Mr. Michael Medline reports

EMPIRE REPORTS FOURTH QUARTER AND FISCAL 2023 RESULTS

Empire Company Ltd. has released its financial results for the fourth quarter and full year ended May 6, 2023.

Highlights:

• Earnings per share (EPS) and adjusted EPS of 72 cents;
• Prior-year EPS and adjusted EPS of 68 cents;
• Same-store sales, excluding fuel, increased by 2.6 per cent;
• Gross margin, excluding fuel, increased by 58 basis points;
• Project Horizon successfully completed; added an incremental $50-million in annualized EBITDA (earnings before interest, taxes, depreciation and amortization);
• Repurchased 9.4 million shares ($350-million) in fiscal 2023, an increase of 48 per cent over fiscal 2022;
• Capital allocation outlook for fiscal 2024:
  • Declared a dividend increase of 10.6 per cent;
  • Renewed NCIB (normal course issuer bid) with the intention to repurchase $400-million of shares in fiscal 2024;
  • Capital investment program for fiscal 2024 expected to be approximately $775-million.

For the quarter, the company recorded net earnings of $182.9-million (72 cents per share), compared with $178.5-million (68 cents per share) last year. The company is excluding the estimated direct impact of the cybersecurity event, net of insurance recoveries and the estimated one-time costs associated with the integration of Grocery Gateway into Voila in its adjusted metrics. For the quarter, the company recorded adjusted net earnings of $184.9-million (72 cents per share), compared with $178.5-million (68 cents per share) last year.

"With our six-year turnaround now complete, we have the tools, team, assets and capabilities needed to thrill our customers, compete and win," said Michael Medline, president and chief executive officer of Empire. "Our focus going forward will be on turbocharging our business, with an even greater emphasis on our stores and supply chain, enhancing our digital capabilities and driving efficiency."

Dividend declaration

The company declared a quarterly dividend of 18.25 cents per share on both the non-voting Class A shares and the Class B common shares that will be payable on July 31, 2023, to shareholders of record on July 14, 2023, which reflects an increase in the annualized dividend rate of 10.6 per cent. These dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation.

Normal course issuer bid (NCIB)

On June 21, 2023, the company renewed its NCIB by filing a notice of intention with the Toronto Stock Exchange to purchase for cancellation up to 12.6 million Class A shares, representing approximately 9.0 per cent of the public float of 139,497,542 Class A shares as of June 19, 2023, subject to regulatory approval. As of June 19, 2023, there were 152,926,775 Class A shares issued and outstanding.

The company intends to repurchase approximately $400-million of Class A shares in fiscal 2024. The purchases will be made through the facilities of the TSX and/or any alternative Canadian trading systems to the extent they are eligible. The price that Empire will pay for any shares will be the market price at the time of acquisition. The company believes that repurchasing shares at the prevailing market prices from time to time is a worthwhile use of funds and in the best interests of Empire and its shareholders. Purchases under the renewed NCIB may commence on July 2, 2023, and shall terminate no later than July 1, 2024.

Based on the average daily trading volume (ADTV) of 337,583 shares over the last six months, daily purchases will be limited to 84,395 Class A shares (25 per cent of the ADTV of the Class A shares), other than block purchase exemptions.

The company has also renewed its automatic share purchase plan with its designated broker, allowing the purchase of Class A shares for cancellation under its NCIB during trading blackout periods, subject to regulatory approval.

Under the company's current NCIB, which commenced on July 2, 2022, and expires on July 1, 2023, the company received approval from the TSX to purchase up to 10.5 million Class A shares, representing approximately 7.0 per cent of the public float of Class A shares outstanding as of June 17, 2022. As of June 19, 2023, the company has purchased 10,464,644 shares through the facilities of the TSX at a weighted average price of $36.18 for a total consideration of $378.6-million under the NCIB that commenced July 2, 2022, and expires on July 1, 2023.

Shares purchased during the quarter and year to date ended May 6, 2023, compared with the same periods of the previous fiscal year, are shown in an attached table.

Project horizon

The company successfully completed its three-year growth strategy, Project Horizon, at the end of fiscal 2023. As part of this strategy, the company realized significant benefits from the store renovation program, new store expansion (including FreshCo conversions and Farm Boy expansion), promotional optimization and data analytics, Scene+ (a new loyalty program), personalization of customer offers, growing and enhancing the Own Brand portfolio, and generating strategic sourcing cost-efficiencies. The company achieved management's target of an incremental $500-million in annualized EBITDA.

Project Horizon initiatives will continue to provide benefits in fiscal 2024 and beyond, including Scene+, personalization, and a continued emphasis on developing the store network through renovations and new store expansion.

Over Project Horizon's three-year time frame, the company achieved a compound annual growth rate (CAGR) in EPS of approximately 13 per cent and an increase in EBITDA margin of approximately 60 basis points, consistent with management's updated expectations provided in the third quarter of fiscal 2023. Differences compared with the original Project Horizon targets of improving EBITDA margin by 100 basis points, which was expected to generate an EPS CAGR of at least 15 per cent, were largely due to delays in delivering some key initiatives as a result of the novel coronavirus (COVID-19 or pandemic) and the cybersecurity event, higher depreciation than originally anticipated resulting from higher capital spend, and the impact of significant and unexpected inflation.

The company's calculation of the EPS CAGR and the EBITDA margin increase excludes the full impacts of the cybersecurity event (due to its unusual nature and the expectation that the timing of certain insurance recoveries will occur after the fiscal year-end) and the one-time costs associated with the Grocery Gateway integration.

