Loblaw Companies (L:TSX) Q2 2026 earnings call transcript

Thanks very much, Colby. and I will also officially welcome you to the Loblaw Companies Limited Second Quarter 2026 Results Conference Call. And joining me this morning is Per Bank, our President and Chief Executive Officer, and Richard Dufresne, our Chief Financial Officer. Before we begin, I want to remind you that today's discussion will include forward-looking statements, which may include but are not limited to statements with respect to Loblaw's anticipated future results.

These statements are based on assumptions and reflect management's current expectations. As such, are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations. These risks and uncertainties are discussed in the company's materials that are filed with the Canadian securities regulators. And any forward-looking statements speak only as of the date they are made. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than what's required by law.

Also, certain non-GAAP financial measures may be discussed or referred to today, so please refer to our annual report or other materials filed with the Canadian securities regulators for a reconciliation of each of these measures to the most directly comparable gap financial measure. And with that, I will turn the call over to Richard.

Thank you, Roy, and good morning, everyone. Before I begin with my remarks, I just want to acknowledge that today is the last day for Michael Van Elf before he retires. So I want to thank Michael for his long-standing support. And so while he's not officially on this call, I hear that he is listening. So enjoy your retirement, Michael.

Okay, so we delivered another strong quarter of consistent operational and financial performance. The quarter was characterized by solid revenue growth, stable gross margin, a flat SG&E rate, and strong adjusted EPS growth. We delivered this performance while we continue to invest in new stores, pharmacies, and optimizing our distribution network. All of our businesses have momentum. We feel good about the rest of the year, and our 2027 plans are beginning to take shape. In the second quarter, revenue, including PC Financial, was $15.3 billion, up 4.1%. total company adjusted EBITDA increased 5.1% to $1.9 billion and adjusted EBITDA margin improved by 10 basis points. Adjusted diluted net earnings per common share grew 11.9% to 66 cents. On a gap basis revenue was $15 billion up 4.1% and diluted net earnings per common share were $0.64, up 8.5%.

In food retail, absolute sales grew 3.3%, supported by new store growth, while same-store sales grew 1.6%, which includes a 20 basis points drag from the right-hand side.

Our hard discount banners continued to perform well in the quarter, with comparable sales close to 4%. Maxi and No Frills remain well positioned for customers focused on value, supported by strong execution in both existing and new stores. As recent openings mature and enter the comparable store base, they are delivering strong double-digit same-store sales growth. This performance reflects the strength of our expansion strategy.

Food retail, traffic, and baskets were both positive on the same-store basis, and we remain pleased with our market share. We continue to gain share and hard discount, and we are outperforming our peers in conventional. Our internal CPI-like food inflation metric remains lower than Canada's grocery CPI. Our actual quarterly in-store average article price has now been consistently lower than CPI inflation for more than four years.

This reflects the relevance of our promotions, our effectiveness at pushing back on unjustified supply cost increases, and trade-down by consumers.

During the quarter, we opened 11 food stores, including 7 Maxi and No-Frill stores, 1 TNT store in Canada, and 1 TNT store in the U. S. We also opened 3 new shoppers drug market locations. These new stores contributed to a net positive impact on our grocery square footage of approximately 1.5% and 2.6% in pharmacy. Our new stores continue to perform very well and we are currently on track to open about 75 stores this year. Our conventional banners also perform well, delivering positive same-store sales growth. 14-0s and TNT remain strong, helping our conventional banners continue to outperform their peers. In drug retail, absolute sales increased 6.1% while same-store sales grew 4.6%. Pharmacy and healthcare services grew same-store sales by 7.5%, driven by continued strength in specialty and chronic prescriptions.

On a same-store basis, prescription volumes increased 3.4%, and average prescription value increased 5.5%. Specialty prescription growth continues to lead our pharmacy performance. Within this category, we are beginning to see the impact of GLP-1 drugs going generic. It's still very early, but the initial indications are encouraging. Lower generic pricing is being offset by higher volumes, and we expect higher revenue, higher gross profit dollars, and higher gross margin rate.

We will provide a more detailed update at our Investor Day in September. LifeMark delivered double-digit sales growth as it continued to experience strong growth in the number of patient visits to its clinics.

Front source, same-store sale grew 1.3%. Prestige Cosmetics, OTC, and Baby were strong, while the timing of the Easter ship was a headwind to sales. The underlying strength and profitability of the front-store business remained solid.

Online sales increased 19.3% in the quarter, driven by PCX Press delivery, PCX Pass, our third-party marketplace partnerships, and the expansion of pick-and-deliver and marketplace locations. Retail gross margins were stable, up 10 basis points.

