Loblaw Companies (LBLCF) Q2 2016 Results - Earnings Call Transcript

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Loblaw Companies Limited (OTCPK:LBLCF) Q2 2016 Earnings Conference Call July 27, 2016 10:00 AM ET

Executives

Sophia Bisoukis - IR

Galen Weston - Executive Chairman and President

Richard Dufresne - CFO

Analysts

Irene Nattel - RBC

Mark Petrie - CIBC

Michael Van Aelst - TD Newcrest

Patricia Baker - Scotiabank

Kenric Tyghe - Raymond James

Jim Durran - Barclays

Peter Sklar - BMO

David Hartley - Credit Suisse

Vishal Shreedhar - National Bank

Keith Howlett - Desjardins

Chris Li - Bank of America

Operator

Good day ladies and gentle and welcome to Loblaw Companies Limited Second Quarter 2016 Conference Call. This conference is being recorded. Today Wednesday July 27, 2016.

I would now like turn the conference over to Sophia Bisoukis. Please go ahead.

Sophia Bisoukis

Thank you Michal and good morning. Welcome to the Loblaw Companies Limited second quarter 2016 results conference call. I'm joined by Galen Weston, President and Executive Chairman; and Richard Dufresne, Chief Financial Officer. Before we begin today's call, I want to remind you that the discussions will include forward-looking statements. Statements such as the Company's beliefs and expectations regarding certain aspects of financial performance in 2016 and future years. These statements are based on certain assumptions that reflect management’s current expectations and they are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations.

These risks and uncertainties are discussed in the Company's materials filed with the Canadian Regulators from time-to-time. Any forward-looking statements speak only as of the date they are made. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than what has been required by law. Certain non-GAAP financial measures may be discussed or referred to today. Please refer to our annual report and other materials filed with the Canadian Securities Regulators for a reconciliation of each of these measures to the most direct comparable GAAP financial measures.

I will now turn the call over to Richard.

Richard Dufresne

Thank you, Sophia and good morning, everyone. In the second quarter we continue to deliver against our financial plan achieving positive same store sales with stable gross margins. We delivered diluted adjusted earnings per share of $1.01 and increase of $0.17 per share or 20.2% compared to the second quarter of 2015 and grew adjusted net earnings by 17.7% to $412 million.

We continue to return capital to shareholders buying back approximately 2 million shares. Our Food Retail business achieved 1.7% same store sales growth, adjusted for the shift in the timing of Easter while our internal food inflation for the quarter was slightly lower than the food CPR rate of 1.8%. Our drug retail business had another very strong with same store sales growth of 4% also negatively impacted by 100 basis points due to the timing of Easter. Same store pharmacy sales grew 3.6%. Same store sales growth in both food and drug retail contributed to total revenue in our retail segment of 10.5 billion, up 1.7% compared to a year ago.

Adjusted retail gross margin remained within our stable trading band and was 26.4% compared to 26.3% in the prior year. This excludes the impact of consolidating franchisees in Q2 of 2016. Adjusted retail gross margin increased by 10 basis points reflecting the impact of incremental synergies, strong drug retail front store gross margin, partially offset by the promotional investments made in our food retail business to enhance our competitive position and sales initiatives.

Our focus on cost reduction and operating leverage are generating positive results. Adjusted SG&A as a percentage of sales improved by 40 basis points excluding the impact of consolidating franchisees. In 2015 we announced the closure of certain under-performing retail stores and this initiative combined with a focus on improving efficiencies at the retail level drove the SG&A improvements in the quarter.

Adjusted EBITDA was 924 million in the quarter, a 7.8% increase versus last year and our consolidated EBITDA margin now stands at 8.6%, an increase of 50 basis points versus last year. I am also pleased to report the achievement of another significant milestone. When we acquired Shoppers Drug Mart in 2014, we initiated a $300 million synergy program. As of the end of the second quarter, we achieved this target three quarters ahead of schedule.

Looking ahead, we remain confident in both our strategy and business performance. Our long-term financial strategy continues to be based on positive sales growth and a focus on cost reductions and operating leverage. With a strong balance sheet and free cash flow, we will continue to invest in growth while also returning capital to shareholders.

Thank you. And I will now turn it over to Galen.

