Empire Co. Ltd., the parent company of Sobeys, says it is positioning itself for brighter economic conditions ahead as the sales gap between its discount and full-service grocery stores begins to narrow.
On a conference call to discuss its latest quarterly results, president and CEO Michael Medline described the rapid expansion of the company’s FreshCo discount banner as a major win for Empire. At the same time, he said the company is seeing early signs that full-service formats will regain momentum as consumer spending improves. “We are increasingly confident that full-service is about to come into its day again, and we want to be there for our customers,” Medline said. “We’re positioning ourselves to take market share in the next few years if the economy improves.”
Canadians feeling better about grocery costs, suggest Empire
Medline said Empire is observing early indicators of improving consumer sentiment, including reduced price-matching behaviour and smaller declines in average basket sizes. While he cautioned that these trends are still in their infancy, the company believes they are contributing to the initial stages of positive sales momentum.
Across Canada, major grocers have seen their discount banners drive sales growth as shoppers remain price-conscious amid inflation and higher interest rates. Loblaw and other retailers have accelerated openings of discount-format stores and, in some cases, converted full-service locations to lower-cost formats. Empire has similarly expanded FreshCo—an initiative that began before the pandemic and continued through recent inflationary periods—while at the same time investing in its full-service offerings, such as the Farm Boy banner.
Medline highlighted that an improving economy would be advantageous for Empire as it leverages its strengths as a full-service grocer. Even though inflation has eased from its peak following aggressive interest rate hikes by the Bank of Canada, elevated borrowing costs continue to constrain household budgets. The Bank of Canada has started to lower its policy rate in recent months, but rates remain materially higher than pre-pandemic levels.
For the 13-week period ended Aug. 3, Empire reported net earnings of $207.8 million, down from $261 million a year earlier, while consolidated sales edged higher. The company said profit amounted to $0.86 per diluted share for the quarter, compared with $1.03 per diluted share in the same quarter last year—when results were helped by the sale of 56 gas stations in Western Canada.
Growing grocery delivery business and other opportunities
Empire also reviewed its grocery delivery strategy, announcing a pause on construction of a new fulfilment centre to reduce costs and refine its approach. While the company said the Voilà grocery delivery service continues to gain market penetration, the size and growth of the Canadian grocery e-commerce market have been smaller than originally anticipated. That gap has created greater net earnings dilution than planned, prompting a shift in priorities.
Instead of expanding fulfilment capacity immediately, Empire will focus on improving volume and operational performance at its three existing Voilà centres. The company also ended its mutual exclusivity agreement with technology provider Ocado earlier than planned, a move Empire said will reduce costs and increase flexibility. Management expects these changes to have a significant, positive impact on Voilà’s profitability across fiscal 2025 and 2026.
On an adjusted basis, Empire reported earnings of $0.90 per share for the quarter, up from an adjusted $0.78 per diluted share a year earlier. The company’s shares closed up on the Toronto Stock Exchange following the release of the results.
Analyst take on Empire’s quarter
RBC analyst Irene Nattel said Empire’s operating results were slightly ahead of expectations as consumer value-seeking behaviour stabilizes. In her commentary, she noted that Empire is executing on strategies to maximize revenue in its full-service locations even while it grows its discount footprint. Nattel has previously observed that Empire remains relatively more exposed to the full-service segment than some competitors, which can be a disadvantage when consumers are highly price-sensitive.
Empire earnings highlights
Key figures from the quarter:
- Empire Company (EMP/TSX): Reported earnings per share of $0.63 (slightly above forecasts) and revenue of approximately $7.41 billion, in line with expectations.
For what the company reported as its first quarter, total sales were $8.14 billion, up from $8.08 billion a year earlier. Same-store sales rose 0.5% for the quarter, and same-store sales excluding fuel increased by 1%.
Medline also noted the positive impact of Empire’s loyalty program rollout. About a year and a half after completing a national rollout of the Scene+ program, the company reported more than 15 million members. According to management, Scene+ members spend on average 55% more than non-members, and the loyalty initiative has materially improved incremental sales and margin compared with the prior program.
Looking ahead, Empire is balancing investment in discount and full-service formats, optimizing its grocery e-commerce operations, and targeting market-share gains as consumer behaviour normalizes. Management stressed that while the recovery in spending patterns will take time, the company is taking measured steps to capture the opportunities that an improving economy could present.