The Canadian Investor - OpenAI Drama and Canadian Grocers Report Earnings

Episode Date: November 23, 2023

In this episode, we start by talking about the Canadian October CPI Print and the drama that unfolded over the weekend with OpenAI and its former CEO Sam Altman. We then look at earnings from Walmart, Metro, Loblaws and Canadian REITs. Symbols of stocks discussed: WMT, MSFT, L.TO, MRU.TO, TNT.UN, SOT.UN, INO.UN Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

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over the last week or so. Yeah guess you sent you sent the snow over to ottawa we're gonna have like 10 centimeters or something tonight so and it's looking pretty cold for the foreseeable future yeah this is some of the warmest weather i've seen like in late november i think it's gonna be like 13 degrees today so it's it's pretty crazy okay yeah i'm pretty jealous i'll be honest but i guess here some of the skiers or winter sport lovers will be pretty excited but i guess we'll we'll get started because we do have a lot of stuff to talk about the first thing we'll start with and i know we were supposed brayden and i to do kind of a quick recording on this. So it is the old drama that's happening at

OpenAI with the departure of Sam Altman. Thank you, Dan, for reading a little bit on it. I know this morning because there's a lot of stuff that happened in a short amount of time. And to be fair, like for people listening to this, obviously it'll be on Thursday or afterwards, so it's possible that there will be some new information. And this is not a really deep dive of exactly what happened. It's more just to give people an overview. So Sam Altman was the CEO of OpenAI until Friday afternoon last week. Prior to joining OpenAI as CEO in 2019, he was a partner at Y Combinator, which is a startup accelerator in the US. Here's like I said, this is a condensed version of what happened. And for those not aware, OpenAI is the maker of ChatGPT. So that's why it's a pretty significant news piece here. OpenAI is a pretty important company. And one of the big players here is Microsoft that

invested, if I remember correctly, $10 billion in OpenAI. Do you remember if that was the amount? I think that's it, right? I thought it was like $13 or $14 billion. I think, but it was around there. It's a lot of money. Yeah. Pocket change for Microsoft, but a lot of money for everyone else. So what happened? It started on Friday. So Greg Brockman, who was the president and chairman of the board, was being removed from the board as chairman by the board of director. He was told he would remain as president because he was vital to the company. However, he resigned as president a bit later on Friday. He was also told at the time that Sam Altman had been fired.

Around 3.30, OpenAI announced in a blog post that Sam Altman had been fired as CEO of OpenAI and as member of the board. The new interim CEO would be Myra Marotti, who was OpenAI's CTO, so Chief Technology Officer. And here is a quote of the blog post and this is really interesting because at the time no one really knew what was happening so and I quote Mr. Altman's departure follows a deliberative review process by the board which concluded that he was not consistently candid in his communications with the board hindering its ability to exercise its responsibility the board no longer has confidence in his ability to continue leading open ai so i'm not sure about you dan but i read this and i feel like i'm reading something that there's gonna be some

big news coming out in the next week or so they're just being too they're trying to being ahead of it some kind of big scandal maybe i don't know he sold some ai information to a geopolitical foe from the u uh to the u.s or maybe something you know a big sex scandal or something like that that's kind of the feel friday that i got is that the same kind of feeling you get by reading this yeah it just feels that something else is going on but apparently like even up till now like there's no there's been no word about any reason why this was done i mean there's some people that are saying that you know he wasn't exactly being honest in how fast he was pushing new functionality out and stuff. And I know just recently, didn't they come out with a whole bunch of new features,

including being able to pretty much create and commercialize your own GPT? I'm pretty sure they made it so that you could create one and get royalties from people utilizing it. So that's kind of what I got the gist of this morning, that it's something like you said, where they aren't exactly being exactly open why this is going on, or it's maybe out in the public, it's pretty much being said that he was just trying to push commercialization and things like that over just safety and just kind of taking the whole AI step a little slower. Yeah. Yeah. I think that's what kind of taking the whole AI step a little slower? Yeah.

Yeah. I think that's what kind of started coming out later over the weekend. But on Friday, there wasn't a lot of information. It really seemed at the time it was being pushed by Ilya Sutskever, I think is how I pronounce the name, who's the chief scientist at OpenAI and member of the board. Again, no one seemed to know about this move except for the board, even including Sam, Greg, employees, investors, until it really happened. It took a lot of people by surprise. And by investors, there's clearly Microsoft, like I mentioned,

that's a big investor in OpenAI and has some partnerships in place. And they released a statement shortly after saying that they were committed to the partnership with OpenAI although behind closed door it seemed to be appearing that investors including Microsoft were not happy about this and interestingly here once the news came out on Friday just about 30 minutes before market closed Microsoft stock took took a hit, a pretty big one. It was down about 1.6%. And you can clearly see when the news came out and how the stock actually kind of reverted its course for the day. And they lost about $45 to $50 billion in market cap. So definitely not great here for the standpoint of Microsoft. But we go into Saturday and from what I've read

it appears that investor in OpenAI were trying to push for Sam's return at this time it was clear that the firing wasn't because of Sam I think in part because you saw a lot of solidarity behind them so people that were close to the situation were starting to you know go behind sam here so clearly that would not have happened it was some kind of big scandal happening it was likely that the board wanting to go to a different direction like you mentioned and a lot of people were starting to call this a bit of a coup what i was reading is that there could have been a difference in opinion like you said for going forward in terms of two faction, people that wanted to push, accelerate AI development that Sam and Greg would have been in. And I think a lot of open AI employees, again, this is just piecing the information together with what we have so far versus some people that wanted a more cautious approach as part of the board.

