April 22nd, 2024

Empire says gap between discount and full-service narrowing as sales, earnings rise

By Rosa Saba, The Canadian Press on March 14, 2024.

The exterior of a Farm Boy grocery store is seen in Toronto, Wednesday, Nov. 22, 2023. THE CANADIAN PRESS/Chris Young

The parent company of Sobeys is looking ahead to sunnier economic times, betting the shift to discount grocery stores that’s been boosting sales industry-wide won’t be permanent.

“The days of discount greatly outperforming full-service are coming to an end. And I think at some point, you’ll see a flip,” Michael Medline, president and CEO of Empire Co. Ltd., told investors on a call discussing third-quarter earnings on Thursday.

The company, which owns multiple grocery banners including Safeway, Farm Boy and discount chain FreshCo, is already seeing the same-store sales growth gap between discount and full-service shrinking, said Medline, adding the trend is expected to continue.

Though Empire expected this to happen as inflation falls, “even we were surprised by the magnitude of the gap closing this much this quarter,” he said.

As economic conditions and consumer confidence improve, interest rates start to come down and construction costs moderate, Medline said the company will be in “very good shape.”

But in the meantime, he said it’s important to conduct business as if things will continue to be tough.

“And then if it’s better, great — we make out like bandits,” he said, adding, “so do our consumers.”

Though shoppers are still seeking promotions and private-label products at higher rates than normal, Medline said Empire isn’t waiting for better days to make improvements to its business, and is “cautiously optimistic.”

“Tough times are an opportunity to make yourself a lot tougher,” he said.

The Stellarton, N.S.-based grocer saw net earnings in its latest quarter rise 8.5 per cent to $134.2 million, up from $125.7 million a year earlier. The earnings amounted to 54 cents per diluted share, up from 49 cents a year earlier.

Sales reached about $7.49 billion compared with roughly $7.48 billion a year ago. They were driven by growth in both discount and full-service businesses, but offset by lower fuel sales, largely because of the sale of all of the company’s Western Canada retail fuel sites in its first quarter.

The grocer’s results were on the softer side relative to expectations, said RBC Dominion Securities Inc. analyst Irene Nattel in a note, “as consumer value-seeking behaviour continues to be a headwind relative to its largely full-service network.”

Nattel said in a previous note that Empire’s “overweight exposure” to full-service is a “relative disadvantage” against competitors.

The grocer bought Ontario chain Farm Boy in 2018 and has since expanded it, acquiring the remaining interest in the company this past quarter. It also bought a majority stake in specialty grocer Longo’s in 2021.

But while Empire continues to try and maximize revenues in its full-service stores, it’s also growing its discount presence, said Nattel in Thursday’s note.

As of March 13, there were 47 FreshCo stores in Western Canada, Empire said. It’s been expanding the banner since announcing in fiscal 2018 that it planned to convert up to a quarter of its Safeway and Sobeys stores in Western Canada to discount.

The company plans to keep growing its footprint as well as renovating existing stores, said chief financial officer Matt Reindel on the call.

But Empire is becoming “draconian” with its projects, said Medline, adding the company is not happy with higher construction costs and not willing to take lower returns.

“We’re not going to flush your money down the toilet,” he told investors. “We’re going to put up stores where they make economic sense.”

The company bought a parcel of land in Montreal this quarter because it was a good opportunity, but doesn’t have plans for it currently.

The grocer said Thursday that it plans to invest in its store network, renovating between 20 and 25 per cent of its stores over the next three years.

Competitor Loblaw announced just before its latest earnings call a plan to significantly grow its store network in 2024, promising more than 40 new stores, expansions, relocations and renovations.

The major Canadian grocers have been under pressure from the government to stabilize food prices. Empire said that during the quarter, it “continued to comply with the federal government’s request.”

The company said it’s focusing on negotiations with its suppliers to ensure competitive pricing.

Empire recently launched an 11-week program that lowered or locked prices on around 1,000 items across many of its banners.

Medline said the number of price increase requests from suppliers continues to trend lower as inflation subsides, and the company continues to push back on unjustified requests.

“However, there are still sizable increases from select suppliers coming through that will inevitably impact the customer. This is largely driven by some commodities like sugar and cocoa continuing to be very volatile due to ongoing climate and geopolitical factors impacting global supply,” he said.

Metro’s CEO made a similar comment in the grocer’s most recent earnings call about orange juice, another product that has seen problems with crops.

Having completed two transformation strategies over the past six years, Empire said it aims to grow its earnings over the long-term through net earnings growth and share repurchases.

It’s also focusing on digital and data initiatives, through continued expansion of e-commerce, its loyalty program, personalization, promotional optimization and improving the productivity of its stores by changing layouts and tailoring product assortments.

This report by The Canadian Press was first published March 14, 2024.

Companies in this story: (TSX:EMP.A)

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