Restructuring Sinks Sobeys Earnings

JON SPRINGER

STELLARTON, Nova Scotia — Severance payments and inventory write-offs related to a restructuring of its distribution network, as well as costs related to its going-private transaction, contributed to a 13.5% decline in fourth-quarter earnings for Sobeys here.

Empire Co. last month completed the acquisition of Sobeys shares it did not already own, taking the retailer private. Sobeys' financial results from this point will be reflected within the results of Empire, a publicly traded holding company controlled by the Sobey family that also owns other businesses.

Sobeys said privatization expenses totaled $2.4 million (U.S.) during the quarter, which ended May 5. Costs related to the rationalization of its distribution network in Ontario — including severance pay for employees and the construction of a new automated distribution center — accounted for costs of $5.3 million, and an ongoing system initiative cost $4.6 million. Net earnings totaled $40.4 million for the quarter, down 13.5% from a year ago.

Overall sales of $3.05 billion increased by 3.8% from the same period a year ago. Same-store sales increased by 2.3%. But in a signal that pricing remains sharp in at least some regions, EBITDA margins fell to 3.99% vs. 4.37% a year ago, while net profit margins also fell, from 1.59% to 1.33%, Sobeys said.

For the fiscal year, sales of $12.2 billion showed an increase of 2.5%, with same-store sales growing by 2.4%, the company said. Earnings of $161.1 million were down by 8.4%.

Sobeys and Empire late last month asked lenders to establish a new $300 million credit facility, the companies added. Later this month, Sobeys is expected to draw on that facility to pay Empire a dividend; Empire will then transfer a $200 million loan to Sobeys.

Empire, which is traded on the Toronto Stock Exchange under the symbol EMP.A, last month reported fourth-quarter net income of $61.12 million, down 45.5% from year-ago levels, on a 3.8% gain in revenues, to $3.17 billion. For the full year Empire posted net income of about $200 million, down 29.2% from the preceding year. Revenues at Empire were up 2.3% for the year, to $12.67 billion, compared with preceding-year results.

“Our fourth-quarter earnings before capital gains and other items of $63.8 million [Canadian] was a record level for the company,” said Paul D. Sobey, president and chief executive officer. “Strong earnings contribution from our residential real estate operation and continued solid same-store sales performance from Sobeys more than offset the impact of costs incurred by Sobeys.”

In addition to the Sobeys chain, Empire also operates a real estate division and Empire Theatres, Canada's second-largest movie theater company, with an interest in 57 movie houses.