There seemed to be a deal in place where Sam would return to the board would return and the board would resign however the deadline passed for that deal to be implemented on Saturday November 18th. Now on Sunday November 19th it looked like the negotiations were still ongoing but the board did not want to resign. On Saturday afternoon Sam was back at OpenAI building with him posting a picture on Twitter that he had a visitor's pass on. And Mira Murady, the current interim CEO at the time, was trying to morning on the 20th, OpenAI announced that Emmett Shearer, the co-founder and former CEO of Twitch, would become the new CEO and replacing the interim CEO, Mira Marotti.

Based on previous statements, Emmett Shearer seems to be more on the safety side of things for AI development. So this whole theory that there was kind of two factions is starting to take place, at least on the board. This reinforces, of course, what, you know, that view that people were kind of starting to speculate on. And a few hours later, it was announced that Sam Altman, Greg Brockman, and colleagues would be, and certain colleagues would be joining Microsoft to lead a new AI research team. OpenAI employees also threatened to resign if Sam Altman and the board didn't resign and Sam Altman didn't return as CEO of OpenAI. In an open letter apparent as of yesterday, there was more than 650 employees out of 770

that said they were supporting this move and would resign if Sam would not return. And Microsoft said that there is room for anyone from OpenAI who wishes to join the new Microsoft AI team. And they also said, Satya Nadella said in a Twitter post that, you know, they were still working with the partnership here at OpenAI. So it's really interesting how this whole thing unfolded because it's almost as if Microsoft is kind of saying, okay, whether we're pushing on AI, whether we do it with a partnership with OpenAI, or whether we take the brain trust from OpenAI

and bring it in-house, it doesn't really matter. And one other interesting thing I taught as well is because during the weekend, there was kind of speculation that Sam would start a new venture, but then he ended up going with Microsoft. And I think a lot of people, I listened to a couple of people and they were saying that's probably a reflection of how difficult it is to get the infrastructure to support AI right now. Those extremely expensive NVIDIA chips that are in short supply, while Microsoft has the infrastructure. So I think it is very attractive for someone like Sam Altman that at least can just focus on developing AI and not having to worry

of getting the infrastructure set up and the time that it could take as well. Yeah. I mean, if there's any company that would have the capacity to do it, it would definitely be Microsoft. I mean, in a way, it kind of seems like this was like a power move by Microsoft, especially like the kind of open arms, like we'll take anybody from OpenAI. If you have a problem, you can resign and come to us. So it kind of seems like they pretty much put OpenAI in a position to either bring him back or, you know, they're just going to take all their employees, which is it's a pretty crazy situation that unfolded over like over such a short time frame. Yeah, I know. talk about this and the reason why we weren't able to kind of do a little segment with brayden on this is because his internet with rogers actually has not been working for like over 24 hours and just the building and the concrete in his building couldn't really hot spot his phone as well so

that's why we couldn't do it with brayden but for those interested on his take on the next release so monday brayden and i will be revisiting that a little bit and especially getting his take because obviously finchad.io is built on the chad gpt api so obviously brayden has some you know additional interest in that because he's building on top of it right so it'll be interesting just to get his take. And as someone developing on it, or his team developing on it, just kind of the impact it could have. Maybe there's a little bit of uncertainty. I don't know. But that would be interesting. Yeah, you're definitely going to get way more juicy information from him than you would me.

He's much more involved in the space than I am. Yeah, I spent most of the weekend looking at some other things, because I didn't think we would have to talk about this, but it was, it was pretty interesting having to read about it this morning. I mean, I got the gist of it and it's just a crazy situation. I mean, what, like say they go back, what, what do they do with the CEO? Like, is he out after what? 48 hours? It's, it's so strange so strange yeah who knows the fact they announced an interim which apparently this they knew like the day before they were going to do it or something but they announced an interim and then they announced somebody else and then like who knows if they go back what happens to that guy yeah exactly and the apparently the person that was pushing for this was Ilya Tsitskitsfer.

However, in that open letter that I said, he's a signatories and apparently posted something saying that, you know, in hindsight, he regretted the move and that was not the right thing to do. It's just like really weird. Like you said, what happened? What will happen with the current CEO? If Sam goes goes back what happens to open ai if he doesn't go back and the rest of the employees i'm sure will there was probably

going to be more information when brayden and i record later this week for the monday episode but no like you said just kind of a bit of a drama i'm sure i'm sure there's going to be a netflix documentary about this in a year or two. You've got arguably the biggest piece of technology that's come out in the last while and could be so influential in the future. And there's all this craziness going on in the matter of a weekend. It's pretty crazy. No, exactly. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select

ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in

South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Now we'll move on to something different, a bit more Canada focused, obviously. So we had the headline CPI for