Galen Weston

Thank you, Richard, and good morning. In our second quarter, we continue to execute against our long standing strategy framework, delivering the best in food, the best in health and beauty, operational excellence and growth. The result was a good quarter with positive same store sales, stable gross margin and earnings growth. We had a strong quarter in drug retail led by cosmetics, health and beauty and OTC. Food continued to perform well and we’ve expanded our enhanced food offering into 12 additional GTA stores this year. Pharmacy same store sales growth benefited from increases in both prescription counts and average script values. In food and retail same store sales growth increased over the first quarter.

On our last call, we talked about a measured and decisive plan to improve our sales performance. In the second quarter, we began to see positive results, showing improvements in all key metrics, including increases in tonnage. We’ve lowered shelf prices, increased promotions, invested in value programs in specific categories and markets. We remain committed to growing sales in measured steps over the balance of the year as we actively work to put money back in the pocket of Canadians.

After two years of over $1 billion in cost increases from our larger suppliers and related higher retail prices across the country, we have asked this group to support us in our initiative to lower prices for our customers. Our focus on pricing value is showing results. And as we head towards the low inflation retail environment we remain focused on driving sales volume, achieving cost savings and surfacing operational efficiencies. While food price investment and healthcare reform will moderate earnings adjusted net earnings will continue to outpace revenue growth through efficiencies allowing us to deliver on our financial plan.

Sophia Bisoukis

Thank you Galen. Michelle we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you, [Operator Instructions] the first question comes from Irene Nattel of RBC, please go ahead.

Irene Nattel

On the prior couple of calls, you described performance in food as somewhat disappointing and noted in particular is that you were not satisfied with operating efficiency gains. Seems to me that you have seen some improvements on those fronts this quarter. So if you could please comment on that, where you stand and what the key sources of the operating efficiency gain might be other than the store closures.

Galen Weston

Yes, so let me start by talking about our sales performance. So we were disappointed both in our relative sales performance and our absolute sales performance and we use this sort of trading band sort of measure for determining whether we're comfortable with how we're doing, we sell outside of our trading band in sales, market share and some other metrics and so we took some action as described in the first quarter and what we are reporting today is that we're seeing traction. We also made the point that we weren't going to slam the lever in a particular way, but I could just be very deliberate and build those sales plan in places specifically where we were not performing and turn the sales trend by the time we got to the end of the year. So we feel good about how that is tracking.

On the efficiency side, this is something that we've always said we were pleased with the efficiencies that were coming out. What we were concerned about was that it wasn't dropping to the bottom line and that was due in part to some noise that was in the system and some other things that were going against us. What we're starting to see in Q2 is that the noise moving out of the system and that SG&A leverage showing up in the biggest parts of the business, the retail business and also the drug business and that is now dropping to the bottom line. So it’s a good sign, I don’t know that I would put that whole amount into your model going forward over the long term, but certainly it's an indication that we can actually drop efficiency to the bottom line.

Irene Nattel

And that's very helpful. Could you just give us a little bit more detail on what kind of noise was there that isn't there anymore?

Richard Dufresne

Rather than focus on the noise why don't we focus about the benefits which is what we're really excited about. Where the businesses themselves have put pressure on their operations to drive SG&A savings and we're starting to see it and obviously it shows up a little bit more on the food side, but it also shows up in shoppers and that like their sale performance is growing well and so therefore it's benefiting them on the rate basis. So together both businesses are driving this SG&A leverage that we're seeing right now. And it's coming from the business.

Irene Nattel

That's great, that's very-very helpful. If we could just shift gears a little bit and talk about consumer behavior, obviously there is a lot of chatter out there around, what consumers are doing trading up, trading down discounts versus market. If you could provide us with a little bit more color around what you’re seeing in terms of your stores?

Galen Weston

I think we commented in Q1 that we were beginning to see this material shift to value, after having seen a number of quarters and really maybe a year and half of customers trading up in mix. And our view is that that was because we had successive years of inflation leading to high food prices and consumer were starting to feel the felling, a feeling that was forcing them to trade into different items and into different categories in different markets.

