Empire promises crackdown on supplier price increase requests

Empire Co. Ltd. is planning to crack down on what it says are unjustifiable cost increase requests from some of its biggest suppliers.

Image: Sobeys

“We’re now seeing more than a few of our large supplier partners send through cost increase requests for February and some of them are distressing,” said Michael Medline, president and CEO, on a call with analysts.

“Inflationary times are not an excuse to pass every single rising cost onto grocers and more importantly to Canadians. This was not the way business was conducted before these inflationary times,” said Medline, adding that the company plans to be “even tougher” with the latest round of requests.

“If that results in a few holes in our shelves, we believe that Canadians will understand.”

The company, which operates grocery chains across the country including Sobeys and FreshCo, reported a second-quarter profit of $181.1 million, down from $189.9 million in the same quarter last year.

The grocer said its profit amounted to 72 cents per diluted share for the 13-week period ended Nov. 4, down from 73 cents per diluted share a year earlier.

“Our quarterly results were harder to follow than normal due to the impact of our real estate transactions both this year and last, the Vaughan distribution centre strike and the sale of our western fuel business,” chief financial officer Matt Reindel told analysts on the call.

The strike resulted in some temporary costs and sales losses, but the centre is now “essentially operating at normal levels,” he said.

This was also the first quarter without the fuel business contributing to results, as the sale happened at the end of the previous quarter, said Reindel.

The combination of the strike and the fuel sale hurt Empire’s adjusted earnings per share by about two cents, he said.

Sales for the quarter totalled $7.75 billion, up from $7.64 billion in the same quarter last year.

The sales increase was primarily driven by positive growth across the business, but especially in discount, the company said. This echoes comments by its competitors Metro and Loblaw in recent earnings reports, which said more customers are seeking out better prices at their discount banners amid the rising cost of living.

Empire had announced plans six years ago to convert up to a quarter of its 255 Safeway and Sobeys stores in Western Canada to its discount banner FreshCo. As of mid-December, the company said it has 46 FreshCo stores in Western Canada with one more slated to open in fiscal 2024.

Same-store sales for the quarter gained 2.2 per cent, while same-store sales excluding fuel sales rose 2.0 per cent.

On an adjusted basis, Empire said it earned 71 cents per diluted share in its most recent quarter, down from an adjusted profit of 73 cents per diluted share a year ago.

In late August, the company noticed a sudden retrenchment by some customers amid higher interest rates and overall economic uncertainty, Medline told analysts.

During the quarter, margins contracted a little more than forecasted as customers increasingly shopped the flyer, he said. Customers also purchased more of Empire’s own brands and traded down to less expensive alternatives.

But despite the challenging macro environment, Medline said he’s seeing “a lot of momentum” in the business. Sales momentum rose during the first five weeks of the third quarter, he said, higher than the second quarter but not as high as the first quarter.

“We are optimistic this trend will continue as consumers start to regain confidence,” said Medline.

The company has accelerated investments in renovations, conversions and new stores in recent years, the company said in its release. Investing in its store network will continue to be a priority, particularly when it comes to renovations and expanding its discount network.

The grocer’s results came in as expected, said RBC analyst Irene Nattel in a note.

Empire continues its strategy to maximize revenues in its full-service stores, which are losing traffic to discount banners, while the company also grows its discount footprint, she said.

Shares in the company closed down 11.22 per cent on the TSX at $34.57.