Sobeys parent Empire navigates choppy waters to beat profit expectations

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Empire Co. Ltd., Canada’s second-largest grocery chain, is reporting higher-than-expected profits in its last quarter, with earnings per share up 16.7 per cent.

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The Stellarton, N.S.-based grocery chain — which includes Sobeys, IGA, Foodland, FreshCo and Safeway — increased third-quarter sales by about five per cent to $7.4 billion, due to higher fuel sales, increased food inflation and its recent acquisition of Toronto-area grocer Longo’s, the company said in an earnings update on Thursday. Empire also credits gains in the quarter to its three-year Project Horizon strategy, aimed at adding $500 million in annualized EBIDTA by the end of next year partly through “cost and margin discipline.”

That cost discipline is no doubt being tested by rising inflation throughout the food chain this year. Grocery prices were up 6.5 per cent year-over-year in January — the highest food inflation in nearly 13 years, according to the latest consumer price index report from Statistics Canada. Executives in the grocery business say they’ve been flooded with requests from suppliers wanting to raise wholesale prices to offset spikes in the cost of labour and ingredients. The often tense nature of those negotiations has been on display at Empire’s top competitor, Loblaw Companies Ltd., which has been cut off from Frito-Lay products in a prolonged price dispute with PepsiCo Inc.

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“We’re negotiating hard with our supplier partners who in many cases have very justifiable cost increases, to be honest with you,” Empire chief executive Michael Medline told analysts on Thursday in a conference call. “All of this is very challenging to our team. I don’t think anyone out there is doing a better job.”

This is our highest (earnings per share) in memory and we achieved it navigating some of the choppiest waters we’ve seen in a long time

Michael Medline

Empire’s gross margin — calculated as gross profit divided by sales — stayed steady with the previous year at 25.7 per cent. But excluding fuel, gross margin was up 41 basis points in the quarter, which ended Jan. 29.

Earnings per share increased 16.7 per cent to 77 cents, blowing past forecasts of 67 cents, according to a preview note from Scotiabank analyst Patricia Baker. Empire booked net earnings of $203.4 million, up $27 million or about 15 per cent, over the same period last year.

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“This is our highest (earnings per share) in memory and we achieved it navigating some of the choppiest waters we’ve seen in a long time,” Medline said, adding that extreme flooding in B.C. during the quarter severely interrupted supply chains.

Same-store sales — a common gauge of year-over-year performance in retail that doesn’t include new stores — fell by 1.7 per cent, excluding fuel. Empire said it was up against a difficult comparison in the quarter, since the previous year’s sales volumes were “unusually high” due to pandemic-related restaurant closures that flooded grocery stores with extra business. Compared to pre-pandemic levels in 2020, same-store sales were up 8.3 per cent in the third quarter of 2022, Empire said. But the company expects another drop in same-store sales growth in the coming quarter, due to another tough matchup to 2021’s pandemic sales.

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Staff at Empire’s distribution centre in Terrebonne, Que., have been on strike since early February, though Medline said the impact on Quebec stores is “absolutely minimal.” United Food and Commercial Workers, the union representing the workers, confirmed on Thursday that 190 staff at the warehouse are on strike.

Medline said the strike will cause extra freight costs for the business in the coming quarter, but they won’t be “unreasonably costly.”

“We settle around 60 collective agreements a year and haven’t had a strike in 10 years, so this is rather unusual,” he said. “When we get a deal that’s reasonable for both sides, this thing will be settled.”

Empire’s shares rose 0.96 per cent to $44.35 at 3:50 p.m.

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