So we’ve been flagging this for a couple of quarter and also expressing our commitment, not to be caught on the wrong side of this and we got a little bit behind in Q1 and that’s -- the actions that we’ve taken through the balance of Q2, it is -- I want to go back to this point, for us it’s very deliberate and very focused in the areas were we see the customer being the most sensitive and it wouldn’t surprise you to know that that would be in our market division and some of our higher priced formats, and those would be the areas that we would be focusing on improving our value position.

Irene Nattel

That’s very helpful thank you.

Operator

Thank you. The next question comes from Mark Petrie of CIBC. Please go ahead.

Mark Petrie

I just wanted a follow up with regards to the Shoppers business specifically, obviously strong gross margin performance, wondering if you could give a bit more color just in terms of the mix there and then ex-synergies with that target achieved, how are you looking at expectations for earnings growth in the Shoppers business over the next twelve month?

Galen Weston

So why don’t start with what’s underpinning the strong performance at Shoppers. So first and foremost, same story as you heard in previous quarters, the addition of a different type of food mix is helping to drive traffic and it’s doing so at a much improved margin. So imagine as customers are going in and they’re buying sort of full price competitive [ph] choice product and a wider food assortment instead of being drawn in to buy, deeply discounted carbonated beverage. That contributes to traffic building with a much lower investment and that improves the margin.

We’re also seeing really strong performance in some of the core categories in Shoppers Drug Mart like health and beauty, not cosmetics, we may be benefiting -- continuing to benefit disproportionately from that target exit, even though it was some time ago, that continues to be a source of strength. And then we’ve had a pretty good cold and flu season, pretty good allergy season, these are all things that contribute positively. Our view is that there is a nice although not enormous sort of structural tailwind in those stores because of this shift to convenient that’s taking place in the consumers mind. And so we think that, there is likely to be continued reasonable performance in Shoppers central [ph] store.

Richard Dufresne

And Mark, the second part of your question. I won’t to give you our expectation as the growth of the Shoppers business, but just to give you something, some comments we made earlier, like we said that, we said at the beginning of this year that this could be the year where we would see the Shoppers business grow its earnings and because we haven’t seen that in a while and I can confirm that year-over-year Shopper excluding synergies is growing earnings. and then it's a matter of attributing which portion of the synergies are attributable to Shoppers and it’s a big chunk of it because they are benefiting from our purchasing power on the lot of the stuff that’s sold in store. So they get a discrete [ph] proportionate part of the synergies attributable to their business, so they’re growing very nicely right now.

Mark Petrie

And Galen you highlighted your request to suppliers for lower cost. I’m wondering if you could just give some initial comments in terms of the response, how those conversations are going. And when you think about the proceeds from that, I mean obviously returning value or passing that value to customers is improvement, but how do you balance that against other strategic initiatives and potential uses of those proceeds?

Galen Weston

So I won’t comment on the process and on the ongoing conversations that we’re having with suppliers, other than to say that it is our view that prices got to a point that were too high in the Canadian market and it is in our joint best interest as suppliers and retailers to lower prices and lowering prices should drive volume. And we are seeing in the places that we are making those investments and we’ve been doing it now for a couple of months. But the customer is very much looking for that kind of value and they are responding more quickly that we perhaps would have expected, which confirmed in our view that specific thesis.

So really the way to think about this supplier ask is us working together with them to make investments in volume. You can’t succeed in a low inflation environment unless you’re moving units in food or mass retail business and that is our focus. We feel well positioned and we feel that we have the financial capacity to do that and still deliver our financial plans.

Mark Petrie

And just following up on that, could you just talk a bit about how you think about the business mix today with regards to regular price and promotion, and the outlook in terms of the balance of between those two over the next year or two?

Galen Weston

I think you know that we are a business that believes in a balanced approach to shelf prices and promotional volume, that hasn’t changed, hasn’t changed in years. It's partly the structure of our business with a big hard discount and discounts at the store present, it's also because we believe that that’s what the consumer wants, it is the best way of delivering real dollars of savings into their wallet.

So, I wouldn’t expect a major change from a strategic perspective for a town where we make the investments, just making them with more intensity, increasing the level of investments across the board. And recognizing also that we have a terrific loyalty program and that loyalty program is another powerful place for us to deliver value to the consumer, particularly those who are most loyal to our stores.

Operator

Thank you. The next question comes from Michael Van Aelst. Please go ahead.

