Empire Reports Fiscal 2023 First Quarter Results

• Earnings per share of $0.71 compared to $0.70 last year
• Same-store sales excluding fuel increased by 0.4%
• Excluding fuel, gross margin increased by 63 basis points
• Project Horizon strategy on track
• Scene+ launched in Atlantic Canada in August 2022

STELLARTON, NS, Sept. 15, 2022 /CNW/ – Empire Company Limited (“Empire” or the “Company”) (TSX: EMP.A) today announced its financial results for the first quarter ended August 6, 2022. For the quarter, the Company recorded net earnings of $187.5 million ($0.71 per share) compared to $188.5 million ($0.70 per share) last year.

“We’re off to a strong start in fiscal 2023 and are confident in the momentum and continued underlying strength across our businesses,” said Michael Medline, President & CEO, Empire. “We are very pleased with the recent launch of our Scene+ loyalty program in Atlantic Canada, a great start for a foundational element in our company’s success going forward.”

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 2021 and 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. Scene+ was successfully launched in Atlantic Canada in August 2022. Additional regional launches are planned across Canada in calendar 2022 and into early calendar 2023. Project Horizon initiatives that are focused on loyalty, store optimization and customer experience will largely provide financial benefits in fiscal 2024 and beyond.

SUMMARY RESULTS – FIRST QUARTER

 

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 primarily due to 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 first quarter of fiscal 2023, same-store sales growth excluding fuel was 0.4% compared to a decline of 2.2% in the same quarter last year and a decline of 2.4% in the fourth quarter of fiscal 2022. Margins will continue to benefit from Project Horizon initiatives and other operating improvements. These benefits could be partially offset by the effect of sales mix changes between banners and the impact of increasing fuel sales.

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 41 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 an additional three 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.

Sales

Sales for the quarter ended August 6, 2022 increased by 4.1% primarily driven by increased fuel sales, higher food inflation and benefits from Project Horizon initiatives, including the expansion of FreshCo in Western Canada, partially offset by the impact of the novel coronavirus (“COVID-19” or “pandemic”) restrictions being in place for a portion of the first quarter of the prior year.

Gross Profit 

Gross profit for the quarter ended August 6, 2022 increased by 3.4% 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), partially offset by sales mix changes as a result of consumer buying behaviour.

Gross margin for the quarter decreased slightly to 24.9% from 25.1% in the prior year. Gross margin decreased due to the effect of increased fuel sales and higher supply chain costs, partially offset by benefits from Project Horizon initiatives and sales mix changes between non-fuel banners. Excluding the mix effect of increased fuel sales, gross margin was 63 basis points higher than the prior year.

Operating Income

For the quarter ended August 6, 2022, operating income from the Food retailing segment decreased mainly due to an increase in selling and administrative expenses and a decrease in other income, partially offset by higher sales and gross profit. The decrease in other income was driven by lease termination income in the prior year. Selling and administrative expenses increased primarily as a result of investments in Project Horizon initiatives (including the expansion of FreshCo, Voilà and Farm Boy), higher depreciation and amortization and increased costs related to the timing of marketing spend in the current year versus the prior year. 

For the quarter ended August 6, 2022, operating income from the Investments and other operations segment increased primarily as a result of higher equity earnings from Crombie Real Estate Investment Trust (“Crombie REIT”) due to operational improvements, partially offset by lower equity earnings from Genstar as a result of higher property sales in the prior year.

EBITDA

For the quarter ended August 6, 2022, EBITDA increased to $594.0 million from $581.9 million in the prior year mainly as a result of the factors affecting operating income (which excludes the increase in depreciation and amortization). EBITDA margin decreased slightly to 7.5% from 7.6%.

Income Taxes

The effective income tax rate for the quarter ended August 6, 2022 was 25.6% compared to 24.5% in the same quarter last year. The effective tax rate was lower than the statutory rate primarily due to differing tax rates of various entities. The effective tax rate in the same quarter last year was lower than the statutory rate primarily due to non-taxable capital items and the differing tax rates of various entities.

