Sobeys owner reports 'very disappointing' quarter as struggles grow

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As the parent of grocer Sobeys Inc. posted another quarter of poor results, it said it has launched a broad review of the company's costs in a bid to pare them down and become a more nimble operation.

Empire Co. Ltd. said Wednesday night its second-quarter profit slumped by more than half to $33.1-million or 12 cents a share from $68.5-million or 25 cents a share a year earlier. Sales slipped to $5.9-billion from $6.1-billion.

Adjusted profit tumbled even more – by more than 70 per cent – to $32.9-million or 12 cents a share from $110.7-million or 40 cents a share. Analysts were expecting 28 cents a share in the latest quarter, according to a poll by Thomson Reuters.

"Clearly a very disappointing second quarter for fiscal 2017 reflecting the significant and ongoing challenges we have been experiencing in our business," said François Vimard, interim chief executive officer of Empire.

"These challenges simply reinforce the need for a renewed focus on our business transformation efforts, as well as a significant expansion and acceleration of efforts to reduce costs and complexity throughout our organization."

The country's second-largest grocer has struggled with its $5.8-billion takeover of Safeway Canada in late 2013, failing to oversee a smooth merger of the two operations at a time when the economy in Western Canada – where Safeway operates – was in decline. Sobeys was hit by botched produce procurement, unsuccessful private label switches and too-high prices that scared off shoppers.

Sobeys has been racing to fix its problems and lower prices. But by July, it parted ways with its CEO, Marc Poulin. The changes have yet to show up in improved financial results.

On Wednesday, Mr. Vimard, interim CEO and former chief financial officer, said management has hired consultants to help it review "both the scope and scale of cost reductions" while addressing "the organization's complexities that not only add unnecessary costs, but often prevent nimble and responsive decision making to support the needs of our customers."

The company expects the study to take a few months, with the goal of considering its recommendations by its fiscal fourth quarter, which ends in the spring.

Last year under its former CEO, Sobeys launched an initiative to simplify its buying and selling, asking suppliers to give it some breaks in its attempt to become a leaner operation and provide more deals for shoppers.

Mr. Poulin said he was dropping some controversial supplier pricing practices aimed at streamlining the payment deduction process for such things as bulk buying and flyer promotions.

On Wednesday, the company said it had always indicated that its simplification efforts would take time as customers "become accustomed to the value being created at store level.

"The impact on the gross margin is the result of the investment required to support the success of the strategy. The company remains firmly committed to the implementation of a better pricing position across the country and will adapt based on the critical learnings we see on a day to day basis. This will ultimately ensure a successful and sustainable approach for the business."

Along with a soft economy in Western Canada, Sobeys also faces the dilemma of not having a discount format there to serve a more fragile consumer. Its key competitors, including the country's top grocer, Loblaw Cos. Ltd., have benefited from running discount retailers there. In Ontario, Sobeys operates its low-cost grocer FreshCo but has yet to expand it beyond that province.

In its second quarter ended Nov. 5, Empire's gross margin fell to 23.6 per cent of sales compared with 24.3 per cent of sales a year earlier.

Sobeys' sales at stores open a year or more dropped 2.6 per cent, excluding the negative effects of fuel prices. They would have declined 1.2 per cent if that and the impact of the ailing Western business were excluded. Those sales are considered a key retail measure.

Empire's board of directors declared a quarterly dividend of $0.1025 a share on both the non-voting Class A shares and the Class B common shares that will be payable on Jan. 31 to shareholders of record on Jan. 13.