Michael Van Aelst

So, with the food GPI slowing rapidly and Loblaw now see inflation below CPI for the first time in a while. Is this a sign that -- obviously it is a sign that you’re investing in price. But are you just keeping pace with what others are doing in terms of like Walmart’s announcements and Empire’s announcements? Or are you going further to try and boost your share?

Galen Weston

I don’t know that it would particularly prudent of me to give you a you a, you know a specific detailed response to that. I mean it doesn't get much more sensitive from a competitive point of view than that. I mean suffice to say we think we're competitively a very potent organization. We believe that we have formats that are uniquely well positioned in each of the core markets and that when we make investment we will make them in places that will deliver a sustainable advantage versus our competitors. They have their own strategies, they have their own view and their own capacity to respond, but our view is that you know this is a period of time where the Loblaw business can excel.

Michael Van Aelst

Okay, and how comfortable are you that this won’t start a price war.

Galen Weston

I don't know, but I can tell you in our case we are specifically focused on targeted, deliberate investments in specific customers, specific banners and specific markets, and you know price wars are generally not something that we look forward to, but we will certainly be ready if the market price heats up.

Michael Van Aelst

Okay, and the investments that you're making now in lower prices, is that spending some of the savings that you're asking from your suppliers in advance or will we see the full incremental growth through after September.

Galen Weston

I mean again I think that's a very difficult question for me to answer, Michael because of the competitive sensitivity, I mean suffice to say we are well down the journey of investing at this point and we have stated publicly that we will invest a 100% of the proceeds that come from this supplier ask back in the customer.

Richard Dufresne

Michael, I can, yes we've invested so far but yes we're delivering on our financial plans. Like we've been able to grow EBITDA margin despite the fact that we made investments already. So we remain committed to delivering on our financials.

Michael Van Aelst

Okay and the Easter impact on the drug side, can you separate it for us between the front store and the drug.

Richard Dufresne

Obviously there's no impact of Easter on drugs, okay. So people don't buy more drugs because of Easter, the whole impact is on frontal store and it's about 200 basis points on products sold which averages the 100 basis points on total shoppers.

Michael Van Aelst

Okay, and then just finally can you update us on the gas station sales status if possible and as well on you’re the click and collect customer option and the pace of roll out that you're expecting this year.

Galen Weston

On gas nothing to comment on right now, the process is ongoing and we will report when we have something to report, but the process is ongoing right now.

Richard Dufresne

And just on click and collect that continued to be an area of focus for us and we will continue to roll out stores and we'd expect to have somewhere close to a 100 by the end of the year.

Michael Van Aelst

Thank you and congratulations on the results.

Operator

Thank you, the next question comes from Patricia Baker of Scotiabank, please go ahead.

Patricia Baker

Good morning and thank you for taking my questions, I have two and maybe the first one may be another one that's two sensitive for you to answer, but I'm going to ask anyway. On the first quarter call when you talked about and you pointed a need to adjust pricing and it certainly was a discussion around discounts in order to catch up there, I think particularly in Ontario markets and in your remarks given, you referenced a need in the market division to focus on improving value position.

So the changes in pricing, in the market division and investing there, has that commenced and what we saw the investment in price in the second quarter, was that primarily in discount or was it across the Board?

Galen Weston

I think it is -- you are sort of also scratching around sensitive areas and there is a distinction in some respect from Q1 in discount. We had a program, a big note [ph] growth program that we typically run in the first quarter that we didn’t, and we didn’t plan appropriately for missing that event. So that’s -- when we focus on discount as the issue in Q1 we were not at the heart of what we were referring to.

But the market business is a business that always has to watch its strategic gap for discount and as the customer gets more sensitive and starts shifting it’s trading into the discount price position, than one need to look at the market business and understand how much to lower the gap. And what I would say is that, some work has been done across some of the more prices sensitive discount banner, in the last number of months and again it is confirmed our thesis that those businesses need to be more competitive to thrive.

Patricia Baker

Would you say generally, and this is something I’m hearing from a lot of food retailers, not just in Canada but also elsewhere, that the gap that can be sustained between a discount banner and a conventional banner, in 2016 and beyond is a very different gap than what could been sustained may be five years ago or even three years ago and that -- the gap has to narrow, just in general not specifically Loblaw?