Canada October 2023 come out at 3.1%. It was lower than expected. Most economists were expecting 3.2% to 3.3%. This again is year over year compared to last year. Food prices actually declined 0.1% on a month over month basis so October compared to September but they were still up 5.6% on a year-over-year basis. Shelter was up 0.9% month over month and 6.1% year-over-year and this was the largest year-over-year increase for any main basket component. It's also higher than the increase we saw in September on a year over year basis. So clearly more and more pressure on the shelter component. Now one of the things that was bringing it down is energy once again because of base effect. It was down 4.6% month over month and down 5.4% year over year. Gasoline, which is a subset of that, was down 6.4% month

over month and 7.8% year over year. And the price growth for goods actually slowed, but services increased compared to September. So that's something to keep an eye on. And the three measures of core CPI, which are definitely looked at closely by the bank of canada were down on a year-to-year basis if we compared the year-to-year increase in september so they were 4.2 percent 3.6 percent and 3.5 percent respectively and overall a little bit of good news on the food front so there was some deceleration for various food items so they had that stats can add actually has a table showing the uh you know lesser increase and that's really important because unless we get actual deflation they're still you know prices are still

going up they're just not going up as rapidly and that's really important for people to know. For an example here, fresh vegetable, the year over year change was 7.6% in September, but came down to 5% in October. That's compared to a year before. So yes, it is slower, but it's still increasing pretty quickly. And you know, all the different deceleration basket that they're talking about. So fresh vegetable, bakery products, fish, cereal products, dairy products, sugar and confectionery, non-alcoholic beverages, eggs, edible fats, preserved fruit and fruit preparation. They were still quite high. They were just not as high as they were a month before compared to the previous year. So I think it's just really important to take into context, especially sometimes if you look at, unfortunately, politicians will try to spin that in whichever way, you know, to fit their narrative, whichever party it is, right?

So, you know, they'll try to spin the number in a narrative that fits their views. So I think it's important for people to, you know, have a look at these, you know, take the time, go look at Stats Canada and look at the website for yourself and understand the data. You don't, you know, don't even listen to us. Go have a look yourself. But aside from that, what are your general thoughts on this, Stan? Yeah, I think like overall, it's, it was a pretty good month. But when you look at like arguably the two things that absolutely everybody is affected by which would be food prices and shelter prices they're still like up a crazy amount year over year like even when you look at the deceleration like you're still seeing

like fresh veggies going up five percent on a year-over-year basis. That's a huge increase. Edible fats and oils up 14% year-over-year. That is a big increase in just annualized numbers. And the one thing I was going to say about shelter is I wouldn't be surprised if the shelter increases were actually just getting started because last quarter, we do a recap in terms of the big bank earnings. And we tend to focus on a specific portion of the bank's earnings in that particular quarter. Maybe we focus on capital markets or the business end of things. But last quarter, we ended up doing residential mortgages. And CIBC and Scotiabank were two companies that this stuff is all voluntary. They don't actually have to announce this stuff, but CIBC and Scotiabank were actually the most

transparent with it. So over the next year, CIBC, and keep note, this is last quarter. It's probably changed a bit, but probably not that much. You're looking at 16.5% of CIBC's mortgages renew in the next 12 months and 14.1% for Scotia. And out of those renewals, 81% from CIBC are fixed rate and 90% from Scotia are fixed rate. So if you think of fixed rate mortgages over the last while, variable rate mortgage holders have already absorbed most all of the costs, unless you think that interest rates are going to continue to go up. Whereas fixed rate holders are the ones who are going to be seeing in the next year, a significant increase to their mortgages, which

kind of leads me to believe, and you know, some of those mortgages would be landlords, especially a lot of them who got, you know, crazy low rates during the pandemic. And I just think once you start to see those come due, unless rates come down really fast, which I don't know about you, I don't think they will, you're going to see big bumps in mortgage payments. And I think that's just going to fuel shelter costs even further. Yeah, no, I think you're right. I mean, the fixed rate mortgages, I think mainstream media are starting to talk a little bit more about it, but even then, not quite. And I was chatting with Steve Serletsky on Twitter. I was interested because I knew he knew that Office had the numbers,

and he was saying that it's about 70,000 mortgages a month that are rolling over for fixed rates right now. And I think later in 2024, it's going to peak at around 100,000 mortgage a month that are rolling over for fixed rates right now. And I think later in 2024, it's going to peak at around 100,000 mortgage a month. So just to go and kind of add to what you're saying, for a lot of people, it's going to be a nasty surprise. Like you said, it could be residential or it could also be landlords that have to roll over their mortgage and they're going to be looking at substantially higher costs, probably, I would say in that 30, 40% increase, depending on what rate you got and what rate you'll qualify. So that's a pretty significant increase if you add in everything else that's

been increasing. And for a lot of people, they're going to have to make some sacrifices. So that's why I think I don't know exactly where rates are gonna go i think i i try to think in probabilities and i think you know you're probably right we're probably looking at rates that have peaked already but again i you know i think it's a non-zero chance that they potentially increase it one more time in the next six months although not super likely and there's probably as some probability as well that by the end of 2024 they might you know do a couple cuts as well so that's how i try to look at things but like you said i think there is a lot of pressure coming for that

housing or sorry the lodging or whatever i forgot the term that we're talking about it shelter costs overall. Shelter. There you go. And if you think about it just as, say, not even from a mortgage renewal perspective, just somebody trying to afford their home, when you think of a landlord who's renewing, they might go into this situation if they think rates have capped, they might re-sign a variable rate mortgage. And I was mentioning, if they start cutting rates, what are the odds that these landlords pass the savings on to the tenants? Almost zero.

