Sobeys’ parent beats profit expectations despite decline in pandemic shopping

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Empire Co. Ltd., Canada’s second-largest grocery chain, beat expectations in its second quarter by recording $175 million in profits, according to a Thursday earnings update.

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Food sales at the supermarket chain — which includes Sobeys, Safeway and FreshCo — hit $7.3 billion in the quarter ended Oct. 30, managing to top last year’s results by almost five per cent.

The gains were partly due to Empire’s recent acquisition of a majority stake in Toronto-area specialty grocer Longo’s, as well as higher fuel sales, both of which helped offset a gradual shift to pre-pandemic eating habits that have put a dent in grocery business sales volumes.

During the pandemic, public health restrictions on restaurants swung household food budgets more toward grocery stores. With those restrictions now eased, sales are swinging the other way.

Empire’s same-store sales — a metric used to measure year-over-year growth in retail by ignoring the sales impact from new stores, such as Longo’s — fell by 1.3 per cent in the quarter, slightly worse than forecasts of a 1.1 per cent drop.

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The company said it expects same-store sales will continue to decline for the rest of fiscal 2022, as grocery volumes fall from last year’s “unusually high” pandemic peak.

Empire chief executive Michael Medline, however, said sales are still better than pre-pandemic levels, with two-year same store sales growth of 6.8 per cent compared to the same period in 2019.

“And at the same time our margins keep improving,” he said in a letter to shareholders on Thursday.

Scotiabank analyst Patricia Baker said Empire’s net earnings of 66 cents per share represented “yet another earnings beat” for the grocer, which “handily” outdid analyst expectations of 60 cents per share. Empire’s gross margin rate of 25.3 per cent was also better than anticipated, she said in a note to investors on Thursday morning.

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But grocers could face pressure to squeeze their margins in the face of rising inflation. Suppliers are pushing for price increases to offset higher costs for labour, commodities and transportation, all exacerbated by ongoing supply chain backlogs.

Metro Inc., a top Empire competitor, in November conceded the situation could impact margin growth.

“We hope to keep our margin rates healthy and we do the best that we can, but there’s clearly inflation out there and we want to stay very competitive,” Eric La Flèche told investors in an earnings update on Nov. 17.

But new research says consumers can expect to see bigger grocery bills. Food inflation in Canada will hit five to seven per cent next year, according to the Food Price Report released on Thursday by Dalhousie University, University of Guelph, University of Saskatchewan and University of British Columbia.

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