Galen Weston

Look, I don’t know, how the worlds thinks about this and I won’t comment on sort of what appropriate sort of around the world. There has been no change in our strategic view of what the gap need to be between discount and market for three or four years. The gap [ph] is making sure that you stay there and making sure that you’re achieving it across as many platforms as possible and continuing to deliver the right financial performance.

Patricia Baker

Okay, fair enough. And my second questions is around, I guess, you referenced that there is an expansion of the expanded food offering in the GTA area and I just wasn’t clear whether you were referencing that you had added it to 12 more in the first quarter -- in the second quarter or that the year over year difference was a little of 12 incremental stores?

Galen Weston

So it’s 12 in the first half, 12 in the second half and I think -- I’ll just take a movement to remind everybody the difference between the food program, which is putting a different assortment lead by private label residence choice and known into of the everyday consumable departments in Shoppers Drug Mart. That is fully deployed across nearly a 100% of the Shoppers stores. That is the anchor of the strong food performance that’s taking place in the Shoppers business.

And the second initiative is what we call the Enhanced initiative, and Enhance is where we’re adding, small complete fresh departments to keep store and that’s the incremental 12 that we’re talking about and that is a much smaller, lower impact program as far as the total company is concerned. But a very exciting initiative in terms of the way that the consumer is responding to it, particularly in the urban market and where we’re most deployed at this point is in Toronto.

Patricia Baker

What’s the total number Galen?

Galen Weston

I think it's 17.

Operator

Thank you. The next question comes from Kenric Tyghe, Raymond James. Please go ahead.

Kenric Tyghe

Galen just trying to get a couple of feelings here, it's been hard to miss a key mass competitive step up and it's Fresh focus campaign. And I am just curious as to how your Fresh performance and fresh tonnage has been trending, given their increased focus on Fresh as a category, or perhaps even they’re refocusing on Fresh as a category and their media spend around the Fresh capabilities certainly been a step up the first quarter and even more pronounced in second quarter. Wonder if you could just speak to your -- how you feel about your performance, how your performance is trending relative to your expectations in Fresh against that sort of step change of that competitor?

Galen Weston

Again, I hate to comment on our perception of other competitors in the market. They’re all executing their own strategies for sure. There is one particularly that has ramped up its commitments to Fresh. And we are paying attention and we are responding to it based on our own analysis in a way that we think is appropriate and effective. The Fresh business is hard. It's hard to execute consistently and you can make a lot of commitments to price and to shopping environment and in soft the question is whether or not you can sustain it. But suffice to say that organization gets better and better at this every day, but it doesn’t change our confidence in our own platforms and our ability to compete with them.

Kenric Tyghe

And if I could just switch gears quickly to the traffic question Galen. Could you provide some colour or any further colour with respect to the puts and takes on the quarter. I mean the number appeared essentially flat from what I could see. Was it a case of gains in Western Canada perhaps offset by some modest losses elsewhere in the country, or was it flatter across the country than we expected and they weren’t the gains that one might have expects in Western Canada that was coming through? Or how should we look at that traffic number in the quarter, or be thinking about it rather in the quarter?

Galen Weston

So a fair question. We typically don’t give a breakdown of areas of strength and areas of softness across the country. I would say there is a bit of a mix, there always is and in some key markets where we’ve invested we’ve seen some very promising changes in the trajectory. And I mean to a degree perhaps that’s being offset by softening in some other areas. But the way we look at it is the underlying performance relative to the competition and one of the things that we believe the market is likely to see over the next couple of quarters is a compression in the absolute sales dollar number. Why, because inflation is coming down.

And so real volume growth or volume growth that translates into sales dollars in priced items is actually going to be key to sustaining a positive sales growth performance in the coming month, and that is specifically what we are focused on. And that is specifically where in Q2 we have seen the most promising improvement.

Kenric Tyghe

Great, thanks so much Galen, I'll leave it there.

Operator

Thank you, the next question comes from Jim Durran of Barclays, please go ahead.

Jim Durran

I just thought I'd focus on the drugstore business for a second, there's been obviously the Quebec situation with respect to tendering sort of an uncertainty still but there's also been some chatter about the national coalition reviewing their current reimbursement rates and the possibility of some change sometime late Fall, wondering if you could comment on that and whether you've done anything in terms of your outlook to try and incorporate that potential risk.

