Empire shares hit 18 month high after Q1 results beat expectations

MONTREAL _ Shares of Sobeys owner Empire Co. Ltd. hit their highest level in 18 months on Thursday after the country’s second-largest grocery retailer beat expectations and signalled a positive turn in Western Canada after its disastrous takeover of Safeway.

The Halifax-based company’s shares hit $22.75 in early trading on the Toronto Stock Exchange. They were at $22.45 later in the session, up $2.70 or nearly 14 per cent.

Chief executive Michael Medline said the chain’s first positive same-store sales in six quarters and small gains in market share are a sign that the company’s efforts have begin to bear fruit.

“You won’t be hearing any champagne corks popping over here,” he told analysts during a conference call. “We still have significant work to do in all facets of our business.”

Still, he said the performance in western provinces has “come off the bottom” with an improved store experience and promotions.

“Many customers lost trust in our brand and now we have to earn that back,” said Medline, a former Canadian Tire CEO who took the helm of Empire eight months ago.

Empire (TSX:EMP.A) said it earned $54 million or 20 cents per diluted share on $6.27 billion in sales in the first quarter of its 2018 financial year. That compared with a profit of $65.4 million or 24 cents per share diluted share on nearly $6.19 billion in sales a year earlier.

On an adjusted basis, the company earned 32 cents per share in the quarter ended Aug. 5, up from 27 cents per share and 22 cents per share forecast by analysts.

Empire said the financial impact of proposed minimum wage increases in Ontario and Alberta on its operations could be up to $25 million in its 2018 financial year and $70 million in its 2019 financial year.

The grocery retailer said the estimates represent only the wage increase for people earning less than the anticipated new rates and does not assume any changes to other wage bands.

The estimate follows remarks by Loblaw and Metro which also noted that the rise in the minimum wage rates would increase its costs.

Empire said it has developed plans to mitigate the impact in 2018 and is working on plans for 2019.

“We will not negatively impact the customer experience in our stores in order to mitigate minimum wage increases,” Medline added.

Empire is on track to achieve $500 million in annual cost savings over three years from its “Project Sunrise” transformation plan. He said the benefits will start to appear in the third quarter. The company is set to announce in early October its plans to simplify its corporate structure.

Irene Nattel of RBC Capital Markets raised her target price for Empire to $23 from $21 on the improved results.

“With momentum apparently stabilizing, strong hands at the helm and a detailed, tangible plan to address top-line and margin and erosion in the form of Project Sunrise, in our view investors are likely to continue to give Empire a pass relative to Loblaw and Metro with regard to structural headwinds facing the industry,” she wrote in a report.