Sobeys' Investments Yield Sharp Sales, Profit Gains

MARK HAMSTRA

STELLARTON, Nova Scotia — Empire Cos. here said same-store sales at its Sobeys division rose 7.6% in the third quarter, which the company attributed in large part to successful operating improvements.

Perry Caicco, an analyst at CIBC World Markets, Toronto, said the results for the quarter — which also included a big jump in profitability — reflect a long period of investment in new technologies and in store remodels at Sobeys, which is the second-largest operator in Canada behind Loblaw Cos.

“It was the product of a lot of things,” he said. “It was years of work to get there. They had to rebuild all their systems, which was a four- to five-year project, and it was painful. They also remodeled a lot of stores, and at the time, people said they were spending too much on remodels and not getting a return on capital.

“But now both those projects have come to fruition, because now they are sitting with a very efficient set of systems. They have a very productive environment, and the most modern base of stores out there.”

He compared the process Sobeys has gone through to the effort that Cincinnati-based Kroger Co. undertook in the U.S. to streamline costs and revamp its promotional strategies to be more competitive. Although the strategies are different, he pointed out that Kroger suffered through some short-term growing pains to achieve its current status as an efficient driver of sales growth.

Sobeys' efforts, he said, have made it “reasonably price-competitive” in a market where Wal-Mart Stores is seeking to make big inroads in grocery sales.

“One of the big consumer reactions to the economy up here has been that people are buying more off the flier, and Sobeys has always been very good at producing a good flier,” Caicco explained. “And when people go into the stores, they find they are really nice stores, so Sobeys is really well positioned right now, after a long period of transformation.”

In a conference call with analysts discussing results for the 13-week quarter, which ended Jan. 31, Bill McEwan, Sobeys' president and chief executive officer, said both transaction size and foot traffic were up in the quarter.

He also noted that the results outpaced inflation, which was in the 3%-4% range.

“Our cost and productivity initiatives, implemented over the past several years, continued to accrue to our benefit,” McEwan said, pointing out that the results are also up against a relatively weak third quarter from a year ago, when the chain faced more intense price competition.

He said the company expects inflation to continue to decline for the rest of the year, with deflation a possibility next year.

For the 13-week third quarter, which ended Jan. 31, Empire reported that operating income in the food retailing segment rose 43.5%, to $76.6 million (U.S.), on an 8.8% gain in revenues, to $2.9 billion. Through three quarters, operating income in food retailing was up 17.3%, to $232 million, on revenues of $8.6 billion, up 8%.