Galen Weston

Well I think very deliberately when we comment on the outlook and the competitive environment. We talk about you know food prices and we talk about healthcare reform. It is something that continues to sit out there and we are always looking at it carefully and we're always planning for an impact and we will be making our best efforts to accommodate for in the context of our outlook. So our job is to manage healthcare reform and you know price competitiveness and still deliver against our financial plan, there is nothing in our view of healthcare reform at this point that would threaten that, however it remains a meaningful headwind the organization that needs to be actively managed against and managed with every single day.

Jim Durran

Thank you, and on the online business as we're rolling it out, like Richard had provided some sort of general metrics on how the business, that online specific relative to the store had performed in the early days when you were talking about rolling it out. Can you let us know like is that relationship still holding up? Like is the average basket larger than a retail trip, is the margin better because of mix and I think there was also a comment about fresh in terms of the basket being larger in the online traffic than it was in sort of regular store traffic.

Galen Weston

I mean I think no meaningful change in some of those things that we've already shared. Perhaps what would be good is for us at the right time to provide all of you with some sort of comprehensive view of how that business is evolving. We're not there yet and it's still very-very early and to draw any sustained conclusions when you 67 pilot stores in the market would be premature. So I wouldn't put too much stock in those early views other than the fact that they're true.

Jim Durran

Okay, thank you, appreciate it.

Operator

Thank you, the next question comes from Peter Sklar of BMO, please go ahead.

Peter Sklar

I believe from your commentary that during the quarter you did invest in gross margin in terms of shelf pricing and promotional weights, but at the same time if you look at your gross margin improvement if you adjust for the change in accounting policy, I believe your gross margin was up 10 basis points. So just wondered if you could reconcile like what are the tailwinds that are allowing you to offset these investments that you're making in margin.

Richard Dufresne

Peter, very simply, gross margin is up in the drug business and it's down in the food business.

Peter Sklar

Okay and I wanted to ask a little bit about inflation. Inflation has decelerated quite considerably for you from Q1 to Q2, I’m just wondering, what you’re seeing so far in Q3 and what’s your outlook is for the rest of the year and in your plan to do contemplate that we actually experience deflation with, commodity prices no longer rising and Canadian dollar seems to have found a level here?

Richard Dufresne

I think that the -- it’s an important question and you’re going to need to come to your own conclusions about it. It’s not just that our inflation right has come down dramatically, so CPI has come down dramatically in food over the last number of months, and we’ve been that calling that out, for the last couple of quarters. As a change, a meaningful change in the market condition in Canadian food. I commented in my remarks, that we’re in a low inflation environment and we don’t expect that to change and that we have to adjust our trading plan to accommodate for that. And the way you do that, is you make sure that you’re positioned to drive volume, because the volume is the only thing that will make sure that you’re sales stay in positive territory.

Peter Sklar

Okay and lastly, can you just comment on the motivation for wanting to sale the retail fueling business, I thought grossers typically liked that business because it presented you with all kind of cross promotional opportunities?

Richard Dufresne

Look I think, very simply, we regularly review, sorry once every year or two, what we would consider to be the noncore or peripheral assets. This is a big business with lots of elements tend to go to it, and there is a limit to which the management team can effectively succeeded across all those different verticals and in our last review, we concluded that the gap business likely had more value to somebody else then to us and that it was strategically less relevant given were we would headed from a consumer prospective, then it has been in the past.

You put those two things together and it’s time to see if there is anybody out there who wants to pay an attractive price for the asset. We’ve also said that, it is only a very attractive price that is going to compel us to sale because we do like the business, we understand it and it does play a secondary roll, on a number of our [indiscernible].

Galen Weston

That Peter, the only thing I’ll add is that gas bars [ph] are helpful in building traffic and we acknowledge that and we like that and we want to do more, however we don’t need to own them to be able to achieve that objective. So we feel that if we find a good partner that wants to align with us, that this could be a win-win for both parties.

Operator

Thank you. Our next question comes from David Hartley of Credit Suisse. Please go ahead.

David Hartley

Just wanted to ask you about your tax rate and depreciation going forward and how we should think about modeling that?

