Better than expected first-quarter
Empire shares soar as turnaround gains traction
TORONTO — The plan to overhaul Sobeys appeared to be gaining some traction after parent Empire Co. reported better than expected first-quarter results in a tough grocery environment.
Shares of the Stellarton, N.S.based retailer soared 13.75 per cent Thursday after the company reported the first rise in same-store sales in six quarters and showed solid signs of clearing the wreckage from its bungled acquisition of the western Canadian Safeway banner four years ago.
The company, which offers online grocery shopping at IGA stores in Quebec and at its Thrifty Foods unit in western Canada, is also working hard on its e-commerce strategy as the industry estimates the reach of Amazon’s Whole Foods acquisition, according to chief executive Michael Medline. But he said the company will be prudent, given the slow penetration of online food shopping in Canada.
“Customers think you’re a dinosaur if you’re not capable of e-commerce, but Canada is trailing the U.S. in e-commerce and grocery is trailing Canadian e-commerce,” Medline told a conference call with analysts, calling food the “last citadel” for e-commerce. “We take every competitor very seriously and we are getting ready for Amazon and their ilk, (but) for the next number of years our biggest competitors start with the letters W, M and L,” he said, referring to rivals Walmart, Metro and Loblaw.
Encouragingly, Sobeys saw higher customer traffic and an increase in basket size at the till in the period ended Aug. 5 and the retailer made small market share gains.
It comes after a prolonged period of food deflation that has hit sales and profits across the industry. At the same time, retailers have remained locked in price-cutting battles in order to hold on to market share in a period of stiff competition.
“We did see deflation slow considerably over the last two quarters but the main thing is us being far more disciplined in the markets, being price-right for our customers, being competitive,” Medline said of the company ’s performance in the quarter, though he said the grocer still had a lot to do to improve its bottom line. The company has improved its performance since the former CEO of Canadian Tire took up the helm of Empire in January.
Net earnings in the period fell to $54 million, or 20 cents per share, from $65.4 million (24 cents) a year ago, as the retailer began to digest costs from its three-year “Project Sunrise” transformation plan announced in May and aimed at generating $500 million a year in annual savings by 2020.
Adjusted earnings were 32 cents per share, vastly higher than analyst expectations of 22 cents, according to Thomson Reuters.
Sales climbed by 1.4 per cent to $6.3 billion and same-store sales, a key retailing metric, rose 0.5 per cent compared with a drop of 1.8 per cent last year. The retailer said it expects a $25-million impact this fiscal year and a $70-million impact in fiscal 2019 related to an increase of minimum wages in Ontario and Alberta.
“Overall, the quarter was better than we were anticipating and showed signs of continued stabilization at the company, following a tumultuous period of underperformance related to the Safeway acquisition,” analyst Peter Sklar of BMO Capital Markets said in a note to clients Thursday. “Empire also exhibited more effective merchandising execution and good cost control,” with gross margin improving 30 basis points year over year.
Empire’s vast restructuring project includes folding the work of legacy regional structures into a national unit, better leveraging its scale for purchasing, simplifying the processes for dealing with vendors and implementing productivity initiatives. When the store and merchandising group processes improve, the company expects a payoff in increased efficiency at its distribution centres.
Medline appeared to be warming to the idea of expanding discount banner FreshCo outside of Ontario, long cited by analysts as a strategic deficit of Empire, given the strengthening presence of Walmart and No Frills in western Canada. The capital requirement would not be as large as some analysts had predicted and would involve the conversion of existing stores rather than adding new ones.