breaks down as?
So, yeah we were in a position to do that. That being said, it's not all customers who use the loyalty card and that’s even though our card -- sales on card penetration is fairly high by industry standards, there are still customers who are not always using the card.
And yes the focus right now and the issue is we’ve lost -- there are customers that we've lost and that we need to recover. There are customers that moved out period, they're not there.
There are a lot of people who are just not well -- don't take it, anecdotally there are customers who used to use their own cards in Alberta, they were now using it in Canada. So that’s the hard reality of Western Canada.
So we do have customers who have -- and we do have challenges on the basket side of things as customers are being less loyal than they used to and we’re trying to address that.
And then in terms of the mix of items in the basket, is there a growing fresh component still or is it may be affected by promotions on some of the stores or maybe that washes out.
Well I think what we're saying overall is that are higher promotion penetration overall, but on the fresh side or on the grocery side and in the Western across the country. So that’s why we're addressing it structurally by redefining our pricing structure.
So the produce initiative in the West is exactly trying to address this. We have very low price that we’ve introduce in certain parts of our meat program right now in the Western business is also addressing this issue.
So the trend we’re seeing around promotional is everywhere and touching every categories and as we said we believe we need to address that structurally in our merchandizing programs.
And I just -- I think the Safeway stores were unionized I think. So when it comes to converting to the -- if you were to convert, is there any framework agreement in place as others having the East to shift the store from conventional to discount?
So clearly the Safeway are all unionized and the situation in the Safeway banner is on a province by province basis and some -- so we have different agreements depending on the province, but clearly any shift in thought format requires to work with the union about how we would -- how that would get accomplish.
And I would argue it's not only associated with the -- with the possible discount introduction, but it’s also a fact that when we want to introduce a start the new concept, these starts require different workflows kind of work in with -- but the ferrous elements we want to provide and renegotiating of the way we operate is an essential condition to put capital into a new concept store in Western Canada and is a key element in getting the right condition for those starts to be successful.
Your next question comes from Vishal Shreedhar from National Bank. Your line is open.
Hi thanks for taking my questions. I just had a few quick ones here, margin normalization I think last quarter, I think Management indicated a few quarters would be required to get back to margin normalization, is that still the view?
Like Marc said, that is going to take time because considering the current moment we have in the business, we will unlike Marc said, we're working on different elements to stabilize it, but our key focus Vishal as you know and that’s what we mentioned clearly the sales spend is the key element we have to work on and that's going to be our focus.
Okay. And what does margin normalization mean? Does that mean relative to the last few years, the Sobeys business alone or do we account for what Safeway used to get?
This margin normalization is margin that is better than was in the past Vishal. We had a lot of clots in our margin over the past year as you know and caused by different elements. We want to go back to a level that is more profitable for sure and more stable also, but at this stage clearly our focus like I said it is on the sales side.
Okay. And given that the focus is on the sales side and last quarter, I think management indicated that they would do what it takes to restore the sales trend. If I got that right, the Western Canada sales continue to weaken relative to the last quarter and same-store sales overall. So does that imply to us that pricing investments are not deep enough?
Right now the pricing investment I guess -- the price investment which is pure promotion that’s what we're doing in the past and we know it doesn’t work on long-term. So clearly our big element more now is on the deep pricing strategy we're putting everywhere and we started in Quebec.
Clearly there is going to be some margin investment overall to support our price position in the market, but overall the key point will be more to reshuffle or re-change our overall pricing strategy. So there were less solving price and price and the customer will see value with those regular prices. So it's not only a margin investment but to reshuffle of the pricing overall.
Understood. In Western Canada are you content with the investment that you made?
No clearly not because we see the results so far and clearly we will be content with the trend on sales change and the pricing strategy is going to be a key element behind that.
Understood. Your view on balance sheet, are you comfortable will lever ratios are today and will you do anything to change that, asset sales or anything else?
Yes, now currently I would say our balance sheet is still strong. We have enough cash flow and I have all facilities I need to support the business for a while. So I don’t need to do anything urgent at this stage.
Okay. Are you targeting any leverage ratio?
