Bet­ter than ex­pected first-quar­ter

Em­pire shares soar as turn­around gains trac­tion

The Recorder & Times (Brockville) - - BUSINESS - HOL­LIE SHAW

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.

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