Net Earnings

Capital Expenditures

The Company invested $155.5 million in capital expenditures⁽¹⁾ for the quarter ended August 6, 2022 (2022 – $147.0 million), including renovations and construction of new stores, investments in advanced analytics technology and other technology systems, expansion of FreshCo stores in Western Canada and the construction of Voilà CFCs.

Free Cash Flow

Free cash flow for the quarter ended August 6, 2022 decreased versus prior year primarily as a result of an increase in payments of lease liabilities, net of payments received for finance subleases, and a decrease in cash flows from operating activities, partially offset by lower cash flows of capital investments.

FINANCIAL PERFORMANCE BY SEGMENT

Food Retailing

Investments and Other Operations

For the quarter ended August 6, 2022, income from Investments and other operations increased primarily as a result of higher equity earnings from Crombie REIT due to operational improvements, partially offset by lower equity earnings from Genstar as a result of higher property sales in the prior year.

CONSOLIDATED FINANCIAL CONDITION

On July 11, 2022, DBRS Morningstar (“DBRS”) upgraded Sobeys Inc.’s (“Sobeys”) credit rating from BBB (low) with a positive trend to BBB with a stable trend. The following table shows Sobeys’ credit ratings as at September 14, 2022:

 

The redemption of the 4.70% Series 2013-2 Notes due August 8, 2023, which was announced in the fourth quarter of fiscal 2022, was completed on June 2, 2022. The total redemption payment of $516.5 million included the remaining aggregate principal balance of $500.0 million and $16.5 million in accrued interest and prepayment costs.

Dividend Declaration

The Company declared a quarterly dividend of $0.165 per share on both the Non-Voting Class A shares (“Class A shares”) and the Class B common shares that will be payable on October 31, 2022 to shareholders of record on October 14, 2022. These dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation.

Normal Course Issuer Bid (“NCIB”)

On June 22, 2021, the Company renewed its NCIB by filing a notice of intention with the Toronto Stock Exchange (“TSX”) to purchase for cancellation up to 8,468,408 Class A shares representing 5.0% of the 169,368,174 Class A shares outstanding. As at July 1, 2022, under this filing, the Company purchased 5,659,764 (July 1, 2021 – 6,063,806) Class A shares at a weighted average price of $39.11 (July 1, 2021 – $38.00) for a total consideration of $221.3 million (July 1, 2021 – $230.4 million). The NCIB expired on July 1, 2022.

On June 21, 2022, the Company renewed its NCIB by filing a notice of intention with the TSX to purchase for cancellation up to 10,500,000 Class A shares representing 7.0% of the public float of 150,258,764 Class A shares outstanding as of June 17, 2022. The purchases will be made through the facilities of the TSX and/or any alternative Canadian trading systems to the extent they are eligible. The price that Empire will pay for any such shares will be the market price at the time of acquisition. The Company believes that repurchasing shares at the prevailing market prices from time to time is a worthwhile use of funds and in the best interest of Empire and its shareholders. The NCIB expires on July 1, 2023.

Shares purchased during the quarter ended August 6, 2022 compared to the same period in the previous fiscal year are shown in the table below:

The Company engages in an automatic share purchase plan with its designated broker allowing the purchases of Class A shares for cancellation under its NCIB program during trading black-out periods.

Including purchases made subsequent to the end of the quarter, as at September 13, 2022, the Company has purchased 3,143,281 Class A shares (September 7, 2021 – 3,349,282) at a weighted average price of $39.42 (September 7, 2021 – $39.75) for a total consideration of $123.9 million (September 7, 2021 – $133.1 million).

Company Strategy

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. For additional detail on Project Horizon, please refer to Empire’s Management’s Discussion and Analysis (“MD&A”) for the first quarter ended August 6, 2022.