Galen Weston

David, on deprecation [indiscernible] will share, they’ll guide you on were we going to be. Tax rate, should be between 27 to 20 for the whole year, it was a bit higher of due to timing in this quarter, but it will come back to normal for the rest of the year.

David Hartley

Okay, perfect and thanks for that. And just back to drug for a minute, so market share and beauty for a numbers of years many of us cover Shoppers Drug while they talk about gains in market share. Could you talk -- give us a little bit of colour on how the Shoppers business is doing in terms of market share gains in mass or prestige?

Galen Weston

I think it continues to do very well in both.

David Hartley

Does that means that’s up?

Galen Weston

That means it's up.

David Hartley

And financial services, another area that had some strength this quarter. What are the prospects there for that business and strategically how are you thinking about this business going forward as it contributes to the overall business of Loblaw?

Galen Weston

So precedence towards financial has been a fabulous asset over the last five or six years. It has over-performed our internal expectations, pretty much every year over that time frame. And so we like the asset. Our customers very much like the asset it complements some of the core business programs really well. And so, there is some change. Facing those financial services industry right now, the word -- the buzz word of the day is sort of disruption from syntax. So yes we’re looking very carefully at what time does impact so new ventures are going to have and whether it represents the threat or an opportunity. So we’re on top of that.

David Hartley

And just last question, just to come around to items on promotion. I believe that items on promotion remained elevated relative to a number of years ago. I guess this is difficult and sensitive. But when I look at Loblaw and your balanced approach, how should I think about Loblaw in terms of its positioning with items on promotion, whether it’d be in discount banners or your market banners?

Galen Weston

I think it's hard to generalize the portfolio. So, if I gave you -- we still own pretty much every part of the continuum. So we’re a very meaningful high-low player at Shoppers Drug Mart. We are slightly less intense high-low player in the market division, but very close. Moving into the super stores, they would tend far more to an EDLP with a complementary flyer and promo program, and then NoFrills [ph] is kind of a really ideal mix for the both, where it's got really, really, really aggressive shelf prices and also comes to market with hot, hot ads. And the way that you deliver a compelling economic proposition is having high volume and low, low, low operating cost. So we’ve run the gamut here and we don’t expect the basic construct of any of our platforms to change materially.

Operator

Thank you. The next question comes from Vishal Shreedhar of National Bank. Please go ahead.

Vishal Shreedhar

I’ve a single question here, perhaps [indiscernible] to do, but efficiencies. Obviously, synergies are coming in quicker than guided to initially. How much opportunities left for efficiencies as you look at the business. I am not talking about the next year, I am just talking about the next couple of years. And how significant are those efficiencies to achieve your business plan as you start investing more so in price?

Richard Dufresne

Obviously we're in the business, top line is not growing fast, so if you want to be driving up any leverage we need to be focused on efficiencies and I would say that that will remain a sharp focus for our organization for the years to come.

Vishal Shreedhar

So, is a fair way to characterize it is that the run way is still significant? The reason why I ask is, I think you'll still running the headquarters at Shoppers and Loblaw separately.

Richard Dufresne

No, there is, we definitely have lots of idea.

Vishal Shreedhar

Okay, alright, thanks a lot, that's it.

Operator

Thank you, [Operator Instructions], our next question comes from Keith Howlett of Desjardins, please go ahead.

Keith Howlett

Yes, had a question on the loyalty programs that Loblaw and Shoppers Drug Mart and what your current thinking is about keeping them separate plain et cetera.

Galen Weston

Yes, so I think I don't know Keith whether you asked this question last time, we get asked this question fairly often. Clearly two big loyalty programs, deep customer databases with a lot of cross shopping in between the two databases and so there is certainly inherent value and we need to figure out precisely the right way to extract that value. So we have a team who is working on precisely that challenge at the moment and we will announce any kind of changes at the right time. At this point we don't have anything to comment on.

Keith Howlett

I rely on Kenric to ask that question, but he didn't this time. Just in terms of the store closures I'm sure you may not want to share, but are you able to indicate when you close the stores that you announced. Do you pick much of the volume at the rest of the network or does most of it disappear.

Richard Dufresne

Typically, we don't -- we don't typically put two stores very close, so we captured some, but we suspect that others are probably capturing a bigger share of that.

