Liquor Stores' (LQSIF) CEO Stephen Bebis on Q2 2016 Results - Earnings Call Transcript

| About: Liquor Stores (LQSIF)

Liquor Stores NA Ltd. (OTCPK:LQSIF) Q2 2016 Earnings Conference Call August 5, 2016 8:00 AM ET

Executives

Stephen Bebis - President, Chief Executive Officer

Matthew Rudd - Chief Financial Officer

Analysts

Sabahat Khan - RBC Dominion Securities

George Doumet - Scotiabank

John Zamparo - CIBC

Sheila Broughton - PI Financial

Operator

All participants, please standby, your conference is ready to begin. Good morning. At this time, I'd like to welcome everyone to Liquor Stores N.A. Limited’s Second Quarter 2016 Earnings Results Call. At this time, all participants are in listen-only mode. Following the prepared portion of the call, we’ll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

A copy of the company's earnings press release and management's discussion and analysis is available on their website and includes cautionary language about forward-looking statements, risks and uncertainties, which also apply to discussion during today's conference call.

All amounts discussed on today's call are quoted in Canadian dollars, with the exception of U.S. same-store sales, which are quoted in U.S. dollars.

I will now turn this call over to Mr. Stephen Bebis, Liquor Stores' President and Chief Executive Officer. Please go ahead, sir.

Stephen Bebis

Thank you, Valerie. Good morning to those on the line, and thank you for joining us on the call today. I'm here this morning with Matthew Rudd, our Chief Financial Officer and Senior Vice President. Assuming you all have read our news release, we will keep our prepared remarks brief. After our comments, we will be available for any questions that you may have.

Overall, I see we delivered a strong second quarter all things considered. As Matthew will get into some of the details, our quarterly results were impacted by the shift in the timing of Easter compared to last year. The economic headwinds that we continue to face in Alberta and Alaska, and from the closure of our seven stores in Fort McMurray in the quarter due to the forest fires in that region.

If you normalize the shift for Easter, our same-store sales were up on a combined basis, in Canada and the United States. And our total sales continue to increase as a result of our new-store growth and the Acquisition of Birchfield debentures, Joe Canal stores in the previous quarter.

Our strong results considering that we’re up against in the second quarter, speaks to the effectiveness of our strategy and our strong management team. We will stay in the course with our Seven Point strategic plan. And we are confident that it will position us for success once we emerge from this current economic cycle in Alberta.

In the meantime, we will continue to carefully deploy capital for the remainder of the year and watch our operating expenses very closely. In July we opened a new store in Lethbridge Alberta, and we are pleased with the first month of operations. We’ve also begun renovating selected stores with the majority to be completed in the third quarter of this year.

I will now hand the call over to our Chief Financial Officer, Matthew Rudd, who will walk you through our second quarter financial performance. Matthew?

Matthew Rudd

Thank you, Stephen, and good morning to everyone on the call. Apologies to our friends calling in from Western Canada and the West Coast this morning for the early call. Stephen and I are actually out in Kentucky and plan to be out in our stores following the call and spend some time with our star teams out here.

For the second quarter, Liquor Stores recorded sales of CAD209.2 million, it’s up CAD18.7 million or 9.8% from the second quarter of 2015. Our same-store sales were impacted by the shift in Easter from Q2 last year to Q1 this year and now reduced our same-store sales by about 1.2%.

So accounting for the shift in Easter with our same-store sales in Canada, down 1.3%, it worked out to be in roughly flat year-over-year. Our same-store sales in the U.S. were up 1.3% even with the shift in Easter.

Our gross margin percentage was 25.2%, compared to 25.7% for the second quarter of 2015. Impacting our gross margin percentage was the addition of Birchfield’s high volume discount stores this year, increased promotional activity and overall sharper pricing in certain markets in Alberta compared to the prior year.

Our operating margin was CAD12.4 million, that’s a decrease of CAD200,000 for the same period last year. Now this decrease was driven primarily by the closure of seven stores for about a six-week period in the quarter, now is due to the evacuation of Fort McMurray as a result of forest fires in that region.

The company does have business interruption insurance and we expect that certain losses related to this matter will be recoverable under this insurance coverage. That claim is in progress and proceeds are expected to be recorded as we progress further with the claim.

