Michael Medline says food inflation and improved performance helped Empire Co. Ltd. report a slightly better than expected third quarter.
Medline is president and CEO of Stellarton-based Empire Co. Ltd., parent of Sobeys Inc., Canada’s second-largest grocery chain. The company reported adjusted net earnings, net of non-controlling interest, of $89.9 million (33 cents per diluted share) for the third quarter which ended Feb. 3.
During the same quarter last fiscal year, Empire had net earnings, net of non-controlling interest, of $34.6 million (13 cents per diluted share).
Empire’s adjusted earnings per share grew by 77 per cent in the quarter, compared to the first three quarters of last year, Medline pointed out to industry analysts during a conference call Wednesday.
“This has been achieved against the backdrop of making tough long-term decisions to restructure and grow our company,” Medline said.
The company closed 10 underperforming stores in British Columbia, he said during the call. That goes with the significant cuts to office staff, a cut to capital expenditures, the announced expansion of the Freshco discount banner in Western Canada; and the announced partnership with British e-commerce specialist Ocado Group PLC to build a $70-million distribution centre for a centrally supplied grocery ecommerce operation in the Toronto area by 2020.
At the end of fiscal 2017, Empire launched Project Sunrise, a threeyear plan to simplify the organizational structure and reduce costs, with the transformation expected to be completed by fiscal 2020 with an expected $500 million in annualized cost savings.
The first phase is on track, said Medline. The company reorganization is substantially complete and benefits are meeting management’s expectations. Total onetime costs are not expected to exceed $240 million, with charges to earnings expected to be substantially complete by the fourth quarter of fiscal 2018.
Sales increased by 2.4 per cent for the 13 weeks ending Feb. 3 and same-store sales were higher in most areas of the country, he said, driven by increases in purchase size and more disciplined pricing strategies.
Medline says Empire and Sobeys management will continue to take a disciplined approach to its business, adding that it would much prefer the company not chase after sales in the wake of heavy promotion activity by competitors, and instead continue to focus on stabilizing and improving margins.
The level of food discounts and promotions was greater in the third quarter in Ontario and Western Canada than at any time in the past year.
The Empire boss didn’t try to hide his disdain for competitor Loblaw, which has been distributing $25 gift cards as a self-imposed penalty for colluding to fix the price of bread for about 14 years.
Medline said Sobeys will be dealing with the competitor’s “curious” gift cards in the fourth quarter as well.
Empire reported an increase in gross profit during the third quarter due to improved store execution and promotional strategies, and resulting in an increase in gross margins from 23.7 per cent to 24 per cent in the third quarter.
Earnings before interest, taxes, depreciation and amortization increased in the quarter due to improvements in sales and margins, benefits related to Project Sunrise and other cost efficiencies, and higher contributions from real estate operations, according to the company. Adjusted Ebitda increased in the quarter by 42 per cent to $253.3 million.
Medline anticipates changes to the health program and increased minimum wage will have an impact on the company. Sobeys also settled with its unionized workers in Saskatchewan during the third quarter and is hoping to reach a similar settlement with workers in Manitoba.
Although Empire announced it would be rolling out its Freshco brand in the West over the next nine months, he told analysts he wasn’t prepared to say where those stores would be located or when they would be opening.
Empire / Sobeys believes it has an advantage by partnering with Ocado Group and the company expects it will be the grocer with the largest e-commerce presence in the Greater Toronto Area.
Empire is focused on the Toronto area for its roll-out of the new e-commerce partnership initially and will expand it strategically to other urban centres.