Retail SG&A is a percentage of sales of SLAT at 20%. This reflects operating leverage from higher sales offset by incremental costs related to opening new stores, the ramp-up of our automated distribution facility, and the year-over-year impact of certain real estate activities. The ramp-up of our East Gwilinbury Distribution Center continues to progress, and we're making progress on the construction of our second new distribution center in South Caledon.

These remain important investments in the long-term capability and efficiency of our supply chain. Turning to financial services, subsequent to the end of the quarter, we completed the sale of PC Financial to EQBank. As of closing, Loblaw owns approximately 19.9% of EQB's issued and outstanding common shares. We expect to increase our ownership through approximately 25% over time. In connection with the transaction, Loblaw received $625 million in cash, representing the release of excess capital, cash consideration from EQB, and the collection of certain commodity tax receivables.

Starting in the third quarter, we will no longer report PC financial results and will begin to recognize our proportionate shares of EQB's net income within our consolidated financial results as financial services remain important to Loblaw's strategy. As we begin this new partnership, we are excited to continue expanding the benefits of PC Optimum while participating in the future growth of EQB. In the quarter, we repurchased $552 million worth of common shares under our NCIB program for a year-to-date total of $1.2 billion.

Our return on equity was 27 and our return on capital was 12 Looking ahead we continue to expect our retail business to grow earnings faster than sales and adjusted net earnings per common share growth in the high single digits. Because the PC financial transaction closed part way through the quarter and our reporting calendars are different, we'll only recognize one month of EQB's earnings in the the third quarter. Despite this timing-related headwind, we remain confident in our ability to deliver net earnings per common share growth in the high single digits. We expect to continue to deliver consistent top-line sales growth in the third quarter and remain confident in the long-term strength of our retail business and our ability to deliver on our outlook of the year.

Consistent growth in free cash flow remains one of the defining strengths of our business. It provides us with the flexibility to simultaneously invest to deliver our long-term growth strategy while maintaining a strong balance sheet and returning capital to shareholders. We believe this balanced approach to capital allocation is a key competitive advantage and an important driver of long-term shareholder value. Given the strength of our balance sheet and growing free cash flow, we now expect to repurchase $2.1 billion of our shares this year, an increase of $200 million to our initial plan.

I will now turn the call over to Per.

Thanks, Richard, and good morning, everyone. We are very pleased to report a strong second quarter for 2026. What stands out to me is the quality of execution across the entire business. We're staying focused on the fundamentals, its strong stores, its disciplined growth, and delivering our customers relevant value and offers in the way they want to shop.

The consumer environment remains consistent with what we have seen over the past several quarters. Customers are looking for value using promotions, engaging with PC Optimum offers, and making choices across the basket to manage their budgets. That puts a premium on execution. We recognize that customers can choose where they make their purchases and spend their hard-earned dollars. And they are responding to retailers that understand and anticipate their needs.

Consumers are rewarding retailers that offer great value, meaningful service, compelling offers, and an unbeatable selection. We believe we are delivering on all these parameters, and customers continue to reward us for meeting their needs. Every day, our merchant, sourcing teams, and suppliers work together to balance delivering affordable products for Canadians while growing our domestic supply chain network. We continue to onboard new Canadian suppliers, invest in local production, and help smaller businesses scale alongside us.

I'm incredibly proud that more than 70% of the food we buy is sourced from or prepared in Canada. and we're always looking for opportunities to increase that number where it benefits our customers. Supporting Canadian suppliers and delivering value to customers are not competing priorities. They do go hand in hand. It's about making thoughtful choices that strengthen our economy while continuing to deliver the quality, selection and value our customers need and expect.

We continue to see suppliers come to cost increases and our approach remains disciplined. We carefully assess every proposal and only accept increases that are supported by the underlying costs. As a result, we have identified successfully pushback more than ever on unjustified cost increases requests, saving hundreds of millions of dollars for our customers.

In food retail, our discount banners remain very well positioned. Maxi and NoFills continue to help customers stretch their budgets, and we continue to see strong customer response as we add capacity in underserved markets. We opened four NoFills and three Maxi stores in the last quarter. As an example, we are proud to bring the first ever hard discount store to the community of Lois Minister in Alberta. We also opened our second maxi in New Brunswick, where we converted no-fills and baths and saw sales more than double under the new maxi banner, a bit better than we expected. And this morning we opened our new no-fills store in Dutton, Ontario, which will be the first hard discount store in that community, providing customers with more choice and the option to save significantly on their groceries.