That's what's going to keep... Shelter costs, I don't ever see coming down. That would be, especially in the next year or two, I think that would be a pretty far stretch to state that when rates come down, rents might adjust. Because especially if you have a lot of these landlords and just homeowners going fixed in this environment just because they're scared of rising costs yet again, which will probably keep shelter costs elevated again. Yeah, because the demand is probably not easing on people. Obviously, we're in a full-blown housing crisis across the country. So there's going to be demand for those rental units.

And the only way that rents would go down is if there'd be a big gap and landlords are simply not able to rent them out. So they have to lower the prices. But if that's not the case, I'm with you. Like, I don't see. Yeah, and I don't see that. The incentive, yeah, For them to lower rent. But anyways, well, something we'll keep an eye on because obviously it's touching a lot of people and we all feel in our everyday lives. Now we'll move on to some earnings because if not, we'll just talk about, you know, news and not actual

earnings. So we'll try to get a few in here. So the first one I'll do, and then we'll be talking about grosser earnings. The first one will be Walmart. And then you'll talk about, start off with Metro in terms of the grosser earnings. So Walmart revenues were up 5.2% to 161 billion. Walmart US comp sales were up 4.9% to 109 billion. Walmart International saw sales go up 10.8% to $28 billion. So much smaller on the international side, which is not surprising. Sam's Club sales were up only 2.8% which I found that surprising because that's essentially Walmart's version of Costco. Yeah, that is pretty strange. Yes. I thought that would have been higher. But anyways, I just found that one

a little bit surprising. But their global advertising business was up 20%. Definitely a bright spot because they made sure that you knew when you went on their investor relations side. But it's still a tiny business for them. It hit 2.7 billion in the last full year, but clearly growing quickly. So definitely worth keeping an eye on but as a percentage of its business it's about half a percent of its revenue so it's still very small but again something that grows really quickly even though it's small can become quite a large business gross margins were up 32 basis point to 24 operating margins more than doubled to 3.86%. That was led by revenue increasing faster than expenses. Although they did say that it increased less than expected.

Net income was $0.17 per share versus a loss of $0.66 last year. So the overall climate for retail, you know, based on what they were talking about in their earnings call, is that pricing levels in many food categories is a concern for them. Product cost is up and that's putting pressure on consumers. They are starting to see pockets of disinflation around certain item groups and believe there might be some deflationary pressures even in the coming months for certain item groups. They think their strong value proposition continues to resonate with consumers, and it's hard to argue with that with seeing here how Dollarama has been performing, for example.

Consumers are increasingly looking for value and general merchandise, which is a synonym for non-essential, I would say. When you go to Walmart, that was down low single digits so it's kind of aligning with everything we've been talking about whether it's a canadian tire whether it's you know name your retailer costco people are shifting their spending from stuff that they you know that would be nice to have to stuff that they actually need so really changing to the essential any comments there before we go on, move on to the grocers?

No, that's pretty much what I was going to say. Like it's the same as Costco, Canadian Tire, like core numbers are pretty good, especially with Walmart. Like Walmart is a discount store for the most part. Like it's where you go to save money. Maybe not like Dollarama type money, but when you see non

essentials dipping, and you know, revenues still going up, it's kind of a sign that you know, people are just buying the absolute necessities. And I think in terms of guidance for like mid single digit growth and guidance, they probably expect it to be much the same, really. Yeah, yeah, exactly. I mean, the guidance was the pretty good part. I would say that, you know, they did better than most there for guidance. So sales to increase between five and five and a half percent for the full year. And it compares actually really favorably to what they were guiding between the beginning of the year, which was between two point five and three percent. So they've been doing quite well this year, again, with probably consumers shifting to them for the value they provide and operating income.

Same thing between 7 percent and 7 and a half percent. And they were guiding for around 3 percent at the beginning of the year. And the last thing I'll add here in that kind of same theme is I saw this really interesting just I went on CNBC justbc just for fun this morning i was just looking quickly at the the stock futures so the market and then i saw shares of the kind of four headlines that were really interesting that kind of adds into what we were talking about the essentials and non-essentials so shares i'll just read the four headlines because it's interesting. So shares of American Eagle plummet 17% on unimpressive holiday forecast. Best buy cuts sell forecast as holiday shoppers hunt for deals. Lows cut sells outlook as homeowners take on fewer projects.

Share slide. Now, the only one that was good was Abercrombie & Finch, which, you know, kids seem to be liking again. They raised their outlook after quarterly sales surged 20%. But obviously, these are just headlines. They're not meant to be deep dive or anything. I haven't looked at the earnings of these companies, but it's still a good example of the kind of environment we're looking at and probably heading into the holidays. So that's why when I see a lot of the US macroeconomic data still being extremely rosy, I'm like something doesn't line up with what the data is saying and what businesses are saying. There's really clearly a disconnect here.