Keith Howlett

Great and then just finally on the, the no fresh -- sorry the Joe Fresh business, you've exited I know the most standalone retail. What is, what are your plans going forward, I think you need a new President there now, but are you in all the categories you want to be in or what's the outlook for more shelf space, more categories, et cetera?

Galen Weston

Well I'm glad you asked the question actually because we're really pleased with what the new team at Joe Fresh has achieved over the last two years. It has been, I think I would describe a soup-to-nuts [ph] overhaul, the branding, the sourcing process, the merchandizing, the marketing and the store program. And it has come with the retrenchment in some respects as far as our international ambition.

But you know that was always part of you know the case scenario, we go out there see you know if there was a viable standalone business in the U.S., we've concluded at this point that there isn't. So we shut the stores and we come back, throughout that time the Joe Fresh business continued to outperform significantly the rest of the comparable apparel market, which we feel great about. And there are still a number of international channel Mexico, Singapore -- not Singapore, Mexico, the Philippines, places that we’re seeing some interesting growth opportunity. Although they are whole sale agreement with no capital and no meaningful incremental risk, the up side of growing the volume base for Joe Fresh which has a really compiling net benefit to the bank business, here in Canada.

As far as new categories, we continue to get new category with the brand and we have a cosmetic business now well positioned for Shoppers Drug Mart, we have a costing Jewelry business, at Shoppers we’ve entered into shoes and are looking to see, how that performs. So I don’t think we’ll ever be finish and we just continue to look at things and see if the customer likes them, if they do, we push into the category; if not, we shift our focus and attention else were. Yet our President is moving to a different role in the group, but we have a superb team, a creative team and an operation team and we have the utmost confident in their ability to continue to build on the success, that they are responsible for the last two years.

Operator

Thank you. The next question comes from Chris Li of Bank of America. Please go ahead.

Chris Li

Got the question, the number first is, you obviously executing well in your cost reduction initiatives and it sounds like from the answer on the call that, if the sales environment becomes more challenging, there is certain leverage that you can pull harder to make sure that you keep margins stable and still grow earnings? Is that a fair, characterization?

Galen Weston

Yes that’s a very good characterization.

Chris Li

Okay that’s good. And as a part that this is a bit of a technical question, I might have asked this in previous call on, just going on the drug reforms, if tendering does get implemented on a largest scale in Quebec, can you remind us just maybe on a high level basis, how does that impact your Shoppers pharmacy business, if you can kind a walk us through some of the steps sort of how that impacts your profitability in that?

Galen Weston

The law has been adopted, we have no idea what they are going to do with it. So we can’t really comment. The only thing I would say, is our export to that market is relatively small across Canada. So we will impact, somewhat less as a percentage of the business. That the only comment, I will make right now.

Chris Li

Okay and my last question is that, I know you think common much on the gas station proceeds but, is it fair to assume, given your debt is where you wanted to be and there is really no big acquisition to make there, the potential user proceeds were most likely before the capital return?

Richard Dufresne

The balance capital returns strategy is kind at the core of how we think about, all of our cash flow, this would be part of that, I mean we think about it in the same terms.

Galen Weston

Chris, can I ask -- could you do me a favor and just ask a question of, just a simple question about synergies, how do we feel maybe about the achievements of our synergies?

Chris Li

Sure Galen, how do you feel about the achieving of your synergies?

Galen Weston

Thank you, you will understand why in the second term. So we feel obviously good to deliver the synergies that we’ve set out, ahead of plan. But what I really wanted to do was take a moment to publically recognize the organization. It is not an easy thing to do, to bring two businesses together and to try and extract cost that essential means business -- the business processes have to change, people have to do things in a fundamentally different way.

The fact that the team, the synergy and the rest of the businesses have achieved this with virtually no disruption to the basic trading and customer experience in our business. And in some cases which are enhancing that, that is a terrific accomplishment, some extraordinary people have been working very, very hard across this business to achieve it. And I just wanted to take a moment to publicly recognize them.

So, thanks for asking the question.

Operator

Thank you.

Sophia Bisoukis

Great, thank you. And thanks everyone for joining us today. We look forward to speaking with you again to discuss our third quarter 2016 results, which will be held on Wednesday, November 16, 2016. Have a good day.

Operator

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line and have a great day.

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