Sobeys finished 2018 fiscal year on positive note

Sales inched up in the fiscal 2018 fourth quarter at Sobeys Inc. as the Canadian food and drug retailer grappled with an intense competitive environment and a reorganization.

Meanwhile, parent Empire Company Ltd. posted adjusted earnings per share that beat analysts’ estimates.

For the quarter ended May 5, Sobeys tallied sales of $5.89 billion (Canadian), up 1.5% from nearly $5.80 billion a year earlier. Same-store sales edged up 0.5% and were flat excluding fuel, but the result marked an improvement from decreases of 1.1% overall and 1.6% excluding fuel.

“We expected challenged same-store sales this quarter versus an aggressive industry promotional environment. This has been a reality for most of us in the industry. But I think we may have been more affected, as we were busy reorganizing and stabilizing our margins, and we're likely a tad slow in reacting to the increased promotional intensity of our competitors,” Empire President and CEO Michael Medline told analysts yesterday in an earnings call.

Medline also noted that two Sobeys competitors were giving out $25 gift cards and the winding down of 10 British Columbia stores earmarked for closure had a negative impact of 13 basis points on comparable-store sales.

“This impact will cease very soon, as nine out of 10 stores will close on July 5, with the 10th store closing at the end of July,” he said. “The biggest challenge we faced in Q4 and continuing into Q1 has been the material organizational restructuring changes we have seen, especially in merchandising. Almost every single person in merchandising is in a new and/or expanded role. It is not reasonable to expect we would be on top of our game through this time.”

Adjusted operating income for Sobeys surged to $124.3 million in the fourth quarter from $81.2 million a year ago. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) also climbed to $225 million from $185 million in the fiscal 2017 quarter.

Empire’s fourth-quarter net earnings were $71 million, or 26 cents per diluted share, compared with $29.5 million, or 11 cents per diluted share, in the prior-year period. Adjusted earnings came in at $93 million , or 35 cents per diluted share, versus $50.2 million, or 18 cents per diluted share, a year earlier.

Analysts’ consensus forecast was for adjusted EPS of 29 cents, according to Zacks Investment Research.

For the full 2018 fiscal year, Sobeys totaled revenue of $24.21 billion, up 1.7% from $23.81 billion in fiscal 2017. Comp-store sales rose 0.8% (0.5% excluding fuel), compared with a decline of 2.1% (2.2% excluding fuel) a year ago.

Fiscal 2018 net earnings were $159.5 million, or 15 cents per diluted share, versus $158.5 million, or 58 cents per diluted share, in fiscal 2017. Empire reported adjusted earnings of $344.3 million, or $1.27 per diluted share, for 2018 compared with $191.3 million, or 70 cents per diluted share, for 2017.

Empire noted that Project Sunrise, a three-year restructuring and cost control initiative launched in the 2017 fourth quarter, is on track after its first year and in line with management's expectations. In fiscal 2018, benefits include organizational design cost reductions, store operational improvements and cost reductions from strategic sourcing, the company said. The in-year benefit was about 20% of the total target, most which was achieved in the second half of the year.

Empire projects the effort to drive at least $500 million in annualized cost savings by the end of fiscal 2020.

"We are proud of our achievements this year," Medline said in a statement. "We have restructured our company, taken out significant costs and stabilized our margins. This has generated an improvement in adjusted earnings of 80% and an increase in free cash flow of 27%. Going forward, our principal mission will be to grow sales and take back market share. This is not a simple task, but we now have the strategy, tactical game plan and team to get it done."

Stellarton, Nova Scotia-based Sobeys owns or franchises about 1,500 stores in 10 provinces under the Sobeys, Safeway, IGA, Foodland, FreshCo, Thrifty Foods and Lawtons Drugs banners, as well as over 350 retail fuel locations.