Yeah. And especially with like, I don't think American Eagle is like an expensive retailer by any stretch. I mean, I haven't shopped there for like probably 15 years, but I never remember the stuff being very expensive. Best Buy is pretty typical. I mean, it's electronics. It's probably the last thing people are looking to buy right now. The one surprising one is Lowe's because I'm pretty sure Home Depot maintained or even kind of boosted their guidance a bit last quarter when they report. I couldn't remember it exactly, but they definitely didn't cut it. Yeah, but I think they were still kind of lukewarm on the environment.

So I think it kind of aligns with that same theme. But yeah, I mean, it's just interesting. I don't know what it is. I know you do the same. We look at these companies' earnings and they're saying something completely different that we see in the macroeconomic data. Like if you look at the macroeconomic data coming out from the States, it's basically like, you know, everyone's in a recession except the States that's firing on all cylinders. And there's, I don't know, maybe we'll kind of see this data come out because it is lagging. You know, six months from now, we'll actually, you know, see the shift that we were seeing right now with earnings.

But I just thought it was interesting. Yeah, I mean, they are forecasts, I guess. So it's pretty much just what these companies are predicting. But I mean, yeah, it's not surprising, especially, like I said, for a company like Best Buy, like an electronics company. I mean, it's not surprising that they're cutting probably holiday forecasts. Because I did read some information that people are going to be kind of scaling back on holiday gifts this year if they can, just because times are so tight.

Yeah. Yeah. I mean, I know I'm going to be giving a lot of love. That's free for the author. Exactly. Yeah. giving a lot of love that's free for the author. Exactly. Yeah. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online

broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit Questrade.com for details. That is Questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who

don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Okay, but now we'll move on to a hot political

issue here in Canada since probably the whole year at this point. So grocers, which have been convened multiple occasions by the federal government. So we'll start with Metro here. Do you want to tell us what their earnings look like? And then we'll look at Loblaws. Yeah, so Metro posted actually a pretty good quarter. A lot of people kind of wonder why it fell. I think it fell like 8% on earnings day, but it was pretty much all related to guidance. They reported revenue up 14.4% year over year and earnings per share up 7.6%. Same store sales increased by 6.8%, which is lower on a year over year basis, but it's still pretty strong for a large cap grocery company. And it pretty much attributed most of this from

a shift to its discount banner stores. We don't have a lot of metros here in... Actually, we don't have any, I think. All I is is loblaws here so but like even from my perspective i'm shopping there a lot more than say a sobies whereas you know yeah prior to the pandemic i maybe stepped into a into a no frills like once a year but now i i go there all the time because sobies which is empire is just the prices are just ridiculous. I'm just going to add something quick. For people more in the East, in terms of the metro brands, you'd be familiar with Food Basics in Ontario, and in Quebec, it would be Esparce, which are their two discount brands. Yeah, they're definitely more Eastern-focused.

There's none of them around here. Whereas I think Loblaws is pretty countrywide. They're quite a bit bigger. But a lot of eyes, as you said, just due to political accusations of driving up prices were just margins overall. And the company actually reported a decline in gross margin on a year over year basis. It now sits at 19.7% in 2023 versus 20% in 2022. So they said the margin decline was even more amplified in its food division. I couldn't find any numbers that actually state the decline in its food division, but pretty much what it's saying is the cost controls are resulting in lower margins in its food division, but they're offsetting it due to higher pharmaceutical margins. So essentially they're taking a hit on food prices in order, well, and pharma is kind of making up the gap. So as mentioned, the quarter was pretty solid,

but it was a guidance that mostly impacted the company. So it's making a few expansions next year, or they're currently in the process that are going to incur some costs next year. So automated distribution center in Montreal and a new facility in Toronto. So as a result, they actually expect earnings to dip by 10 cents per share in fiscal 2024 relative to 2023. And I know this kind of seems crazy for the stock to drop like 8% because Metro earns like $4.30 a year. So people are, I know I had a lot of people ask me like, why is a 10% dip when they're earning, you know, $4 some a share, like causing it to drop this much. But it kind of makes sense to me because you'll go over Loblaws next. I mean, that's,

that's a grocer that still expects, youdigit growth, whereas Metro is reporting a decline. So it's not essentially the amount of the decline. It's the fact that earnings probably aren't going to grow next year, which I mean, to me is pretty short-sighted. Apparently, they figure these two distribution centers are going to help fuel more growth in the future. So it's probably just going to be a short-term decline over the next year. Although, you know what? There is uncertainty there because sometimes these expansions, they never work out to be as profitable as these companies expect and investors get a little bit impatient. But overall, I really think the discount element is going to be a large factor moving forward with these grocers i don't think as of right now empire hasn't reported yet which is sobies and i'd

actually be very very curious to see like how they're doing in this because their prices are just so expensive relative to the no frills discount brands loblaws discount brands yeah no i'll be interesting to watch. I think they have Farm Boy too, right? Which is not the cheapest either. I think that's under the entire brand. They don't have the discount brands that Metro has and mostly Loblaw has. Yeah. No, that's fair. And I hear for our Join TCI subscribers, so you'll see I have a graphic metro in terms of free cash flow. So they've done quite well from a free cash flow perspective.