As Richard mentioned, our conventional banners are also performing well, after lapping a very strong performance in quarter two last year. TNT remains one of the most exciting growth opportunities that we have in the company, and customers' response continues to be strong, both in Canada and in the U. S. In June, we opened our first TNT location in California, and it has been a huge success.

The Saint-Rochet stores generated the highest first week sales of any store opening in the history of Loblaw. Hundreds of customers were lined up for hours on the opening day. And the mayor was there to help cut the ceremonial ribbon. We plan to open two more California stores in 26. We are and stay excited to bring TNT experience to new communities. In drug retail, Shobhaz Rockmire and PharmaPrix continue to grow.

It's great to see the role our pharmacy teams are playing in improving healthcare delivery in Canada. Customers want convenient access to care closer to home, and our pharmacists and healthcare professionals are increasingly part of that solution. In the quarter, we brought that convenience to three new communities, including a new smaller format pharmacy and care clinic in a new residential development in the West End of Toronto.

In Front Store, we continue to focus on making the offer more relevant for customers. One example is the food refresh we are testing in select server stores, with more SKUs at cheaper prices. Early results are encouraging, and we plan to expand the test this year. It is practical retail work, listen to customers, test the offer, learn quickly, and scale if it works.

Our pharmacy healthcare services business continues to perform very well. Our chronic prescription volume continues to grow in the mid-single digits, while speciality on healthcare services deliver strong double-digit growth. As the speciality segment begins to evolve with the introduction of generic alternatives in the DGLP1 space, we have an opportunity to play a meaningful role in helping Canadians better understand their treatment options and, in partnership with healthcare providers, help them benefit from safe and appropriate use of these treatments. e-commerce growth remains very strong at 19.3%.

Our click and collect sales remain stable, while PCX delivery increased more than 40%, led by our PCX press delivery and third-party options. We're seeing improving efficiencies and profitability as our growth accelerate in both third-party pick and delivery. At Shoppers, we originally rolled out our buy online pick-up in stores to 500 stores, offering customers additional convenience in the front-door shop while driving an incremental in-store purchase.

Looking ahead, we are confident that consumer preference for discount is a long-term shift. Our momentum on investing in this area and the differentiation of max and no-fill banners position us very well for continual growth. We believe the diversity of our banner portfolio combined with our scale, loyalty program, control brand and execution puts us in a very strong position.

As an example, customers have really embraced our summer's Insiders program. And this is the best and most successful program so far. And it's also bringing us a lot of new customers. I'm proud to add that one of our top-selling Insider products this season is our PC Cherry Tomatoes. And these delicious online wine cherry tomatoes are greenhouse grown right here in Canada. And on tomatoes, that actually reminds me that our president of Hard Discount, Melanie Sink, whenever she asks about what she does, she answers, I'm just here to sell tomatoes. And trust me, we are selling tons of tomatoes in Hard Discount. On a more serious note, our performance this quarter reinforces our confidence in the year.

We are serving our customers well, investing with discipline and delivering consistent performance across the business. I want to thank our colleagues across stores, distribution centers, pharmacies, clinics and store support offices their hard work and dedication and what allows us to deliver for our customers everything With that we will open the floor for questions Thanks a lot Thank you Per Colby if you don mind introducing the Q process again please Of course.

Thank you for the questions. And our customers, it's more or less in line what we have seen so far this year. There are a few examples that customers, they are looking more for value, more for discount. That's also why in the way that we work, we apply more value both to our discount stores, but also to our conventional banners. And to Richard's point before, having close to a 4% discount comp growth, I think that's a proof to that. But we are still seeing the customers that are going for the promotions, and we have seen an increase in our private labels.

And also we're seeing some shift in patterns, how the shop, A new insight that we just revealed a few weeks ago was that customers are buying more and more into the frozen wedge area. So it's more than 500 basic points growth in the frozen wedge in our hard discount banner. So those customers who shop there, they're trying to mitigate their inflation. And they're doing that, also proof that our internal inflation is much lower than the external inflation. So I would say customers, they stay conscious, they stay focused on value.

It's more or less the same as last quarter with a little bit of more comp to the discount. But that's also because we had a very strong comp last year of three and a half also on our conventional banner.

It's very hard. Like prices went up and then they started to go down again and now they're going back up. So it's very hard to predict. But like when you look at inflation year to date, it's still pretty stable. So but as we said in previous quarter, if this lasts longer than expected, like you're going to have you're going to see an impact. But right now, we're still seeing our inflation below 3%.

