Sobeys reports earnings jump in second quarter

Sobeys reports earnings jump in second quarter

CEO bullish on progress of strategic transformation, retail expansion

Empire Company Ltd., parent of Canadian grocer Sobeys Inc., saw net earnings surge in its fiscal 2019 second quarter as some of its strategic initiatives began to take hold.

For the quarter ended Nov. 3, net income totaled $103.8 million (Canadian), or 38 cents per diluted share, compared with a net loss of $23.6 million, or 9 cents per diluted share, a year earlier, Empire said Thursday. Adjusted earnings were $110.4 million, or 40 cents per diluted share, versus $73.9 million, or 27 cents per diluted share, in the prior-year period.

Analysts, on average, had projected adjusted EPS of 32 cents for Empire’s second quarter, according to Zacks Investment research.

"In what has been our strongest quarter since we began the transformation of Empire, we are extremely pleased with the top- and bottom-line numbers the team put up on the board. Our trajectory and momentum continue to trend in the right direction with strong sales and tonnage growth, stabilized margins, a significant decline in our costs and a 48% earnings improvement [adjusted EPS]," Empire President and CEO Michael Medline said in a statement.

Empire said its Project Sunrise transformation plan, which stands to generate at least $500 million in annualized benefits by the end of fiscal 2020, is on track and meeting management's expectations. The company realized about 20% of the benefits in fiscal 2018, and executives expect up to another 30% to be achieved in fiscal 2019, primarily during the second half.

"We have a ways to go, but we are setting ourselves up for long-term success through strategic moves such as Project Sunrise, FreshCo 2.0, our Ocado-driven e-commerce platform and the recent acquisition of Farm Boy,” Medline added.

At the top line, sales came in at $6.21 billion, up 3.1% from $6.03 billion a year ago. Sobeys accounts for virtually all of Empire’s revenue, which also includes income from the Crombie REIT and real estate partnership. Empire said the sales gain reflects a stronger performance across the business; higher fuel sales, driven by increased gasoline prices; and positive food inflation.

Same-store sales rose 2.5%, excluding fuel, and were up 3% excluding pharmacy sales. Empire noted that comparable-store sales grew in most areas of the country, and volume increased for the second consecutive quarter. The increases were partly offset by the impact of store closings in western Canada during the first half of fiscal 2019 and the deflationary impact of health care reform, the company said.

Food retail net earnings totaled $96 million in the second quarter, compared with a $31.9 million net loss in the year-ago period. Adjusted net income was $102.6 million versus $65.6 million a year earlier. Operating income rose to $162 million from an $11.7 million operating loss. On an adjusted basis, operating income was $171.1 million versus $124 million a year ago.

For the fiscal 2019 first half, Empire tallied sales of $12.67 billion, up 3% from $12.30 billion in the 2018 first half. Net earnings were $199.4 million, or 73 cents per diluted share, compared with $30.4 million, or 11 cents per diluted share in the prior-year period. The company said adjusted net income was $210.6 million, or 77 cents per diluted share, versus $161.4 million, or 59 cents per diluted share, a year earlier.

Sobeys announced earlier this week that it closed the $800 million acquisition of Farm Boy, an Ottawa-based fresh grocer that operates 26 stores in southeastern Ontario. Stellarton, Nova Scotia-based Empire said Farm Boy plans to open its 27th store in Oakville, Ontario, on Dec. 13 and its 28th store in Toronto early next year.

Empire has said it aims to step up the rollout of the Farm Boy concept in greater Toronto and southwestern Ontario through new construction and conversions of some current Sobeys locations. In fiscal 2018, Sobeys unveiled plans to expand its discount banner to western Canada and convert up to 25% of its 255 Safeway and Sobeys full-service stores in the region to its FreshCo banner over the next five years. The first two Manitoba FreshCo stores are on track to open in Winnipeg, Manitoba, next spring.

Overall, Sobeys owns, affiliates or franchises more than 1,500 stores in all 10 provinces under such banners as Sobeys, Safeway, IGA, Foodland, FreshCo, Thrifty Foods and Lawtons Drugs. Its retail network also includes over 350 fuel locations.

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