Empire soldiers on in grocer y war
Analysts point to poor Q3 after Safeway deal; Sobeys parent plans for the long ter m
Executives at Stellarton’s Empire C o. Ltd. can’t seem to catch a break from analysts who think the $5.7-billion acquisition of C anada Sa feway should have produced better results in the company’s third quarter.
Competition in the food busi*ness is very tough, according to most analysts, and Empire, parent o f the Sobeys Inc. grocery chain, had to contend with absorbing the Safeway operations as the loonie declined against the U.S. dollar.
The resu lt was a less-than*sparkling quarterly performance at Empire, but it should have been exp ected.
The third quarter, which ended Feb. 1, was the first full quarter to include the Safeway acquisition. Empire reported net earnings for the quarter of just $400,000 on sales o f $6 billion .
In the same quar ter the previ*ous year, before the Safeway deal, Empire had net earnings of $74.1 million ($1.05 per diluted share) on sales of $4.3 billion.
Company executives explain the decline in net earnings was due to lower operating income and higher finance costs. After all, the company wasn’t carrying an extra $5 billion in debt this time last year.
The rise in Sobeys sales repres*ented a $1.73-billion increase over the same quar ter the previous year, mainly because of the inclu*sion of Canada Safeway. Without those, Sobeys would have repor*ted increased sales of $115 million in the quar ter.
Some analysts were reported to be disappointed by the pace of the savings Empire has achieved by integrating Safeway into Sobeys. Company executives told a con*ference call Thursday that they are sticking to the goal of achiev*ing $200 million in synergies within the next three years, $100 million of which will be accom*plished by this time next year.
Empire CEO Marc Poulin told analysts the food business is still highly promotional, meaning that competition is extreme, especially in Ontario. Although there has been some success in passing along higher acquisition costs, Poulin says that too has been difficu lt .
Sobeys has also recently intro*duced a new long-term healthy eating strategy, which required the food chain to raise freshness standards in its stores. As a result of that initiative, Poulin says, it has raised the amount of shrink*age, an industry term for spoiled food or food that does not meet the company’s new merchand*ising standards and therefore cannot b e s old.
Empire is willing to endure some short-term pain, according to Poulin, if it means it will be able to differentiate itself from competitors over the long term. The amount of shrinkage in fresh food has been disappointing, Poulin admits, but he promises adjustments will b e made to how the grocery chain’s “better food for all" initiative operates.
Although Empire and Sobeys famously asked suppliers to ac*cept a controversial price cut, Poulin told analysts the company has b een holding dis cussions with reluctant suppliers who now seem to be starting to understand what the larger Sobeys brand can ac*complish for them .
In other words, suppliers may be able to make up on volume what they may lose on price.
The debt level is weighing heavily on Empire, but the com*pany expects to gain about $400 million from the sale of stores in the fourth quarter and the first quarter of fiscal 2014-15. The sale of 29 stores was required by the federal competition bureau, however, company executives say they’re also considering selling some non-core assets as a means of lessening the debt burden.
It is easy to be impatient in the high-stakes world of the Canadian grocery sector, especially if one closely examines the finances quarter to quarter. But Empire bosses are hoping the view will be different if one examines its plans over the long term .