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Third-quarter sales edge up at Sobeys

Farm Boy acquisition helps boost results

Sobeys Inc. parent Empire Co. Ltd. got a lift from the acquisition of the Farm Boy grocery chain in reporting higher sales for its fiscal 2019 third quarter.

Empire said food retail sales for the quarter ended Feb. 2 totaled nearly $6.25 billion (Canadian), up 3.6% from $6.03 billion a year earlier.

The Stellarton, Nova Scotia-based company attributed the gain to a stronger performance across the business, positive food inflation, increased volume and the inclusion of eight weeks of results from Farm Boy. The $800 million acquisition closed in December. Store closings in Western Canada, lower fuel prices and the deflationary impact of health care reform on pharmacy sales partially offset the sales uptick.

Same-store sales rose 2.5% year over year. The gain was 3.3% excluding fuel and 3.9% not counting both fuel and pharmacy, according to Empire.

Operating income for the food retail business climbed 5.8% to $83.4 million in the quarter from $78.8 million a year ago.

Empire noted that third-quarter gross margin increased to 24.2% from 24% year over year because of early benefits from category resets and the inclusion of higher-margin Farm Boy results, partially offset by the effect of sales mix between banners. Gross margin also was up 30 basis points from the second quarter.

"Our execution continued to improve this quarter, building on our run of positive tonnage growth and strong same-store sales across the country. Sales were the strongest we have seen in almost 10 years. Improving margin rates in the third quarter are a harbinger of more progress to come as category reset changes start flowing through to our bottom line," Empire President and CEO Michael Medline said in a statement.

On the earnings side, Empire had third-quarter net income of $65.8 million, or 24 cents per share, compared with $58.1 million, or 21 cents per share, a year earlier. Adjusted net earnings were $72.9 million, or 27 cents per share, versus $89.9 million, or 33 cents per share, in the prior-year period.

Analysts, on average, had projected adjusted EPS of 39 cents, according to Zacks Investment Research.

Empire said adjusted EPS included 12 cents of charges related to labor buyouts in British Columbia and FreshCo conversion costs. The company expects to open 12 FreshCo locations during calendar 2019 in British Columbia and Manitoba. In December 2017, the retailer had unveiled plans to convert up to 25% of its 255 Safeway and Sobeys full-service stores in the region to the FreshCo banner over the next five years.

Plans also call for Sobeys 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 stores. Ottawa-based Farm Boy, which has 28 stores in southeastern Ontario, operates as a separate unit within Sobeys.

In addition, Empire said its Project Sunrise transformation plan — expected generate at least $500 million in annualized benefits by the end of fiscal 2020 — remains on target. The company said it realized about 20% of the benefits in fiscal 2018 and expects to achieve up to another 30% in fiscal 2019, mainly during the second half.

"The strategic building blocks of our plan continue to fall into place, with momentum on our FreshCo discount expansion plan, very strong performance of our recent Farm Boy acquisition and on-track development of our e-commerce platform in the greater Toronto area,” Medline added.

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

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