I’m not targeting any leverage ratio. As we said in the past Vishal, clearly we always wanted to be investment grade rating with the rating agencies. So we have flexibility to get financing that we need and that’s still our target.
Clearly when you have pressure on earning that we have currently, it's a bit more challenging, but that's still I would say overall target to be investment grade.
Okay. And last one here. It's a quick one, we could take offline if need be, but last year there was a $30.5 million inventory adjustment, was that adjusted of SG&A or gross margin?
It was adjusted in gross margin.
Okay. Understood. All right, thanks a lot.
Your next question comes from Jim Durran. Your line is open.
Just a few follow-ups. So first of all, I don’t recall you mentioned what your measured food inflation was in the quarter?
Yes, as mentioned that Jim was 2.2.
Okay. And with respect to the SBS program, I know it’s early days in Quebec, but I would assume that you would normally expect that during year-over-year compares to a promo period right that you would see volume potentially weak year-over-year and then you would see a strengthening of volume in non-promotion period such that over a 12-month period you would hopefully end up with same volume over the entire period. Is that the right way to think about it?
Well obviously if you're taking on a overall category basis we’re doing this with the expectation that we will eventually grow sales on an overall basis, but for this to occur two things needs to happen. The first one as we need that the customer needs to appreciate the value that's on shelf versus what it used to be so that we gain confidence on the overall shelf pricing and that will not -- that will take time and will not procure as an overall phenomenal if I’m going to put it that way.
It's not as if okay I have confidence in Category X and I don’t have confidence Category Y. It's by experiencing the program over time that that disappears and hence in the meantime we keep promoting as we've always had and in the same factor.
And the second element is we -- we optimize the categories in the way we go to market. So you know the number of promotions we're running in any given category will evolve to a level that maximizes both sales and profitability and trying to find the relevant price points between -- at which that maximizes customer behavior.
So that’s the work that also goes on as we’re basically resetting our category strategies and both our suppliers of ourselves are right now relooking in Quebec about how customers are reacting to the new price point and how should we tweak category plans to optimize them in order to get the best customer reaction possible.
Okay. Last question, the Western Canada re-launch, how dependent it is on the new D.C. being open in Western Canada?
So what do you mean by re-launch?
Well, I know that you're making a number of changes right now, but I guess presumptuously I'm assuming that at some point in time when you feel you've got all your ducks in a row and things are -- you can make a promise to customers that you can actually back up across the Board that you want to be a bit more aggressive in terms of encouraging customers to come back and shop you again.
So I'm wondering how much -- how important is the D.C. changeover in that strategy in terms of your ability to go aggressively on that front already or you're hesitant to see to hold off?
So it's getting -- I don't think it strictly dependent on the D.C. So to put it in -- and it's probably not the most important element, but it's about our readiness to be able to deliver a customer proposition that we feel will -- that will be properly executed and that the customers will feel that yes something has changed for the better, but it's also about to know the way we show up for the customer and that level.
So it’s that overall readiness of the organization of properly executing the plan that’s more key than an actual element of the plan. I’m not saying that D.C. is not an important factor. It is and we’re doing lots of change currently nor our distribution that's worked in order to put us in a better cost position.
And those changes have to be implemented properly so that it doesn’t impact the customer and sometimes most of the times we have it right, but to be honest sometimes we have to look that impacts the stores and so we got to be careful.
So overall it's just a state of readiness and overall say the readiness to say that we are in a good position that the investments we're making are not good to be negated by a bad customer experience at the end of the day. So that’s the key factor for us.
And so you mentioned upfront that the transition in Western Canada from a distribution center standpoint will happen in fall of 2017 right. When you say fall of 2017, is that the product will have shifted from the existing facilities to the new facility or is that when the new facility will be ready to accept that transition.
So just we didn't say fall. We did say strength. So that’s one thing, but we’re currently making changes as we speak almost on a weekly basis to our distribution infrastructure because it’s not only the -- while Rocky View opening is going to be a very important milestone, they are other changes in our distribution channels uplift that are currently occurring to be honest. We can sell data, our distribution in Winnipeg to one BC.