In the second quarter, we recorded net earnings of CAD4.7 million or CAD0.15 per common share. It was an increase of CAD100,000 compared to the same period last year.

So with that summary, I refer you to our news release and management discussion and analysis for further details on our second quarter financial performance.

I’ll now hand the call back over to Stephen.

Stephen Bebis

Thank you, Matthew. We are satisfied with our second quarter performance considering the headwinds we faced this quarter. And we remain committed to investing in our business to protect and enhance our competitive position.

To do this, we will continue to invest in our store remodels, our refurbishments, which we have demonstrated is an efficient use of capital generating significant returns. We plan to renovate a further 10 stores over the remainder of 2016. We are also focused on measured growth in new regions and are excited to open our first store in Connecticut later this year.

In summary, we will continue to battle against the economic slowdown in Alberta and we will not relent or deviate from our strategic plans and we will be very careful of our operating expenses. You can tell from the numbers, we’ve been scrutinizing those operating expenses monthly. And we make sure that they are in-line with our business.

We will continue to be excellent stewards of our shareholders’ capital and remain positioned to deliver on our strategy of measured growth in the near-term.

So, I’ll now hand this back to Valerie, our operator for our Q&A period. Valerie?

Question-and-Answer Session

Operator

Thank you, Mr. Bebis. [Operator Instructions]. Our first question is from Sabahat Khan with RBC Capital Markets. Please go ahead.

Sabahat Khan

Thank you. In your release I guess where you talked about the potential RFP and some privatization going on to Saskatchewan. Can you maybe talk about what the opportunity is? Where you are in the process and how long that process might take?

Stephen Bebis

Yes, sure, Sabahat. Thanks for the question. We think Saskatchewan would be a great opportunity for us. And we think the consumers there would love our winding beyond stores and our new prototype liquor depot. I personally spent time in the province, so has our management team. We have, we’re executing the RFP process. And we put a lot of effort into that process. And it’s been a teamwork effort. And we would be very proud to be in Saskatchewan.

And of course now it’s up to the process, it’s not an auction. It’s a review process that the government will be looking at all different retailers and different criteria and they’ll be selecting who gets the, very limited amount of licenses that will be available. So, that’s all I have for you Sabahat. We’ll wait and see.

In terms of RFP we submitted the first round there is another round now for some of the smaller markets. And so, we’re very involved [ph] to engage in that process.

Sabahat Khan

Thanks. And if you maybe take a look at Alberta, just at a high level, both across your larger markets and some of the smaller ones, where would you say based on the traffic and sales trend that you’re seeing, would you say it kind of stabilizes the overall environment there? Do you think there is still potential for downside?

I guess you saw the Fort Mac fires on top of the impact from the overall economy this quarter. But kind of going forward, where do you think from your view we are in the cycle?

Stephen Bebis

Yes, it’s hard to say Sabahat. We’re seeing kind of a flat, we don’t see the bottom falling out we haven’t seen any of that as you can tell by our data. Even though I’ve been, I’ve been waiting for that some of the other shoe to fall, it hasn’t. So we’re very happy about that. Certainly the Edmonton market is still doing well, considering and there is still pressure on the oil markets that we’re in.

On the other hand, Fort McMurray is, we - our management team did a great job of opening those stores. We were one of the first retailers open in that market. We’re serving all the contractors that are there working on, rebuilding the city. Our people have done a wonderful job there of opening our stores early. And so we’re enjoying that business right now in the Fort McMurray area.

Sabahat Khan

All right, thanks, and just one last one from me. Can you maybe talk about Alaska, it looks like the comps they were positive this quarter. Can you talk maybe some of the changes you made there and if there is any more work still to be done in that market?

Stephen Bebis

We’ve been working very hard on our marketing program, our people we made a lot of changes in terms of our management team there in the last year and half. And we’re starting to see the benefits of those changes. And so, I don’t see the economy there any better. In fact I just, it’s, I don’t think it’s continued a decline a little bit but I do see a lot of regaining market share due to the fact that we’re running a better business there than we were two years ago. So, a lot of the sales we’re seeing from the execution of our team there.

Sabahat Khan

Thank you.

Operator

Thank you. Our next question is from George Doumet with Scotiabank. Please go ahead.

