Empire bets on full-service grocery stores gaining strength as economy improves

Empire Co. Ltd. is planning for sunnier economic times on the horizon, as the parent company of Sobeys says it’s continuing to see the sales gap between its discount and full-service stores narrow.

The company’s growing FreshCo discount banner has been a “home run” for Empire, said president and CEO Michael Medline on a conference call with analysts discussing the company’s latest earnings on Thursday.

“But having said that, we are increasingly confident that full-service is about to come into its day again, and we want to be there for our customers,” he said. “So we’re looking at ensuring that we’re going to be taking market share in the next few years, as the economy hopefully improves a little bit.”

The company is noticing signs of improving consumer sentiment, said Medline, including less shopping around and smaller declines in the average grocery basket size.

However, he was careful to emphasize these were still early indicators.

“While it will still take time for stretched customers to fully return to their more typical purchasing behaviours, these factors are translating into the very early innings of positive sales momentum for Empire,” Medline said.

Canada’s major grocery retailers have seen their discount stores drive sales growth in recent quarters as consumers grapple with the effects of inflation and higher interest rates. The companies, Loblaw in particular, have been opening more discount stores in response, including by converting some full-service locations.

Empire is no exception, with an expansion of its FreshCo banner that began before the COVID-19 pandemic and the recent bout of inflation. But the company has also invested in its full-service stores, including recent expansions of its Farm Boy banner.

Medline thinks an improving economy will be “advantageous” to Empire as it leans into its “strengths as a full-service grocer.”

Inflation has cooled significantly from its highs after the Bank of Canada hiked interest rates, but those elevated rates are also weighing on consumers.

The Bank of Canada in recent months has started lowering its key interest rate, but it’s still a lot higher than it was in the years before the pandemic.

Empire said it earned $207.8 million in its latest quarter, down from $261 million a year ago as its sales edged higher.

The company also said it’s hitting pause on a new fulfilment centre to help save costs in its grocery delivery business Voilà, among other changes.

“While the market penetration of Voilà continues to be strong, the size and growth of the Canadian grocery e-commerce market is smaller than anticipated, resulting in higher net earnings dilution than originally estimated,” Empire said in its press release.

The company says it’s focusing on driving volume and performance at its three existing centres.

Empire also prematurely ended its mutual exclusivity agreement with technology provider Ocado, as part of changes it’s made to lower costs and increase flexibility.

The changes “are expected to have a significant, positive impact on Voilà’s profitability in fiscal 2025 and 2026,” Empire said.

The company says its profit amounted to 86 cents per diluted share for the 13-week period ended Aug. 3.

The result was down from a profit of $1.03 per diluted share in the same quarter last year when its bottom line was boosted by the sale of 56 gas stations in Western Canada.

RBC analyst Irene Nattel said Empire’s operating results came in “a tick above forecast as consumer value-seeking behaviour stabilizes.”

She said in a note that the company continues to execute on its strategy to maximize revenue in its full-service stores, despite the broader momentum in discount stores, though she added Empire is also growing its discount presence.

Nattel has previously said Empire is overly exposed to the full-service part of the grocery sector compared with its competitors, giving it a relative disadvantage amid heightened price sensitivity.

Sales for what was the company’s first quarter totalled $8.14 billion, up from $8.08 billion a year earlier.

Same-store sales for the quarter were up 0.5 per cent, while same-store sales, excluding fuel, increased one per cent.

Medline said a year and a half after completing the rollout of loyalty program Scene+ across Canada, the program has more than 15 million members, with those members spending on average 55 per cent more than non-members.

“Scene+ has significantly boosted our incremental sales and margin compared to our prior loyalty program,” he said.

On an adjusted basis, Empire says it earned 90 cents per share in its latest quarter, up from an adjusted profit of 78 cents per diluted share in the same quarter last year.

Shares in Empire closed up 5.6 per cent on the Toronto Stock Exchange at $40.62.

This report by The Canadian Press was first published Sept. 12, 2024.

Companies in this story: (TSX:EMP.A)

Rosa Saba, The Canadian Press