Business Updates

Farm Boy

The acquisition of Farm Boy on December 10, 2018 added 26 locations to the Company’s Ontario store network with plans to double the store count in five years from the acquisition date, mainly in the Greater Toronto Area (“GTA”). As at September 14, 2022, Farm Boy has 44 stores and in fiscal 2023 the Company expects to open four additional Farm Boy stores.

FreshCo

In fiscal 2018, the Company announced plans to expand its FreshCo discount format to Western Canada with expectations of converting up to 25% of the 255 Safeway and Sobeys full-service format stores in Western Canada to the FreshCo banner. The Company opened one FreshCo store in Alberta during the first quarter of fiscal 2023. The Company expects to have 44 FreshCo stores in Western Canada by the end of fiscal 2023. Three stores are expected to open in Alberta in fiscal 2023.

Voilà

In fiscal 2021, the Company introduced its new e-commerce platform, Voilà, which is the future of online grocery home delivery in Canada. Voilà is powered by industry-leading technology provided by Ocado Group plc (“Ocado”), through its automated CFCs. Robots assemble orders efficiently and safely, resulting in minimal product handling, while Voilà teammates deliver orders directly to customers’ homes.

The Company will operate four CFCs across Canada. With these four CFCs, the supporting spokes and curbside pickup, the Company will be able to serve approximately 75% of Canadian households representing approximately 90% of Canadians’ projected e-commerce spend. The first CFC in Toronto, Ontario began deliveries on June 22, 2020 and has been successfully operating for over two years.

The second CFC in Montreal began deliveries to customers on March 7, 2022, beginning with a phased transition of customers to Voilà par IGA from IGA.net. The rollout was completed in the first quarter of fiscal 2023 and Voilà par IGA now services over 100 municipalities from Gatineau to Montreal to Quebec City. The Montreal CFC is progressing well with increasing weekly order volume and strong customer experience metrics, including on-time delivery and fulfilment.

Crombie REIT has completed the construction of the building for Voilà‘s third CFC in Calgary and has turned it over to Ocado to build the internal grid. The CFC will service the majority of Alberta, with deliveries expected to start in the first quarter of fiscal 2024.

On February 7, 2022, the Company announced that its fourth CFC will be located in Vancouver and will service customers in B.C. starting in calendar 2025.

In fiscal 2021, the Company launched Voilà curbside pickup, which currently services 98 stores in locations across Atlantic Canada, Ontario, Manitoba, Saskatchewan, Alberta and B.C. The curbside pickup solution is powered by Ocado technology and serves customers in areas where future CFCs will not, or are not yet, operating.

Voilà‘s future earnings will primarily be impacted by the rate of sales growth. Voilà‘s sales capture of the market continues to be strong. However, in the first quarter of fiscal 2023, overall e-commerce industry sales were lower than anticipated as restrictions eased and lockdowns were lifted compared to the prior year. Management expects that Voilà‘s net earnings dilution for fiscal 2023 to be approximately the same as fiscal 2022.

In the first quarter of fiscal 2023, the Company’s four e-commerce platforms experienced combined sales decline of 21%. The decrease was primarily due to elevated sales levels in the prior year during COVID-19 related lockdowns.

Longo’s

On May 10, 2021, the Company, through a wholly-owned subsidiary, acquired 51% of Longo’s, a long-standing, family-built network of specialty grocery stores in the GTA, and its Grocery Gateway e-commerce business. The purchase price of the transaction was $660.6 million. For additional detail, please refer to Empire’s MD&A for the first quarter ended August 6, 2022.

Store Closure, Conversion and Lease Terminations

During the first quarter of fiscal 2023, the Company expensed $1.0 million in store closure and conversion costs related to FreshCo conversions (2022 – $6.3 million).

During the first quarter of fiscal 2022, the Company engaged in lease termination transactions which resulted in other income of $11.6 million.

Sustainable Business Reporting

Environmental, Social and Governance (“ESG”) has deep roots in the Company’s history, and the principles of ESG have been a part of the organization since the Company started 115 years ago.