George Doumet

Yes, good morning guys.

Stephen Bebis

Good morning.

Matthew Rudd

Hi George.

George Doumet

Would you characterize the environment as increasingly promotional in Alberta? I’m just wondering what you’re seeing there in terms of competitive response and how long do these promotional period typically last?

Stephen Bebis

Yes, in order to maintain the market share we have in Alberta, we’ve had to get sometimes a little bit more aggressive than we’ve liked. So, that’s why you see some of that erosion there. But we’re not there is no race to the bottom here because everybody realizes that cutting prices is just a very short-term fix.

And in the long-term, no one makes any money. So I think all of us as retailers have been very careful to maintain the margins but yet we still have to be competitive. And so that’s why you see some of that erosion.

And so, the good thing is we have not seen massive price cut in these markets. We’ve seen pretty much maintaining, in fact we’ve seen some of these smaller independent retailers back off on the promotional activity.

And on the other hand, we’re working hard to expand our promotional activity. And so, I’ve learned in my past and the last 40 years in the business that when things are difficult, it’s a time to pick up market share. And so, since we have the resource to do so, we’ve been working very hard to drive our top-line. And so that’s what we’re doing. We’re very promotionally oriented and continue to be on TV, radio, print. And it’s working well for us.

George Doumet

That’s really helpful, thanks. And just one more if I may. As you mentioned earlier, I guess if adjusted for the Easter shift, it looks like the comps have been hanging in there pretty well. Just wondering why we haven’t restarted the rollout of the ERP System? Is it more a question of I guess better capital deployment opportunities out there or are we just looking for specific indicators and prove before we do so?

Stephen Bebis

Yes, I think that’s what we’re looking for George. We’re looking I think for, what do you think Matt, wouldn’t you say?

Matthew Rudd

Yes, absolutely. Just a bit of stability, little bit of reduction in the volatility we’re seeing in our key market in Alberta. It becomes a bit more difficult to commit to that level of spend in initiative. And we’re fighting a good fight in Alberta here so, just waiting for a bit more certainty there.

Stephen Bebis

We’ve had fire, we’ve had floods we’ve had - what’s next, locusts? I mean, it’s been - Alberta has been a very difficult situation from the economy to the weather. And so, we’re very, very excited that as a management team to restart our ERP implementation. But we just - the Board of Directors and the management team don’t feel comforting yet it’s the right thing to do at this time.

George Doumet

All right. That’s it from me. Thank you.

Operator

Thank you. Our next question is from John Zamparo with CIBC. Please go ahead.

John Zamparo

Thanks, good morning guys.

Stephen Bebis

Good morning.

Matthew Rudd

Good morning.

John Zamparo

On I think your sales, is there any commentary you can provide on traffic versus basket trends especially in your urban markets?

Matthew Rudd

Yes. What we’ve seen is our basket is basically flat up a little bit. Our traffic if you’re just not normalizing for the Easter shift, the loss traffic relates to the shift in Easter and basically it’s in lock-step with our comp store sales decreases. And it’s been all traffic our basket is consistent, basically across markets as well.

John Zamparo

All right. That’s helpful. And moving back to gross margin, you mentioned sharper competition and also the lower contribution from Birchfield. But I would assume you’re still making nice gains from private label, is there any other kind of lever you can pull to increase gross margin rate going forward?

Stephen Bebis

Well, we continue to expand our private label offering. I think this year will be, we’re introducing another, I believe another 50 to 60 wines this year. And also we’re introducing 35 new private label spirits, and 35 that’s on top of 3, 4 so, a big initiative on spirits.

And we’ve introduced a couple of them recently. One of them is called Flag Boat, which is bourbon. We introduced in Canada and it’s out of Kentucky. And that’s a product that we make significant margins on. And it’s doing very well. It’s become one of our bestselling bourbons. And so, we’re excited about expanding our private label spirits business into Alberta and British Colombia.

John Zamparo

Okay. More of a housekeeping question, you’ve listened to Connecticut store. Is the Massachusetts store still kind of slated for Q1 next year, is that fair to say?

Stephen Bebis

Yes, yes, it is.

John Zamparo

Okay. And last one from me, your drizzly app, I’m curious when this might become meaningful from a financial perspective or if there is anything you can share about how that’s going so far?