I mean, it's kind of leveled off since 2020. It's a little bit down. I don't have it for free cash flow per share right away, but they've done pretty well. So I have to say that, you know, there's definitely something there in terms of increased profits. But yeah, they they definitely know what they're doing. And I think they're pretty well run businesses. I know Loblaws has higher margins, but I think Metro's nothing to sneeze at either. So anything else to add for them or I'll go on to Loblaws? No, that's pretty much it. Pretty good quarter, pretty good quarter, bad guidance pretty much was what drove the decline. Yeah, and I unfortunately didn't look at the guidance for Loblaws, so that's on me, but I'll still give a good overview.

Now, revenue increased 5%, $18.2 billion. Food retail, same-store sales increased 4.5%. Drug retail, so there's Shoppers Drug Mart, a banner. Same-store sales increased 4.6%. E-commerce sales increased 13.6%. Gross margins were slightly down year-over-year to 31.4%. Same operating margins were slightly up year-over-year to 5.8%. EPS was up 15% to $1.95 per share.

They repurchased 2.9 million shares at a cost of $341 million. Free cash flow was up 46% during the quarter to $756 million. And for those not aware, and I actually thought they still had that partnership with CIBC, but that ended in 2017. So they actually have an in-house finance arm in Loblaws as well, a bit like Canadian Tire would have. It's much smaller for Loblaws, but I wanted to look at their credit card loss rate. And that was up 120 basis point year over year. It went from 2.6% to 3.8%. So that actually, remember when we were looking at Canadian Tire, I don't have the numbers right in front of me, but that kind of aligns with those numbers from Canadian Tire.

I think Canadian Tire was 5.6% from what I remember. Yeah. They were quite a bit higher. They were 3.6% in 2022. And then I think they jumped to 5.5% now. Yeah. I think you're right. Yes.

I'm trying to look at my older notes right here. So yeah, credit card write off. Yeah. Five point nine percent, but a similar increase in terms of basis points. Yeah. Yeah. Which is I mean, is expected. Yeah, exactly. It's expected something to keep an eye on because obviously, as people are struggling, that's something you'll see with businesses that have like a financial arm. So they'll actually issue this kind of credit now during the call i listened to part of it they mentioned a few interesting things decrease in food margins is evident that their cost continues to increase faster than food prices however i couldn't really find that so same thing as you said for metro i couldn't really find that. So same thing as you said for Metro. I couldn't really narrow down the food retail margins either.

They don't report it. No. So I guess we'll take the reward for that. Yeah. They were definitely not shy on the call at placing the blame on suppliers on food price increases and said that several global suppliers are coming with higher than expected food prices increases for next year they also said that consumers continue to migrate from shopping to food retail discount stores so similar things that you said for metro they are converting more and more stores to discount stores so i thought that was pretty interesting. They gave the example that they converted

seven Provigo stores in Quebec. So these are equivalent to like Loblaws branded stores in Quebec to Maxi, which is their discount stores. I'm trying to think about the equivalent here. It's not food-based. I think it could be like No Frills potentially in Ontario. Yeah, No Frills is like our, at least our like deep discount store from Blah Blahs. Like it's the cheapest one.

Yeah, so I think that would be their equivalent. But maybe you can check that whether they own the No Frills brand. But all that to say, they've done 18 conversion to Maxis in Quebec so far this year. And we'll do six more in Q4. And on the Quebec side obviously I have family there around the Ottawa area and I used to live next to a provigo that now has been converted to maxi so I've definitely seen that with my own eyes and they are still seeing some problems some significant problems with shrink and organized crime although it seems to be getting slightly better and for

those not aware shrink refers to not only theft although a lot of people think it's only that but also it's kind of a catch-all terms for things like damage items theft cashier errors and other things that would kind of incur some losses that are a bit kind of unforeseen if you'd like. But that's the gist of it for Loblaws. Any comments on that regarding them versus Metro? No, I think they're both pretty solid grocers. We cover Loblaw quite a bit more than Metro. So I guess the guidance, they expect a double digit earnings growth in 2024. So I think that's a big contrast with Metro and Loblaw is like next year Metro is going to decline. Loblaw is going to grow by double digits, at least forecast wise, but. Per share or a total?

Per share. Per share. Yeah. I was going to say they're probably going to be doing quite a bit of share buying. Yeah. So Loblaw expects retail business to outpace sales growth in terms of earnings and forecast adjusted net earnings per common share growth in the low double digits. So yeah. But when you think of it, Metro's not necessarily because of performance. It's just they expect some costs incurred with development of things that will down the line, hopefully boost earnings.

So I think it's pretty strong quarters from both companies, really. Yeah. So I guess, you know, be careful, you'll probably be get called upon on Parliament Hill in the next little while. So but yeah, they were definitely like that was a big theme of the call. So I found that interesting. But I guess enough on the grocers here. Do you want to, you had a little bit, a nice segment on Office Read. I think we'll have time to do it. So as long as we keep it around 10 minutes, I think we'll be good. Yeah. So this, this is kind of what I spent most of my weekend digging into actually was all

this like outright thrashing of Office Reads. So there was three of them that full out suspended the distributions and I might have even missed one. I don't even know, but there was True North, there was Slate and there was Innovalis. So all three of these REITs are down more than 72% in 2023. Slate is approaching 80%. So pretty much you could tell that these companies had cut the distribution or slash the distribution just by reading the quarterly earnings like titles so they were all like you know they're looking to realign the portfolio or they're optimizing for unit holder values so generally when you see a headline like this it's just not good news and the one interesting thing about