The Company published its 2022 Sustainable Business Report in July 2022 which set bold, science-based emissions reduction targets in support of Canada’s transition to a low-carbon economy. This is a significant step forward in the Company’s plan to help combat climate change and is the latest step in the journey to commit and invest in sustainability. As part of the Company’s sustainability commitments and corporate governance practices, the Company will launch a newly established Sustainable Business Council (“Council”) in fiscal 2023. In conjunction with the Company’s science-based targets (which are being validated by the Science-Based Targets initiative), the Council will ensure accurate reporting of carbon emissions for internal monitoring and external reporting.

The Company is focused on several initiatives as part of a continuing ESG journey such as working to remove plastics from the business, focusing on avoidable and hard-to-recycle plastics, expanding the Company’s efforts to cultivate a fair, equitable and inclusive environment for all and embedding sustainable business mandates within the Company’s performance management goals.

FORWARD-LOOKING INFORMATION

This document contains forward-looking statements which are presented for the purpose of assisting the reader to contextualize the Company’s financial position and understand management’s expectations regarding the Company’s strategic priorities, objectives and plans. These forward-looking statements may not be appropriate for other purposes. Forward-looking statements are identified by words or phrases such as “anticipates”, “expects”, “believes”, “estimates”, “intends”, “could”, “may”, “plans”, “predicts”, “projects”, “will”, “would”, “foresees” and other similar expressions or the negative of these terms.

These forward-looking statements include, but are not limited to, the following items:

• The Company’s expectations regarding the financial impact and benefits of Project Horizon and its underlying initiatives, which could be impacted by several factors, including the time required by the Company to complete the initiatives and the effects of inflationary pressures;
• The Company’s expectation of the impacts of cost inflationary pressures, which may be impacted by supplier relationships and negotiations and the macro-economic environment;
• The Company’s expectation that labour shortages will not have further significant impact on supply chain challenges, which may be impacted by labour force availability;
• The Company’s expectations that fiscal 2023 will achieve growth of same-store sales, which may be impacted by the effects of inflationary pressures on consumer buying behaviours;
• The Company’s expectations for net earnings dilution for the Voilà program for fiscal 2023, which may be impacted by future operating and capital costs, customer response and the performance of its technology provider, Ocado;
• The FreshCo expansion in Western Canada and Farm Boy expansion in Ontario, including the Company’s expectations regarding future operating results and profitability, the amount and timing of expenses, the projected number of store openings, and the location, feasibility and timing of construction, all of which may be impacted by construction schedules and permits, the economic environment and labour relations;
• The Company’s plans to purchase for cancellation Class A shares under the normal course issuer bid which may be impacted by market and economic conditions, availability of sellers, changes in laws and regulations, and the results of operations; and
• The Company’s expectations regarding the amount and timing of expenses relating to the completion of any future CFC, which may be impacted by supply of materials and equipment, construction schedules and capacity of construction contractors.

By its nature, forward-looking information requires the Company to make assumptions and is subject to inherent risks, uncertainties and other factors which may cause actual results to differ materially from forward-looking statements made. For more information on risks, uncertainties and assumptions that may impact the Company’s forward-looking statements, please refer to the Company’s materials filed with the Canadian securities regulatory authorities, including the “Risk Management” section of the fiscal 2022 annual MD&A.

Although the Company believes the predictions, forecasts, expectations or conclusions reflected in the forward-looking information are reasonable, it can provide no assurance that such matters will prove correct. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information. The forward-looking information in this document reflects the Company’s current expectations and is subject to change. The Company does not undertake to update any forward-looking statements that may be made by or on behalf of the Company other than as required by applicable securities laws.