Stephen Bebis

It’s doing very well so far. We have very limited markets in Edmonton. We’re going to expand it in Edmonton and we’re going into Calgary. And we like it, we like it. Are we making money on it? No. We are not making any money, we’re not making a profit but we’re getting close I think by as we learned how to operate and expand the business. I think we can be breaking even on that business later this year.

So, we love about the app, we love about drizzly, it creates a loyalty with our customers, it gives our customers the opportunity to buy all to use us for all their adult beverage needs. And it really is a convenience to our customers. And that’s the business we’re in. We’re in the customer service business. So, we like working with the app.

John Zamparo

Okay, good to hear. That’s it from me. Thank you very much.

Operator

Thank you. [Operator Instructions]. Our next question is from Ms. Sheila Broughton with PI Financial. Please go ahead.

Sheila Broughton

Good morning, Steve, and congratulations Matthew on your new position.

Matthew Rudd

Thank you, Sheila.

Sheila Broughton

I wanted to, yesterday, when in BC we got the big announcement that the tax rate regime was changing again in Alberta for the non-Alberta craft beer for brewers. Are there any more regulatory changes that are impacting you and I’m not sure how much this one if at all would impact you in either Alberta or BC right now because we’ve certainly seen a lot of changes in BC?

Stephen Bebis

Yes, we don’t see anything significant on the horizon. This craft beer is really great for our customers, and great for our local breweries in Alberta, which we support very much. But there is nothing significant. The only significant we think we’ve seen of course is Saskatchewan. So, Saskatchewan is moving towards a private model. Of course we’d love to see that in other jurisdictions in Canada. And hopefully this gains momentum throughout the rest of our country.

But in BC, we’re working very closely with the government there to find ways to make the process more efficient. And so, and they’re great listeners there and working with us. So, yes, I don’t see anything significant changes.

Sheila Broughton

Some of the changes that you were hoping would happen in BC that would have made your operating cost more efficient. There were some delays, is everything in place now as far as transferring inventory or are you still waiting for some more changes?

Stephen Bebis

We’re waiting for more changes.

Sheila Broughton

Okay, sounds like easy. We were pleasantly surprised to see that Alaska was contributing positively on the same-store sales this quarter. So, congratulations with the changes you’ve made there.

Stephen Bebis

Thank you.

Sheila Broughton

Just a quick follow-up on the gross margin question previously, in 2015 quarterly gross margin was very tight ranging from 25.5% to 25.8%. So, with the 25.1% this quarter and how your business is dealing with Alberta and also the Joe Canal Stores, should we be thinking more in line with the Q2 margin for Q3 and Q4 or expect some of the private label and the higher volume and the recovery in Fort Mc to really help more significantly?

Matthew Rudd

Yes, if you look at our margins so far this year, it’s been relatively consistent quarter-over-quarter. And barring a significant change in our price, in our promotional strategy beyond what we’re doing now and it’s a little bit tough to predict in terms of how fierce our competitors are going to react here.

But at least from my perspective I don’t see anything material changing at this point. But it remains to be seen in terms of Alberta being our biggest market and an ever evolving market from a competitive perspective.

Stephen Bebis

And also, the addition of the Joe Canal Stores, I mean, these guys are low-low margin. I think they run significantly lower than we do. Yes, but they generate high sales, those two stores are two highest volume stores in the company today. And so, that’s had an impact but that has also had a positive impact in terms of gross margin dollars for us.

And so, I’m very happy with our gross margin dollar contribution that our stores are giving us today. So, the rate might not be where you wanted but gross margin dollar contribution is doing very well.

Matthew Rudd

Yes, the preferred label program is doing really well as well. It continues to grow and our penetration continues grow. But we’ve taken the task of reinvesting those dollars to improve market share. And we feel that’s a good investment for the long-term.

Sheila Broughton

That sounds great. Thank you very much.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you Mr. Bebis.

Stephen Bebis

Thank you for listening in today. Thank you for your interest in our business. Thank you for being a shareholder. And we’re a strong company with great management team, good strategic plan and particularly in Alberta we’ll be survivor after all this is over. And we’ll be in a better position in the long-term. So thank you very much. Have a great day. Cheers.

Operator

Thank you gentlemen. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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