slate is because i was watching them pretty closely because we cover allied a lot i was like this, it's just not good news. And the one interesting thing about Slate is, because I was watching them pretty closely because we cover Allied a lot, I was looking for their earnings. They were supposed to report after the close. And I don't know if this was just an accident from the PR release company or whatever it was, but Slate reported pretty quickly after close. And the report was just kind of put it on their investor relations page, but they didn't release the press release until 10 50 PM Eastern time, which is like, like I said, you have no idea if it was, it was intentional or, you know, if there was an issue with the release of it, but I just found it really weird that, you know, you're, you're like five hours, I think after you report earnings and you fully suspend your

distribution. And then you don't release a press release until like almost 11 p.m. Eastern time when everybody's in bed. So yeah, it's been a crazy time. And they had the one interesting thing about Innovalis in particular, and this was something that probably wouldn't have been foreseen as a massive risk, although it was still pretty risky just even before the pandemic came. So the company's coverage ratios look pretty good right now, but it was actually in terms of the distribution. So you'd kind of wonder why they would slash it, but it actually boiled down to a pretty disastrous acquisition they made in 2019. So they bought a building in Paris for $51 million, and it accounted for 36% of the company's

revenue. So they bought it in 2019. It closed in 2020 and the lease. Now this wouldn't have been known to a lot of people unless they actually looked up the conditions of the lease, but it was set to come due in 2022. the conditions of the lease, but it was set to come due in 2022. So they bought this building 100% occupied by a single tenant and it had a two-year lease left on it. So ultimately the pandemic hit, the company told Innovalis that they would not be renewing their lease in November of 2022. And by the sounds of it, the building is still pretty empty. So year over year FFO is down by 61%. It doesn't even come close to being able to cover

the distribution overall. And so they just had to slash it. But I mean, I don't know about you, but it just like, it blows my mind that they would make that significant of an acquisition. And there's a two month, two year lease left on 100 percent single occupied building. Yeah. Yeah. I mean, it's not it's probably not the wisest move. Obviously, like I feel like the pandemic probably played a little bit of a role in there. So for sure, I mean, I'll give it I'll give them a pass for the pandemic happening, but not a pass on the fact that I mean, if their FFO is down so much because of this, clearly that was a big issue. And we've talked about that before on the podcast. Whenever you look at companies, whether it's a company and you're looking at their customer base, if a company gets like a whole lot of revenue from one specific customer, regardless

if it's a REIT or not, I mean, that's always a big risk if they lose that customer. And that's one thing where I have, I own a small portion in Granite Industrial REIT. And that's one of the key things I check every quarter is their exposure and if it's still going down to Magna International. So yeah, for them, it's in the low 20s. But again, it's something that you have to keep an eye on because it's a big proportion of their leasable area and their actual revenue coming, the rent revenue coming from there. So I think that's a good reminder for people is if you ever see that, you know, it may still be a good investment, don't get me wrong, but that's a risk you have to keep in mind that if something like this happens, they're in a tough

position. Yeah. And you would think maybe... So apparently the Lisi was a subsidiary of a pretty major telecom company there. So I think if the pandemic doesn't hit, it probably gets renewed because apparently they were a long time occupant of the building. But the one thing in relation from say Granite to an office REIT is it's so much more of a pain for a company like Magna with industrial properties and what they're utilizing those properties for to just pack up and leave. I think it's a much easier process to just, you know, if they can get a better rate elsewhere, or maybe they can move from home or work from home that they can just stop occupying the space. Yeah, no, you're totally right. And we were chatting on the weekend. I had a feeling you were working on something like this because we were chatting quite a bit. And one thing I did mention, I've mentioned that before on the podcast is there's definitely a big difference in downtown buildings versus suburban buildings and whether it's a class A building versus a class B.

So a class A building is the nicest building. So they're either very new. They'll have some of the nicest amenities, really nice place to go in and work. And you might also see like Allied, they have a lot of older buildings, but they've fully renovated them with all these amenities. And what's been happening a whole lot is you have businesses that are asking their employees to return to work, but it's much easier to ask your employee to return to work if you have a really nice building to go to, right? Versus one that's, you know, not the nicest, you're comparing that to home.

And for those listening, and I'll go over for those that are watching on join TCI.com. But for those listening, the discrepancy in vacancy rate between the different classes of building is quite significant in Canada. And also, what you can ask per rent, terms of price per square foot is also massively different. So I'll just go over some little stats here. So the worst performing in terms of class is downtown class B, which has a 23.6% as of Q3 in terms of vacancy rate across Canada. Obviously, it varies from city to city here. And then you have kind of bunched together

suburban class A and class B similarly around you know around 18 percent and then the best performing which is what Allied owns is the downtown class A which is at 16.3 percent so clearly below all of the other types of buildings. And the price you can get is significantly higher from downtown class A. I mean, it's about 50% more than you can get from any other class, whether it's downtown class B or suburban class A. So that's really important. I wanted to mention, especially when you look at REITs, there's different types of quality in terms of REITs, even if you look at a kind of specific subsection. And the vacancy rates will most likely follow, obviously vary quite a bit, but also the price per square foot that you can get will vary as well. personally thought not i've been thinking for a while now that allied is pretty well positioned and the market is overly pessimistic because of the quality of their asset and now also their