NON-GAAP FINANCIAL MEASURES & FINANCIAL METRICS

There are measures and metrics included in this news release that do not have a standardized meaning under generally accepted accounting principles (“GAAP”) and therefore may not be comparable to similarly titled measures and metrics presented by other publicly traded companies. Management believes that certain of these measures and metrics, including gross profit and EBITDA, are important indicators of the Company’s ability to generate liquidity through operating cash flow to fund future working capital requirements, service outstanding debt and fund future capital expenditures and uses these metrics for these purposes.

The Company includes these measures and metrics because it believes certain investors use these measures and metrics as a means of assessing financial performance. Empire’s definition of the non-GAAP terms included in this News Release are as follows:

• Same-store sales are sales from stores in the same location in both reporting periods.
• Same-store sales, excluding fuel are sales from stores in the same location in both reporting periods excluding the fuel sales from stores in the same location in both reporting periods.
• Gross profit is calculated as sales less cost of sales.
• Gross margin is gross profit divided by sales.
• Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is calculated as net earnings before finance costs (net of finance income), income tax expense, depreciation and amortization of intangibles.

The following table reconciles net earnings to EBITDA:

• EBITDA margin is EBITDA divided by sales.
• Free cash flow is calculated as cash flows from operating activities, plus proceeds on disposal of property, equipment and investment property and lease terminations, less acquisitions of property, equipment, investment property and intangibles, interest paid and payments of lease liabilities, net of payments received from finance subleases.
• Book value per common share is shareholders’ equity, net of non-controlling interest, divided by total common shares outstanding.

The following table shows the calculation of Empire’s book value per common share as at August 6, 2022, May 7, 2022 and July 31, 2021:

• Funded debt is all interest-bearing debt, which includes bank loans, bankers’ acceptances, long-term debt and long-term lease liabilities.
• Total capital is calculated as funded debt plus shareholders’ equity, net of non-controlling interest.

The following table reconciles the Company’s funded debt and total capital to GAAP measures as reported on the balance sheets as at August 6, 2022, May 7, 2022 and July 31, 2021, respectively:

• Funded debt to total capital ratio is funded debt divided by total capital.
• Funded debt to EBITDA ratio is funded debt divided by trailing four-quarter EBITDA.
• EBITDA to interest expense ratio is trailing four-quarter EBITDA divided by trailing four-quarter interest expense.
• Management calculates interest expense as interest expense on financial liabilities measured at amortized cost and interest expense on lease liabilities.

The following table reconciles finance costs, net to interest expense:

 

For a more complete description of Empire’s non-GAAP measures and metrics, please see the section headed “Non-GAAP Financial Measures & Financial Metrics” in Empire’s MD&A for the first quarter ended August 6, 2022 available on SEDAR at www.sedar.com, which section is incorporated by reference into this press release.

CONFERENCE CALL INFORMATION

The Company will hold an analyst call on Thursday, September 15, 2022 beginning at 1:00 p.m. (Eastern Standard Time) during which senior management will discuss the Company’s financial results for the first quarter of fiscal 2023. To join this conference call, dial (888) 390-0546 outside the Toronto area or (416) 764-8688 from within the Toronto area. To secure a line, please call 10 minutes prior to the conference call; you will be placed on hold until the conference call begins. The media and investing public may access this conference call via a listen mode only. You may also listen to a live audiocast of the conference call by visiting the “Quick Links” section of the Company’s website located at www.empireco.ca.

Replay will be available by dialing (888) 390-0541 and entering access code 526605 until midnight September 29, 2022, or on the Company’s website for 90 days following the conference call.

ABOUT EMPIRE

Empire Company Limited (TSX: EMP.A) is a Canadian company headquartered in Stellarton, Nova Scotia. Empire’s key businesses are food retailing and related real estate. With approximately $30.5 billion in annualized sales and $16.3 billion in assets, Empire and its subsidiaries, franchisees and affiliates employ approximately 130,000 people.

Additional financial information relating to Empire, including the Company’s Annual Information Form, can be found on the Company’s website at www.empireco.ca or on SEDAR at www.sedar.com.

SOURCE Empire Company Limited

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