Sobeys ‘off to a good start’ with strong 1st quarter, CEO says

Sobeys Inc. parent Empire Company Ltd. kicked off fiscal 2024 with first-quarter net and comparable-store sales gains that bounced back from lackluster results in the previous quarter.

The Canadian food and drug retailer also topped analysts’ adjusted earnings-per-share forecast in Q1, with the company getting a bottom-line lift in reported net income from a sale of retail fuel assets.

For the quarter ended Aug. 5, food retail net sales totaled $8.08 billion (Canadian), up 1.7% from $7.94 billion a year earlier, Stellarton, Nova Scotia-based Empire reported Thursday. That built on a 4.1% increase in the fiscal 2023 first quarter and marked a rebound from a 5.5% decrease in the fiscal 2023 fourth quarter.

Empire said the uptick reflects a “stronger performance across the business” but was partially offset by lower fuel sales versus prior-year elevated gas prices and one fewer week of fuel sales after the retail fuel asset divestiture, the company said.

On July 30, Empire finalized a $100 million deal to sell all of its 56 retail fuel stations in Western Canada. The agreement was reached last December between a subsidiary of Sobeys and Canadian Mobility Services Ltd., a subsidiary of Shell Canada.

Same-store sales rose 3% year over year for Q1 2024 yet were up 0.4% excluding fuel, according to Empire. The growth came atop a comp-store sales gain of 3.3% (0.4% excluding fuel) in the prior-year period and stepped up the momentum from a 1.6% increase (2.6% excluding fuel) in the 2023 fourth quarter.

Related:Sobeys finishes fiscal 2023 on high note with completion of Project Horizon

Sobeys' third Ocado-automated customer fulfillment center in Calgary, powering Voilà online grocery deliveries, became operational in Q1. / Photo courtesy of Empire Co. Ltd.

Market conditions remain volatile

“Fiscal 2024 is off to a good start. This quarter, we delivered positive top-line growth while maintaining strong control over margins,” Empire President and CEO Michael Medline said Thursday in a conference call with analysts. “Despite the market volatility, we continue to face, the strong results delivered in Q1 exemplify our team’s ability to consistently execute regardless of the macro environment,” he noted, adding that “I believe our first-quarter results speak for themselves.” (Call transcript provided by AlphaSense.)

The Sobeys retail arm posted a stronger top-line performance in its full-service conventional supermarket banners and maintained double-digit sales growth in its discount grocery formats, Medline reported, also citing relaxed food inflation.

“Our internal inflation was well-below CPI [Consumer Price Index], reaching the lowest rate we’ve seen in 17 months. We have positive indications this trend will continue. For example, in non-fresh categories, we implemented approximately one-third of the value of cost increases in Q1 versus the prior year. Nonetheless, the reality is that we continue operating in uncertain times, with high market volatility, rising interest rates and inflationary pressures,” the CEO explained.

Related:Sobeys goes live with Voilà delivery in Alberta

“Customers are continuing to adapt their purchasing behaviors in this environment, including trading down to cheaper alternatives and buying on promotion. Not surprisingly, in Q1, we saw greater uptake from customers of our flyer and in-store promotions in both our full-service and discount banners,” he said. “Our team remains focused on providing the best value and offering to customers, including growing our value-size offering, increasing the number of products with [loyalty program] Scene member pricing and expanding our own brands assortment this quarter, which continued to outpace the market with double-digit growth.”

Strategic priorities Voilà and Scene gain traction

Chief Financial Officer Matt Reindel said in the call that Empire’s Voilà online grocery delivery business tallied a 7.2% year-over-year sales gain in the 2024 first quarter. The Voilà platform—driven by Ocado-automated customer fulfillment centers (CFCs)—launched in fiscal 2021, and three CFCs are now operating in Toronto, Montreal and Calgary. A fourth CFC slated to get under way in calendar 2025 in Vancouver, serving customers in British Columbia. Also powered by Ocado technology, and introduced in fiscal 2021, is Voilà curbside pickup, currently available at 98 stores across Canada.

Related:Sobeys wraps up national rollout of Scene+ loyalty program

Along with supporting “spoke” cross-docking sites, Empire said it expects its e-grocery operations to be able to serve about 75% of Canadian households, accounting for roughly 90% of Canadians’ projected e-commerce spend.

In just over a year, the Scene rewards program has grown its member base by 40%, according to Empire. / Photo courtesy of Empire Co. Ltd.

As part of integration of the Longo’s chain, acquired in May 2021, Empire completed the merger of the Ontario grocer’s Grocery Gateway e-commerce service with Voilà during the 2024 first quarter. The company noted that the move will extend Longo’s reach within Ontario and boost Voilà’s product count by about 2,000 Longo’s products.

“Onto Voilà. This quarter, we successfully launched our CFC three in Calgary and seamlessly integrated Grocery Gateway into Voilà. We are pleased to now be offering Sobeys, Farm Boy and Longo's products across Ontario,” Medline said. “Grocery Gateway customers have quickly embraced Voilà, with strong repeat order rates and customer conversions exceeding targets. We continue to see strong customer retention rates and order frequency across all of our CFCs, which helped contribute to our CFCs gaining national market share this quarter.”

Meanwhile, the year-old Scene customer loyalty program—another strategic linchpin for Empire—has seen its membership swell by 40%. The company completed the national deployment of the program, which it co-owns with partners Scotiabank and Cineplex, this past March.

“Just over a year ago, we launched Scene in Atlantic Canada and, at the time, the program had approximately 10 million members. Today, we have successfully completed our national rollout, and Scene has grown to over 14 million members,” said Medline. “We have seen our active loyalty members increase over 30% this year, and program awareness and affinity continue to grow. Through this partnership, Scene has become the second-largest loyalty program in Canada and is not done yet. In August, Scene welcomed [retailer] Home Hardware to the program.”

Lion’s share of capex earmarked for store network upgrades

At the bottom line, Empire turned in fiscal 2024 first-quarter net income of $261 million, or $1.03 per diluted share, compared with $187.5 million, or 71 cents per diluted share, a year ago. The result reflects a pretax gain of $90.8 million from the sale of the Western Canada retail fuel sites, for a quarterly net earnings impact of $71.5 million, the company said. Also for Q1, Empire reported $400,000 in insurance recoveries from a November 2022 cybersecurity incident and noted that the company is continuing to work with insurers on claims.

Adjusted net income in Q1 came in at $196.2 million, or 78 cents per diluted share, versus $187.5 million, or 71 cents per diluted share, in the year-ago period. Prior to the Empire’s quarterly report, analysts on average had projected adjusted EPS of 75 cents, with estimates ranging from 74 cents to 77 cents, according to Refinitiv.

Plans call for fiscal 2024 capital expenditures of about $775 million, with roughly half of budgeted for store renovations and new stores and approximately $50 million for sustainability initiatives. Empire said the company aims to renovate 20% to 25% of its store network over the next three years, an effort that also includes refrigeration system and HVAC upgrades plus other energy efficiency initiatives.

“We continue to strategically allocate our free cash flow to deliver the largest impact to our business,” Reindel told analysts. “In Q1, our capex totaled $124 million, mainly spent on investments in store renovations, construction of new stores, investments in advanced analytics technology, other technology systems and our Voilà CFCs.”

During the first quarter, Empire opened, relocated or acquired seven stores; rebannered or remodeled three stores (including a store conversion to FreshCo); and closed nine locations. The company’s food retail network spans over 1,900 food, drug and convenience stores in all 10 provinces under such banners as Sobeys, Safeway, IGA, Foodland, FreshCo, Thrifty Foods, Farm Boy, Longo’s and Lawtons Drugs.