"This quarter reflects the strength and resilience of our business, particularly in our International Operations where we delivered solid same-store sales growth. While our Canadian Operations performance faced expected headwinds following the sunset of the Inuit Child First Initiative food voucher program, our team remained focused on execution and finding efficiencies within our business. Our Next 100 work contributed to an improvement in gross profit rate through refinement of our merchandise assortments, including expanding our private label offering, that are delivering value to customers. These factors, combined with an asset disposition gain, drove an increase in earnings in the quarter. These results underscore our ability to adapt and deliver performance even in a shifting economic environment", said Dan McConnell, President & CEO. "Looking ahead, we are mindful of external pressures, including the impact of rising fuel costs, and the evolving pace of government infrastructure investments and settlement payments in the communities we serve. While near-term variability in these factors may impact results, we remain confident in our long-term strategy, the fundamentals of our business, and our ability to create sustainable value."
Financial Highlights
Sales First quarter consolidated sales decreased 1.5% to $631.6 million compared to $641.4 million last year due to the impact of foreign exchange on the translation of International Operations sales and a decrease in Canadian Operations sales. Sales excluding the foreign exchange impact decreased 0.4%, with food sales increasing 0.3% and general merchandise and other sales decreasing 2.5% compared to last year. Sales were negatively impacted by the closure of a Northern store in Fond du Lac, Saskatchewan as lease renewal terms could not be agreed upon prior to the expiration of the lease and the sale of a Cost-U-Less ("CUL") store in Chalan Pago, Guam in advance of the expected opening of a new CUL store in Agana, Guam in the third quarter this year. Same store sales increased 1.2%1 compared to a 3.5%1 increase in the first quarter last year as a 4.3%1 gain in same store sales in International Operations was partially offset by a 0.9% decrease in same store sales in Canadian Operations which were negatively impacted by a decrease in funding to individuals from Inuit Child First and Jordan's Principle programs.
Gross Profit Gross profit increased 0.6% to $215.3 million compared to $214.0 million last year due to a 72 basis point increase in gross profit rate. The increase in the gross profit rate is due to the positive impact from our Next 100 work, including refinements of our merchandise assortment and procurement. Changes in sales blend, including lower wholesale food sales, was also a factor. These factors were partially offset by higher markdowns and inventory shrink compared to last year, partially due to challenging weather conditions in northern markets which contributed to merchandise transportation delays.
Selling, Operating and Administrative Expenses Selling, operating and administrative expenses ("Expenses") decreased $1.7 million or 1.0% compared to last year but were up 14 basis points as a percentage to sales. The decrease in Expenses is primarily due to a $3.8 million gain on the sale of the CUL Chalan Pago store combined with a $2.2 million decrease in share-based compensation costs primarily related to changes in the Company's share price in the quarter compared to last year. The impact of $1.9 million in one-time costs for professional fees related to the execution of the Next 100 strategy were more than offset by the Next 100 gross profit factors previously noted. Excluding the impact of the Chalan Pago-related gain, share-based compensation and Next 100-related one-time costs, Expenses increased $4.5 million or 2.7% compared to last year and were up 111 basis points as a percentage to sales mainly due to higher staff costs and other inflationary cost increases. An increase in depreciation and higher utility costs due to unseasonably cold weather in northern markets were also factors.
Earnings From Operations and EBITDA Earnings from operations ("EBIT") increased $3.0 million or 7.5% to $43.4 million compared to $40.3 million last year, and earnings before interest, income taxes, depreciation and amortization ("EBITDA2") increased $4.1 million or 5.8% to $74.2 million compared to $70.1 million last year due to the sales, gross profit and Expense factors previously noted. Adjusted EBITDA2, which excludes the impact of the Chalan Pago-related gain, share-based compensation and Next 100 one-time costs, decreased 2.7% to $75.8 million compared to $78.0 million last year and as a percentage to sales was 12.0% compared to 12.2% last year mainly due to the impact of lower sales in Canadian Operations and higher Expenses.
Interest Expense Interest expense increased $0.3 million or 8.5% to $4.2 million mainly due to changes in average debt compared to last year.
Income Tax Expense Income tax expense increased to $9.9 million compared to $8.7 million last year due to the impact of higher earnings and an increase in the effective tax rate to 25.3% compared to 23.9% last year. The increase in the effective tax rate is largely due to the blend of earnings across the various tax rate jurisdictions and changes in tax estimates.
Net Earnings Net earnings increased 5.4% to $29.2 million compared to net earnings of $27.7 million last year. Net earnings attributable to shareholders were $27.3 million and diluted earnings per share were $0.56 per share compared to $0.53 per share last year. Adjusted net earnings2, which excludes the after-tax impact of the Chalan Pago-related gain, share-based compensation and Next 100 one-time costs, decreased $3.3 million or 9.9% to $30.3 million due to the sales, gross profit, Expense, interest and income tax expense factors previously noted.
Non-GAAP Financial Measures
The Company uses the following non-GAAP financial measures: earnings before interest, income taxes, depreciation and amortization ("EBITDA"), adjusted EBITDA and adjusted net earnings. The Company believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the Company for the reasons outlined below.
Earnings Before Interest, Income Taxes, Depreciation and Amortization ("EBITDA") is not a recognized measure under IFRS. Management believes that in addition to net earnings, EBITDA is a useful supplemental measure as it provides investors with an indication of the Company's operational performance before allocating the cost of interest, income taxes and capital investments. Investors should be cautioned however, that EBITDA should not be construed as an alternative to net earnings determined in accordance with IFRS as an indicator of the Company's performance. The Company's method of calculating EBITDA may differ from other companies and may not be comparable to measures used by other companies.
Adjusted EBITDA and Adjusted Net Earnings are not recognized measures under IFRS. Management uses these non-GAAP financial measures to exclude the impact of certain income and expenses that must be recognized under IFRS. The excluded amounts are either subject to volatility in the Company's share price or may not necessarily be reflective of the Company's underlying operating performance. These factors can make comparisons of the Company's financial performance between periods more difficult. The Company may exclude additional items if it believes that doing so will result in a more effective analysis and explanation of the underlying financial performance. The exclusion of these items does not imply that they are non-recurring.
