Analysts unsure if Sobeys parent firm’s recovery plan enough

Analysts are worried about the lack of a turnaround timeline for Sobeys’ parent company after the retailer posted disastrous fourth quarter results this week amid continued struggles to integrate its Safeway business in Western Canada.

Two quarters of impairment charges in a row at Empire Co., totalling $1.3 billion and $1.7 billion respectively and leading to steep fourth quarter losses, “amount to about half the purchase price of Canada Safeway,” analyst Peter Sklar at BMO Capital Markets said in a note to clients. “It is not clear to us how long it will take for investments in margin to reverse the negative traffic trends,” he added. “We remain concerned that this initiative could be more costly than anticipated, and could push out the prospect for a reversal of financial trends.” He continues to rate Empire shares at market perform, and revised his target price on Sobeys shares to $22 from $24.

Kenric Tyghe at Raymond James, who rates the shares market perform, cut his target price to $21 from $24. While the quarter “further highlighted the enormity of the challenges, it did not in our opinion provide sufficient insight into the recovery roadmap, much less a timeline,” the analyst wrote in a note to clients.

And though a new program to slash prices on packaged goods at its Quebec IGA stores dubbed “Simplify, Buy and Sell” seems to have received a positive consumer response, Tyghe has doubts about its potential given the state of the market.

“We are mindful that not only is it still very early days, but also that key competitors in the market are as (agile), if not more agile, with a more granular view of the Quebec consumer, in our opinion.”

Two years of food inflation has cramped household budgets and consumers have been increasingly flocking to discount stores, such as No Frills and Walmart.

Empire only operates its discount chain FreshCo in one province, Ontario, and that could be a significant impediment in other areas where it is competing head to head with discounters.

“After more than a year of volatility, management believes that operations in the Safeway- Sobeys business have stabilized and execution will improve,” analyst Mark Petrie of CIBC wrote in a research note. “But a weaker economy and lack of a discount banner mean that over-investing in price today will likely not result in the kind of traffic improvement needed to offset the investment.”

And while the retailer’s Quebec price reduction program is going to be rolled out nationally, it is “most needed in the West, where lower produce and meat prices are in place but traffic remains materially negative,” the analyst added.

We remain concerned that this initiative could be more costly than anticipated, and could push out the prospect for a reversal of financial trends.