Sobeys Analysis

Analyst: Sobeys facing 'years of heavy lifting'

Rivals expected to capitalize as Canadian economy improves

Don’t expect competitors to take pity on Sobeys, an analyst said this week.

While their embattled rival seeks to recover from the aftereffects of a botched Safeway Canada acquisition, a black eye for its loyalty partner and the financial impacts of a new go-to-market strategy, Loblaw Cos. and Metro Inc. should both be positioned to take market share— and perhaps, gain closed store sites — from Sobeys for at least two or three quarters, analyst Keith Howlett of Desjardins Securities said in a research note Wednesday.

Moreover, Howlett said, Sobeys while addressing its operating challenges could miss out on what he forecasted to be an improving environment for Canadian staples retailers in coming months.

As previously reported, Sobeys, a division of Stellarton, Nova Scotia-based Empire Cos. Ltd., said profits were down by 70% in its fiscal second quarter as it experienced lower-than-expected sales and higher costs while launching a new everyday low-price program at its stores in Western Canada. At the same time, Sobeys was experiencing customer backlash associated with a since-withdrawn change in how its travel rewards loyalty partner was processing reward points.

Air Miles parent LoyaltyOne in November told members that points more than five years old would expire by Dec. 31 then reversed course this month under a torrent of criticism. Air Miles is a national loyalty partner of Sobeys.

The results prompted Sobeys to seek help from outside consultants who would “leave no rock unturned” in an effort to reduce internal costs to fund continuation of the strategy and to help more customers to understand it, interim CEO Francois Vimard said in a conference call with analysts. Vimard maintained confidence in the pricing program, known as “Simplified Buy & Sell,” saying that it would ultimately allow Sobeys to decrease its complexity and provide value for shoppers.

The poor initial reception of the new strategy in Western Canada follows a period in which issues in integrating systems of acquired stores in those provinces resulted in supply and promotional challenges. Howlett pointed out this week that Sobeys EBITDA run rate in the first half of its fiscal year was lower than it was in the same period before it acquired Safeway Canada in 2014.

“Our view is that Empire has two to four years of heavy lifting ahead of it,” Howlett, who covers Loblaw and Metro but not Empire, said in the note. “In our view, Empire must strategically reassess and redesign its go-to-market strategy, improve operational execution in Western Canada and reduce unnecessary costs. This may result in a further downsizing of the store network in selected regions of the country.”

Loblaw and Metro in the meantime could also benefit from an improving Canadian economy in coming quarters, Howlett said, citing opportunities in digital sales, improving economic conditions in once-struggling geographies and rebounding commodity prices. Canadian retailers are also expected to deal with fewer competitive intrusions than in the past, Howlett said, citing Target Corp.’s difficulty and subsequent withdrawal in 2015.

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