Inflation Not Helping Empire Co.'s Margins

It may come as a surprise to inflation-weary consumers, but the president and chief executive of grocery giant Empire Co. Ltd. is not happy about the high cost of food. 

Michael Medline told analysts on the company’s second quarter earnings call Thursday (Dec. 15) that inflation isn’t helping its margins.  

“You start every quarter knowing that… you're a little bit behind the eight ball in terms of inflation,” he said. “We have all these great initiatives and improvements in our stores that are going on that can overcome that inflation headwind by being able to operate stores better… It may surprise many but we pray for the end of inflation. One of the first reasons is because it's just not good for Canadians or consumers. It's just a horrible thing. Nobody wants to pay more for anything, and we feel that. The second part is it's not good for our business. We want the end of inflation… Inflation does not help our margins, it does not help our company.”

The parent to Sobeys, Farm Boy, Longo’s, Foodland, FreshCo, IGA and other grocery retail banners said it continues to see price increases from vendors. 

Pierre St-Laurent, EVP and COO, said Empire expects to see a slowdown in early 2023, but the situation remains volatile. 

“Our national sourcing team is doing an excellent job right now to challenge every single cost increase,” St-Laurent said. “It's a balance act between accepting cost increases when justified and pushing back when we believe that that cost increase is not justified. The team is extremely rigorous on that because we need to protect our relationship with vendors and at the same time we need to protect our customers.”

Empire’s results for the second quarter of fiscal 2023 included the sale of 56 of its gas stations in Western Canada to Canadian Mobility Services Ltd. (a subsidiary of Shell Canada) for around CAD $100 million in cash. That deal is expected to close in the first quarter of fiscal 2024. 

The company also shared more color on its recent cybersecurity incident in November after remaining tightlipped for several weeks. 

Empire expects to take a CAD $25 million hit after insurance. That figure includes certain business losses, the company said, such as shrink and additional labor, as well as the cost of professional and legal expenses. 

The situation had almost no impact on Empire’s results for the second quarter of 2023, St-Laurent said. He expects the financial impact will likely be seen in the company's third or fourth quarter results of 2023. 

“Looking forward operationally, our customer-facing operations are back to normal. We continue to systematically bring our information and administrative systems back online in a controlled phased approach,” Matt Reindel, EVP and CFO for Empire, told analysts. “This event has reinforced the importance of the investments already made in the cybersecurity area as well as our upcoming investments in IT systems and people.”

Net earnings for the quarter came to CAD $189.9 million, up from CAD $175.4 million in the year-ago quarter (an 8.3% increase). Net earnings for Empire’s food retail business totaled CAD $158 million, down from CAD $159.3 million last year. 

The company’s four e-commerce platforms experienced combined sales growth of 4.6%.

“Our Voilà business continues to grow with comparable sales of 14.4%, driven by particularly strong growth in Toronto. Voilà is also performing very well in Quebec and is now materially larger than our prior IGA.net business year over year,” Medline said. “Grocery Gateway is down 14.1%from last year, reflecting the lower performance of most e-commerce businesses post pandemic with the exception of Voilà.”

Sales totaled CAD $7.64 billion compared to CAD $7.32 billion in the second quarter of fiscal 2022. Same-store sales excluding fuel were up 3.1%.

While consumers continue to trade down to discount, Empire said that behavior isn’t affecting the performance of its full service stores.

“As you would expect in this inflationary environment, our discount business is very strong with double digit same store sales. But what might surprise you is that our full service business is more than holding its own with solid and positive same-store sales,” Medline told analysts. 

St-Laurent said Empire is seeing a growth in transaction count at its full service banners across the country.

“I think it's not true to say that customers are shifting from one format to another – they are just shopping at more stores,” he said. “We remain extremely active in our full service banners. It's why we're very pleased with our results.”

Among other highlights, Medline touted the success of Empire's Scene+ rollout in Atlantic and Western Canada, which now counts more than one million new members. 

He also said Empire launched more than 240 new private label skews in the past year and plans to launch more than 200 in 2023. 

Stellarton, Nova Scotia-based Empire’s key businesses are food retailing, through wholly owned subsidiary Sobeys Inc., and related real estate. With approximately CAD $30.5 billion in annual sales and CAD $16.3 billion in assets, Empire and its subsidiaries, franchisees and affiliates employ approximately 130,000 people. The company is No. 22 on The PG 100, Progressive Grocer’s 2022 list of the top food and consumables retailers in North America.