Empire Reports Fiscal 2023 Second Quarter Results

Empire Reports Fiscal 2023 Second Quarter Results

• Earnings per share of$0.73compared to$0.66last year
• Same-store sales, excluding fuel, increased by 3.1%
• Gross margin, excluding fuel, increased by 58 basis points
• Project Horizon strategy on track
• Scene+now launched inAtlantic Canada,Western CanadaandOntario
• All retail fuel sites inWestern Canadato be sold for approximately$100 million

STELLARTON, NS, Dec. 15, 2022 /CNW/ – Empire Company Limited (“Empire” or the “Company”) (TSX: EMP.A) today announced its financial results for the second quarter ended November 5, 2022. For the quarter, the Company recorded net earnings of $189.9 million ($0.73 per share) compared to $175.4 million ($0.66 per share) last year, an increase of 8.3%.

“Our team put up another solid quarter with improved same-store sales of 3.1%, including double-digit growth for Voilà,” said Michael Medline, President & CEO, Empire. “Despite a persistent inflationary environment, the fundamentals of our business remain strong. The continued momentum and solid performance seen across our Full Service and Discount banners are a direct result of our Project Horizon initiatives.”

The Company is also announcing today a definitive agreement to sell all 56 retail fuel sites in Western Canada to Canadian Mobility Services Limited (CMS), a wholly owned subsidiary of Shell Canada for approximately $100 million in cash. As part of the sale agreement, CMS will offer employment to all non-union employees within the scope of the transaction including employees currently working at these sites. CMS will voluntarily recognize the unions representing unionized workers of these sites and all unionized workers will transfer to CMS upon the closing of the transaction. Closing of the transaction is subject to customary conditions, including regulatory approvals. Empire expects the transaction to close in the first quarter of fiscal 2024. Proceeds from the sale will be used by Empire for general corporate purposes.

PROJECT HORIZON

In the first quarter of fiscal 2021, the Company launched Project Horizon, a three-year strategy focused on core business expansion and the acceleration of e-commerce. In its third and final year, the Company remains on track to achieve an incremental $500 million in annualized EBITDA and an improvement in EBITDA margin of 100 basis points by fiscal 2023 by growing market share and building on cost and margin discipline. The Company expects to generate a compound average growth rate in earnings per share of at least 15% over Project Horizon’s three-year timeframe.

In fiscal 2022, benefits were achieved from promotional optimization and data analytics, the continued expansion and renovation of the store network, and strategic sourcing efficiencies. Benefits achieved in fiscal 2022 were partially offset by the planned investment in the Company’s e-commerce network.

These initiatives continue to deliver benefits in fiscal 2023. Additional benefits are expected from strategic initiatives launched more recently as part of Project Horizon, including Scene+, the Company’s new loyalty program. In August 2022, Scene+ was successfully launched in Atlantic Canada followed by Western Canada in September 2022 and Ontario in November 2022. Additional regional launches in most of the Company’s banners are planned across Canada by late fiscal 2023. Project Horizon initiatives focused on loyalty, store optimization and customer experience will largely provide financial benefits in fiscal 2024 and beyond.

On November 4, Empire experienced some IT system issues related to a cybersecurity event (as defined under “Business Update – Cybersecurity Event”). This is considered a one-time item and it will be excluded from the Company’s assessment of Project Horizon.

Outlook

The Company continues to be well positioned to pursue growth and deliver on its Project Horizon targets despite the impacts of higher than normal inflation and supply chain challenges.

The industry continues to experience inflationary pressures, particularly related to cost of goods sold and fuel. Although it is difficult to estimate how long these pressures will last, the Company is focused on supplier relationships and negotiations to ensure competitive pricing for consumers.

The industry continues to experience supply chain challenges due to ongoing labour shortages. Although it is difficult to estimate the duration of these challenges, management remains focused on utilizing alternative sourcing options where necessary and does not expect significant adverse impacts to its supply chain.

The Company expects same-store sales will grow in fiscal 2023. For the second quarter of fiscal 2023, same-store sales growth excluding fuel was 3.1% compared to a decline of 1.3% in the same quarter last year and growth of 0.4% in the first quarter of fiscal 2023. Margins will continue to benefit from Project Horizon initiatives and other operating improvements in fiscal 2023. These benefits could be partially offset by the effect of sales mix changes between banners and the impact of higher fuel pricing.

The Company expects continued improvements in the results of Voilà’s Toronto Customer Fulfilment Centre (“CFC”) as volumes increase and efficiencies improve. At the same time, Voilà will also incur additional costs as the Montreal CFC continues to ramp up and the Calgary and Vancouver CFCs are commissioned. The ramp up of the Montreal CFC is expected to have higher costs in the first half of fiscal 2023 with improving results in the remainder of the year. Future earnings will be primarily impacted by the rate of sales growth. The Company expects Voilà’s fiscal 2023 net earnings dilution to be approximately the same as fiscal 2022.

The Company continues to expand its discount business in Western Canada with 42 stores now operating. Newer stores are improving efficiency at a faster rate than the early conversion stores as the business gains critical mass across each province. The Company expects to open two additional stores in Alberta in the remainder of fiscal 2023 for a total of 44 stores.

Management continues to expect to achieve its Project Horizon targets and that associated benefits will continue into fiscal 2024 and beyond, including initiatives launching in fiscal 2023 that are focused on loyalty, store optimization and customer experience.

Based on an initial assessment, management estimates the financial impact of the Cybersecurity Event on the fiscal 2023 annual net earnings will be approximately $25 million, net of insurance recoveries.

Sales

Sales for the quarter ended November 5, 2022 increased by 4.4% primarily driven by increased fuel sales, higher food inflation and benefits from Project Horizon initiatives, including the expansion of FreshCo in Western Canada.

Gross Profit 

Gross profit for the quarter ended November 5, 2022 increased by 5.6% primarily as a result of benefits from Project Horizon initiatives (including the use of advanced analytical promotional optimization tools, Own Brands and the expansion of FreshCo, Voilà and Farm Boy).

Gross margin for the quarter increased to 25.6% from 25.3% in the prior year. Gross margin increased primarily as a result of benefits from Project Horizon initiatives, partially offset by the effect of higher fuel sales. Excluding the effect of fuel mix, gross margin was 58 basis points higher than prior year.

Operating Income

For the quarter ended November 5, 2022, operating income from the Food retailing segment decreased mainly due to an increase in selling and administrative expenses, partially offset by higher sales and gross profit. Selling and administrative expenses increased primarily as a result of investments in Project Horizon initiatives (including the expansion of Voilà, Farm Boy and FreshCo), higher utility rates and higher depreciation. 

Operating income from the Investments and other operations segment for the quarter and year-to-date ended November 5, 2022 increased primarily as a result of higher equity earnings from Crombie Real Estate Investment Trust (“Crombie REIT”) mainly due to increased sales of properties, partially offset by lower equity earnings from Genstar as a result of higher property sales in the prior year.

EBITDA

For the quarter ended November 5, 2022, EBITDA increased to $584.2 million from $565.2 million in the prior year mainly as a result of the factors affecting operating income (which excludes the increase in depreciation). EBITDA margin decreased versus prior year to 7.6% from 7.7%.

Income Taxes

The effective income tax rate for the quarter ended November 5, 2022 was 25.4% compared to 26.2% in the same quarter last year. The effective tax rate for the quarter was lower than the statutory rate primarily due to capital items taxed at lower rates and investment tax credits. The effective tax rate for the same quarter last year was lower than the statutory rate primarily due to consolidated structured entities that are taxed at lower rates.