Sobeys builds on pandemic gains in second quarter

Sobeys Inc. parent Empire Company Ltd. eked out sales gains for its fiscal 2022 second  quarter atop strong pandemic-driven growth a year ago.

At the bottom line, the Canadian food and drug retailer surpassed analysts’ consensus earnings-per-share estimate and topped their high-end projection.

For the quarter ended Oct. 30, food retail sales rose 4.9% to $7.32 billion (Canadian) from $6.98 billion a year earlier, when Stellarton, Nova Scotia-based Empire posted an 8.4% increase. Same-store sales inched up 0.4% but were down 1.3% excluding fuel, compared with growth of 7.3% overall and 8.7% excluding fuel in the fiscal 2021 quarter.

Empire attributed the fiscal 2022 quarterly growth mainly to the acquisition of Longo’s, higher fuel sales and benefits from its Project Horizon three-year strategic plan, including the expansion of retail banners Farm Boy in Ontario and FreshCo in Western Canada and online grocery service Voilà in Ontario. The company noted that the gains were partly offset by the stabilization of consumer buying behavior amid relaxed COVID-19 restrictions.

“It was a straight-up good quarter, well-executed by our teams across the country. We are consistently putting numbers on the board. We have strong underlying momentum and, in only 4.5 months, we will be entering our crucial final year of Project Horizon, which we’re feeling very good about,” Empire President and CEO Michael Medline (left) told analysts in a conference call on Thursday.

Related:Sobeys parent Empire names Matt Reindel as chief financial officer

“Our sales grew 4.9% this quarter, while same-store sales grew 90 basis points from Q1 to negative 1.3%,” he said. “As we and many others have said, year-over-year comparables do not tell the entire story as we lap strong COVID sales. Our same-store sales are growing 6.8% over the last two years.”

For the fiscal 2022 first half, food retail sales advanced 4.3% year over year to $14.94 billion. Comparable-store sales in the 26 weeks were flat overall but down 1.8% excluding fuel.

The acquisition of Longo's, expansion of the Farm Boy and FreshCo banners, and growth of Voilà online grocery service drove second-quarter gains.

After the pandemic led many consumers to shop Empire’s value grocery store banners, customers have more recently been shifting back to its full-service supermarkets, according to Medline.

“We expect discount will return almost to pre-pandemic levels, but slowly. In other words, we are not seeing fast, significant changes. In fact, we continue to see a lot of stickiness in our full-service banners. As we look ahead, we believe our full-service stores will keep momentum coming out of COVID,” he explained.

“While customer occasions are starting to change, including more visits to restaurants, we are seeing a structural change in consumption of food at home,” Medline noted. “Over the past 22 months, customers have seen and experienced the affordability and convenience in eating at home with their families. We believe there is permanence in this shift. We’re seeing this as how customers are shopping. Prior to COVID, customers shopped an average of eight food stores a month. During COVID, that dropped to one or two. Today, that number is steady at five to six stores. Despite this, our customers continue to favor larger shops, full-service stores.”

Related:Empire closes Longo’s acquisition, sets new FreshCo locations

E-commerce sales, excluding Longo’s Grocery Gateway service, rose 1.8% on a comparable basis in the second quarter, indicating that online grocery sales remained elevated since the 241% digital sales jump in the 2021 quarter.

“This number disguises the fact that Voilà has continued to grow, while being partly offset by our IGA.net and Thrifty Foods [online] businesses coping strong COVID-driven sales,” Medline said.

Sobeys now operates an Ocado-powered customer fulfillment center (CFCS0 in Vaughan, Ontario, to support Voilà service and plans to build three more CFCs.

Voilà service launched in June in the greater Toronto area, powered by an Ocado automated customer fulfillment center (CFC) in Vaughan, Ontario. Empire has accelerated plans to construct three more CFCs. They include a second CFC in Montreal to support the Voilà par IGA home delivery service in Ottawa and cities in Quebec, which is expected to go into operation in spring 2022. Two more CFCs are slated to be built in Western Canada, including in Calgary, Alberta, which is expected to begin delivering to customers in the first half of calendar 2023.

In fiscal 2021,Voilà Curbside Pickup launched at 30 stores in Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island and Alberta, and the service has since expanded to British Columbia, Manitoba, Saskatchewan and Ontario. Empire added 30 pickup sites in the 2022 second quarter and expects to add up to 35 more locations in the remainder of the fiscal year. Powered by Ocado’s store-pick solution, the click-and-collect program is designed to serve customers in areas where CFCs don’t deliver or aren’t yet built.

“E-commerce is a small fraction of the market today. But it is growing quickly and is top-of-mind right now,” Medline told analysts. “For our customers, we believe it will be critical to have the best omnichannel experience; that includes e-commerce. And for our shareholders, it will be critical that we do this profitably.”

On the earnings side, Empire totaled second-quarter 2022 net income of $175.4 million, or 66 cents per diluted share, compared with $161.4 million, or 60 cents per diluted share, in the 2021 quarter. Analysts, on average, had forecast adjusted earnings per share of 61 cents, with estimates ranging from 58 cents to 64 cents, according to Refinitiv.

First-half 2022 net earnings came in at $363.4 million, or $1.36 per diluted share, versus  $353.3 million, or $1.31 per diluted share, in the 2021 period.

“Strong cash flows allow us to continue investing in our store network,” Chief Financial Officer Matt Reindel, promoted to the CFO post in late October, said in the analyst call. “During Q2, we improved 45 stores through renovation, redevelopment or conversion. This included one new FreshCo store, with seven more to open over the next few months. We also opened one new Farm Boy in the quarter and two more locations subsequent to the quarter, including one new and one conversion site.”

Farm Boy is on track to expand its footprint by seven net new stores in fiscal 2022, Empire reported. Through Dec. 8, the chain had 42 stores, mainly in the greater Toronto area. The company expects to open another seven FreshCo sites in Alberta in the remainder of fiscal 2022, for a total of 40 locations open in Western Canada by the end of the fiscal year.

Empire’s food retail network, operated via its Sobeys subsidiary, encompasses more than 1,900 food, drug and convenience stores in all 10 provinces under banners such as Sobeys, Safeway, IGA, Foodland, FreshCo, Thrifty Foods, Farm Boy and Lawtons Drugs.