Yeah, and I would add to that that we have only seen a few of our suppliers coming with cost increases because of fuel. But of course, as Richard said, if it's continuing, then we will expect a few more of those cost increases that, of course, we will push back on. But we will expect that. But we don't expect that inflation will increase compared to where it is now.

Hi, Irene. So, yeah, Pear hinted, like, I think our conventional business continues to be quite strong. I think when you look at comparing it to the comp last year, like Per mentioned that the total comp was 3.5, our comp in conventional in Q2 last year was actually higher than our comp in discount. And I won't go back as to why. Everybody knows why.

So that is queuing a bit what's happening now. So from a comp perspective, you'll see. And that effect that we saw in conventional started in Q2 of 25 and lasted for also Q3 and a bit in Q4. So you'll see that affecting the reported comp, but you look at our top-line performance and you look at our market share performance, it sort of signals that our business continues to be quite healthy.

Yeah, and I would add to that that we do continue to manage our business to deliver against our financial framework with the comp sales that we're achieving. And rest assured that the comp sales will remain as a really key metric for us. And in the quarter there were several moving parts that influenced our performance, but on market share, as Richard said, we gained market shares with our discount banners, we were better than our peers in our conventional business, and overall we did gain share in the quarter. And then there were a few factors, as mentioned in one of the scripts, that we had a negative impact from the Easter ship. We had some headwinds from lower tobacco and liquor sales.

And then we're also right now seeing a headwind from tariff impact from last year. Remember, we increased prices on American products directly imported because of the tariff. So they were increased by 25% last year. It disappeared again in October. So there's a short impact swing of about 40 bids right now. It has no profit impact, and that will disappear again in October. So we actually feel really strong about outcome sales as well.

Yes. Actually, we started the plan 2027, and it's still early days, so we're using just preliminary data. But our data is telling us that next year, GLP-1 sales, despite the price decrease, should grow double digits in dollars. and that you're going to see gross profit dollars and gross profit rate grow way more than that.

I think the market stays very rational, and I think you're right. Not a lot has changed to the last quarter, and there are some different impacts in this quarter.

So I think the pace will be stable. We don see it accelerating nor decelerating And remember it in our pace now so as we have said several times that in the beginning when we ramping up building those stores it will be a headwind, but over time of course that will be a tailwind because we don't add additional depreciations compared to the base.

Yeah, like we expect gross margin rate and gross margin dollar will grow more than top line growth. That's what we mean.

Yeah, we do have erosion estimates in our plan, and so far we're doing better than our internal estimates.

We don't measure it like that, so we don't have that number. We measure it as a percentage of sales, And that's the planning assumption we have, and that's what we track. And we're doing better than our... And it's not a concern of ours at all. Not ours and not competitors.

Like we always want to keep our price competitive and we always invest money in our stores, but you should see a positive tailwind on gross margin, largely on the back of GLP-1 drugs going generic. So that's what you should start to see, and that's what we're planning for. And we have invested back in prices in the past, and we'll continue to do that in the future to stay competitive.

And we feel good about gross margin for the next while.

Yeah, like we have a rough estimate, like by November of next year, we should get there. Obviously, that's us buying using the rules. But if some blocks were to become available, that could help us go faster. But like right now, I think it's sort of November 27 is the date.

Yeah, I think it's mainly driven by GLP-1s. And in Q1, it was not generic yet, so that was helped by that. But we're also seeing very, very strong sales in chronic disease management. So the med reviews and, yeah, everything else that our pharmacists are doing, but driven by GLP-1, definitely.

It's around the same. Yeah.

I think we still want to reduce shrink even further. We are at a very good level right now. We are back to pre-COVID levels on shrink in shoppers, so we are pleased where we are. But, of course, we always strive to reduce it. We like the slope at which the shrink curve on shoppers is falling, so we want to maintain that.

Yep.

So we have completed 17 stores now, and we have 11 more on the way, and we're still reviewing and adjusting them, and they're giving us some very, very good numbers. And I think we'll share more when we have the investor day coming later in the year to get a little bit more into some of the details in Shopper. But so far, we are very pleased. And for us, it is about continuous to test. And since we will be soon more than 30, it's a good indication that we are getting what we want.

Yeah.

Thanks for your time, everybody, this morning. We are around. If you have any questions, call or drop me an email. In terms of Q3, circle November 19th when we'll be releasing our results. And as both Per and Richard alluded, we're looking forward to hosting you all up at our East Willenberry, D. C. in September for an investor day. Have a great day, everybody. Thanks again.