balance sheet is actually looking quite good yeah like the high the higher quality your your property like there's going to be a more demand probably you know more stickiness and you know in the lower quality properties like these companies might jump around from more attractive leases. Whereas if you have higher quality properties, your real estate is going to be in higher demand and Ally does have quite a bit of that. And it's definitely best positioned. The one thing I was going to say for your talk about just these specific things when it comes to REITs is I find a lot of new investors, especially when it comes to REITs,

focus a lot on tenants, like the quality of the tenants. Like, you know, there was a lot, what is it? I think it was smart centers. You know, they got a lot of Walmart, you know, tenancy they'll never, you know, they'll never not pay their lease, things like that. But Slate actually had pretty much 70% of its base rent is derived from government or credit rated tenants. So its top three tenants are CIBC, Bell, and the government of Canada. And its fourth biggest tenant, I believe, is the government of Ireland. And this is still a company that, like, I believe they cut the distribution like three quarters or so ago because they were paying out like 170% of their FFO. And now it's just they completely axed it. So the tenants that are occupying the spaces, it's definitely only one part of the story.

It definitely requires a lot more research when it comes to these real estate properties. Yeah. No, I totally agree. And I mean, at the end of the day, too, it's the percentage that each tenant, right? So if you have your top four tenants, but you only have like seven tenants in total, obviously those top four will be a pretty large part versus if you have 50 to 100, the top four or five may represent five to 10% in total, but it may be more diversified than that. I know one that I like in the US, Realty Income. I don't think they have more than a couple percent exposure to any single tenant.

So that's a good example of having your diversified base. But again, there's a lot more to look at in terms of REIT. And Allied is not without risk, right? If there's a severe recession or something like that, right? Like there could be, you know, if there's a severe recession or something like that, I mean, it could go down further. So don't take this, this is not investment advice. Do your own research because, you know, my thesis is that, but, you know, I've been wrong before and I'm sure I'll be wrong again in the future. And the main thing about investing is that, you know, you're right more

often than you're wrong. And those winners outweigh the ones that you're wrong on. So I think that that's important for people to remember. But before we wrap up, anything else you wanted to add, Dan? No, in terms of the office REITs, I guess I would just say that, you know, yield does not equal return. Like a lot of these REITs, a lot of these REITs were yielding like 10 or 15%. And that was kind of the main draw to them. But I mean, if you bought it based on that 10 or 15% yield, you're now 70% in the hole. So yeah, it's been pretty bad for a lot. I would expect more cuts in the REIT space. Like there has been a few articles that I was reading as well that just says it's pretty much just getting started in the space in terms of distribution cuts.

Yeah. Which is, you know, make sure that it's not everything, but make sure they have a good FFO and a FFO payout ratio when it comes to REIT. I think that's extremely important. But again, it's not the only thing. If you lose your major tenant, you know, you may have a good payout ratio, but then that tenant is gone. It might not look so thing. If you lose your major tenant, you know, you may have a good payout ratio, but then that tenant is gone. I might not look so good afterwards. So something to always keep in mind. But I think we'll wrap it up on this note.

So for those of you, again, I've mentioned a few times, but we appreciate the support on join TCI dot com. You can get the full videos here and also our portfolios will be looking. I'll be chatting with Dan if he wants to add his portfolio in the next month or two. So we'll let you guys know for that. Aside from that, any other words? I would say also give us a review on Spotify, Apple Podcasts. If you haven't done so already, give us a five star rating on Spotify, Apple Podcasts, five star, write us a little review. Always really appreciated for people to get to know us, kind of pop up for the algorithms

and share us with some friends and family because that goes a long way as well. And Dan, you want to tell people where they can find you before we sign off? Yeah, so our website, www.stocktrades.ca. I'm on Twitter at StockTrades underscore CA, and I have been considering making YouTube videos again. I haven't quite yet. I have to kind of think about what I want to do on there. I definitely don't want to go back to what we were doing before, but I'm thinking about making videos again. So stay tuned on that. Perfect. Yeah, I think we'll probably start doing that most likely in the new year for the

Canadian investors. So we do have a YouTube channel, three subscriber, we haven't done anything with it yet. So yeah, so the idea would probably be to put some small clips there. So if people are, are interested, they can have a look. And then if they like what we're talking about, hopefully they can come and listen to a full thing. But that's kind of the idea of what we'll be looking at. Just need to probably get a little graphic designer to get a nice little smooth intro. That would be kind of sweet. Fiverr. Yeah, Fiverr, exactly.

That's it. I think that will wrap it up on that. Thanks for listening, everyone. We'll talk to you soon. We have a release coming up next Monday. I'm back with brayden on mondays for those who are still getting to the show so i'm here with dan on thursdays and then on mondays i'm there with brayden and if you haven't had the chance we had a special release

yesterday which will be tomorrow versus when we're recording this so i did an interview with a bitcoin podcaster so for people interested in learning more about Bitcoin, I do encourage you, especially Bitcoin adoption, encourage you to listen to that. So thanks again for listening. Take care, everyone. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.