Sobeys parent sees comparable sales growth, declining adjusted profits as shoppers feel inflation

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For months, Canadians have been turning to discount grocery stores as they seek relief from the pain of skyrocketing food prices. But the chief executive officer of Sobeys parent company Empire Co. Ltd. EMP-A-T believes that as inflation slows, signs are emerging that shoppers want to go back to full-service stores.

“It’s going to fluctuate a little bit over the next quarters. But I think the days of discount greatly outperforming full service are coming to an end,” CEO Michael Medline said of shoppers, during a conference call Thursday to discuss the company’s third-quarter results. “And I think at some point, we’ll see it flip.”

Empire executives are hoping that’s the case: Compared with its rivals Loblaw Cos. Ltd. L-T and Metro Inc., MRU-T a smaller percentage of Empire’s store network is in discount. Competitors have reaped the rewards: As recently as last month, Loblaw executives said shoppers are continuing to flock to its lower-priced stores such as No Frills and Maxi. Metro has noted the same trend at its Food Basics and Super C banners.

“Consumers are under pressure,” Mr. Medline said. But he added that in the quarter, the sales gap has narrowed between its discount stores such as FreshCo and full-service stores such as Sobeys and Safeway – to a degree that surprised executives.

“They’ve had to make decisions they don’t actually like,” he said, referring to shoppers who have changed up their habits.

Empire has been investing in expanding its own discount business. The company has already converted some Sobeys and Safeway stores in Western Canada to the FreshCo banner, and now operates 47 discount stores in the West. Empire plans to renovate 20 to 25 per cent of its stores over the next three years, and to continue expanding its discount stores.

Chief financial officer Matt Reindel acknowledged on the call that this fiscal year has been “the worst possible period” for Empire’s full-service business, but that the management team is “cautiously optimistic” as they look to the year ahead.

The Stellarton, N.S.-based grocer reported on Thursday that its net earnings grew to $134.2-million or 54 cents a share in its third quarter ended Feb. 3, compared with $125.7-million or 49 cents in the same period the previous year.

The results were affected by $39.1-million in costs that the company recorded in the prior year, related to a cybersecurity breach that hit the company in November, 2022. Empire has so far recovered $15.5-million in cybersecurity insurance related to the breach this fiscal year, and expects further insurance recoveries in its fourth quarter.

In the third quarter of this year, earnings were also affected by $18.8-million in charges related to restructuring, which included changes in the leadership team and in the company’s organizational structure.

Excluding these factors, Empire reported that adjusted net earnings were $153.1-million or 62 cents a share, down 7 per cent compared with the prior year.

The restructuring effort has involved making “tough decisions” to take costs out of the business, Mr. Medline said. That has included improvements in its supply chain to increase efficiency and lower distribution costs.

Partly as a result of those initiatives, the company’s gross profit margin increased significantly, to 26.5 per cent in the quarter, compared with 25.4 per cent the year before. The prior-year impact of the cybersecurity breach, and the sale last July of Empire’s gas stations in Western Canada, also contributed to the margin improvement.

“We’re tightening every single screw we’ve got,” Mr. Medline said. “… That’s the way we’ve got to manage this company, and that’s what you do in tough times.”

He added that the added margin was not a result of raising prices.

Grocers have faced significant political and public pressure over rising grocery prices. While food inflation has slowed down significantly – prices rose at an annual rate of 3.4 per cent in January, compared with 4.7 per cent the month before – the cost of groceries remains much higher than just a couple of years ago.

Empire reported that its internal measures show that food inflation at its stores was lower than the food price growth tracked by Statistics Canada’s Consumer Price Index. The company recently launched a new program that either lowered or froze prices on roughly 1,000 items at its stores.

Empire’s sales were roughly flat, growing by 0.1 per cent to nearly $7.5-billion in the quarter. While its grocery sales grew, fuel sales decreased on a year-over-year basis, partly because of the sale of the gas stations.

Same-store sales – an important metric that tracks sales growth not linked to new store openings – grew by 1.9 per cent in the quarter, excluding fuel sales.

Sales at the company’s e-commerce service, Voilà, increased by 16 per cent in the quarter. But nearly four years after Voilà's launch, the uptake of grocery e-commerce in Canada has not been as significant as many in the industry had predicted, Mr. Medline acknowledged.

“It’s a bit bewildering, in that it’s lower than anyone thought it would be,” he said during the call, suggesting that many of the experiences customers had with grocery e-commerce during the pandemic were subpar, hindering adoption. He added that Canada was behind other markets in investing in digital grocery services.

“Are we happy now with the penetration and how it’s affecting our e-commerce? We are not,” Mr. Medline said. Voilà has high customer satisfaction scores with those who use the service, he said. “We’re happy we have it. But I’d like to be a year or two further along.”