So it’s not Quebec a significant milestone for the Manitoba market. So it’s not -- there is more than one changes. You can imagine if you're moving from 18 to 10 distribution centers it impacts -- it impacts not only one province but all provinces and at the same time the transport of business.
So it’s a distribution while the visible part is Rocky View for a lot of you. For us it’s an ongoing process that we've been on for quite a while now and that will go on for a quite a while.
Great. Thank you.
Your next question comes from Michael Van Aelst from TD Securities. Your line is open. I’m sorry, he jumped out of the queue. Your next question is Mark Petrie from CIBC. Your line is open.
Yeah, I just wanted to cycle back on your expectation with regards to SG&A. I understand a lot of it is distribution driven and some of that isn’t until next fiscal year, but how should we think about SG&A dollar spend for fiscal '17 versus '16?
The goal in FY '17 clearly even on distribution we have some savings that's going to happen during '17. So clearly there is still some reduction of SG&A is going to continue in absolute dollars. So we’re working on it.
So overall our goal is to continue to work hard on our SG&A. Clearly, we'll see what kind of support we need on the marketing side to re-launch the sale. So there could be some additional expenses in the year to compensate for that.
So I wouldn’t -- I don’t like to do, I don’t like to give all color Mark, but I can give you a sense that clearly there is reduction we see in front of us, but there could be some investment to re-launch our pricing infrastructure for the company.
The focus on SG&A dollars is on SG&A dollars and not the percentages and I think that's the key point is that obviously we got to control the fixed cost portion of our business and get at one point the sales leverage to play in our flavor on a percentage basis?
Yeah, no I got that. Okay. And then what's your plan for CapEx this year?
So the CapEx mark is around between 6, 6.50 for that.
Okay, thank you.
Your next question comes from Michael Van Aelst from TD Securities. Your line is open.
Michael Van Aelst
Yes just a few housekeeping as well, can you maybe just give us what your expectations is for deprecation for the year?
Depreciation for the year will be in the same range as this year Michael.
Michael Van Aelst
Okay. And just one final one here on the synergies again you touched upon it, but it was a good incremental jump versus last year and compared to even Q3. Can just talk about what was behind the jump and what we should be expecting in terms of is this a feeling or the run rate going forward?
I would say the run rate here in Q4 once I get to FY '14, so clearly it does affect the numbers, but also clearly as you know, we have done all the -- or most of the marketing work out West. We have done most of the SG&A work out West with the integration of the team now.
And so that, and that on the problem itself so most of it is done also. So that’s why you saw that jump. So the run rate that we had in Q4, clearly taking in account the 14 weeks it's something that we feel should be sustainable.
Like I said it did impact our cost structures, our cost structure is down clearly. The fact that the sales -- challenge on sales we have has a negative impact on the leveraging of it. But so what you saw in Q4 could be a trend as you can see for the future.
Michael Van Aelst
And then we have the additional one going to deliver in '17 by the end of '17 with the distribution.
Michael Van Aelst
Thanks very much.
We have one final question in queue from Keith Howlett from Desjardins Securities. Your line is open.
Yes, I just wanted to ask about the early evidence of softening sales elsewhere. I presume the same-store sales is it's one of those indicators, but I was just wondering if there's any additional granularity on what early evidence you look at?
Yes. So clearly we’re more experiencing or we're seeing softening on the insulation side too. So that’s I think that’s going to be an impaired if that trend continues, so that's a factor, but yes, the sales trends as you saw in Q4 versus Q3 is weakening in our business in the West, but also in other parts of the country. So that will require management's attention in the quarters to come.
And just to add on this which is its more linked if you look at outside the West it's more linked to basked size. So it's just in line with what we’re saying that the product strategy that we have in place is not supporting what the customer is looking for and so that’s why we need to change it.
I have no further questions in queue. I turn the call back over to the presenters for closing remarks.
Thank you, Michelle. Ladies and gentlemen, we appreciate your continued interest in Empire and look forward to having you join us for our first quarter fiscal 2017 conference call on September 15.
Thank you, everyone. This concludes today's conference call. You may now disconnect.
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