Company priorities

Over the last six years, the company has successfully completed two transformation strategies -- Project Sunrise and Project Horizon. These strategies have comprehensively reset Empire's foundation, enhanced the company's data capabilities, deepened the understanding of customers and prepared the business to effectively capture emerging trends. With these transformation strategies now accomplished and the turnaround complete, the company aims to grow total adjusted EPS over the long-term through net earnings growth and share repurchases. The company intends to continue improving sales, gross margin (excluding fuel) and adjusted EBITDA margin by focusing on priorities such as:

• Continued focus on store: Over recent years, the company has accelerated investments in renovations, conversions and new stores, along with store processes, communications, training, technology and tools. Beyond fiscal 2023, investing in the store network will remain a priority, demonstrated by a sustained emphasis on renovations and continued store expansion in Discount. The Own Brands program enhancement will remain a priority through increased distribution, shelf placement and product innovation.
• The company intends to invest capital in its store network and is planning to renovate approximately 20 per cent to 25 per cent of the network over the next three years. This capital investment includes important sustainability initiatives such as refrigeration system upgrades, heating, ventilation and air conditioning (HVAC) system upgrades, and other energy efficiency initiatives.
• Enhanced focus on digital and data: The focus on digital and data will include continued e-commerce expansion with Voila, loyalty through Scene+, personalization, improved space productivity and the continued improvement of promotional optimization. Space productivity will further enhance the customer experience by improving store layouts, optimizing category and product adjacencies, and tailoring product assortment for each store. The advanced analytics tools built for promotional optimization will continue to be refined through the partnership between the advanced analytics team and category merchants.
• Efficiency and cost control: The company has significantly improved its efficiency and cost-effectiveness through sourcing efficiencies, optimizing supply chain productivity, and improving systems and processes. Beyond fiscal 2023, the company will continue to focus on driving efficiency and cost-effectiveness through initiatives related to strategic sourcing and supply chain productivity.

Summary results -- fourth quarter and fiscal year

The company's fourth quarter and fiscal year end on the first Saturday in May. As a result, the fourth quarter and fiscal year are usually 13 weeks and 52 weeks, respectively, but include results for an additional week every five to six years. The quarters ended May 6, 2023, and May 7, 2022, were 13 and 14 weeks, respectively. The years ended May 6, 2023, and May 7, 2022, were 52 and 53 weeks, respectively. The 53rd week of operations in fiscal 2022 accounted for approximately $551-million in sales and generated earnings per share of approximately seven cents.

On Nov. 4, 2022, Empire experienced IT (information technology) system issues related to a cybersecurity event. The company has included in its adjusted metrics an adjustment for direct costs such as inventory shrink, hardware and software restoration costs, legal and professional fees, and labour costs, net of insurance recoveries to date. The adjustment to net earnings for the quarter ended May 6, 2023, was a recovery of $5-million. The adjustment to net earnings for fiscal 2023 was negative $34.1-million.

In addition, the cybersecurity event required certain operational systems to be shut down for several weeks. The inability to utilize these systems had a temporary negative impact on Empire's sales and operational effectiveness, further impacting third quarter and fiscal 2023 net earnings by at least negative $15-million (negative six cents per share). There was no incremental impact in the fourth quarter.

Empire is in the process of working with its insurance providers to make claims under its policies. Due to the complexity of the cyber insurance coverage and related claims, there is a time lag between the initial incurrence of costs and the recognition of anticipated insurance proceeds.

Longo's e-commerce business, Grocery Gateway, will be merged into Voila in July, 2023. The company has included in its adjusted metrics an adjustment for the costs of the integration charged to earnings in the fourth quarter of fiscal 2023, which were approximately $7-million, net of tax and non-controlling interest.

Business updates

Cybersecurity event

On Nov. 4, 2022, Empire experienced IT system issues related to a cybersecurity event. Upon discovery, the company immediately activated its incident response and business continuity plans, including the engagement of world-class experts, isolated the source, and implemented measures to prevent further spread.

This cybersecurity event and the precautionary response caused some temporary challenges in the third quarter. For example, availability of some products was temporarily impacted and pharmacy services were shut down for four days, while some in-store services, such as self-checkouts, gift cards and redemption of Scene+ points, were impacted for approximately one week. Other than this, customers would have noticed very few changes to their normal shopping experience.

Empire's security teams, supplemented by leading cyberdefence firms, worked to remediate this incident, implemented preventative measures, including pro-actively shutting down certain systems out of an abundance of caution, and took steps to supplement existing security monitoring, scanning and protective measures. During restoration efforts, the company established certain workaround processes to ensure continuity of supply chain, product availability, costing and retail pricing. Empire completed its controlled and phased approach to systematically bringing information and administrative systems back on-line early in the fourth quarter of fiscal 2023.

The company regards the protection of personal information as critically important and has taken all required steps with privacy regulators and potentially impacted individuals.

The company has a multilayered security approach involving cybersoftware tools, controls, policies, standards and procedures pertaining to security access, system development, change management, and problem and incident management. This cybersecurity event has reinforced the importance of the investments already made in the cybersecurity area as well as coming investments in the IT systems and people. Continuous enhancement of the company's IT infrastructure will strengthen its defence against future such incidents.

The company maintains a variety of insurance coverages, including cyberinsurance. Empire is in the process of working with its insurance providers to make claims under its policies. Due to the complexity of the cyberinsurance coverage and related claims, there is a time lag between the initial incurrence of costs and the recognition of anticipated insurance proceeds. While the operational impact of the cybersecurity event is behind the company, management expects that there will be additional insurance recoveries in fiscal 2024.

The cybersecurity event is considered an unusual item and has been excluded from the company's assessment of Project Horizon. For comparative purposes, the company is presenting adjusted metrics to exclude certain impacts of the cybersecurity event. The net financial impact of incremental direct costs, inventory shrink and insurance recoveries on net earnings in the fourth quarter and fiscal year ended May 6, 2023, were $5-million and negative $34.1-million, respectively.

In addition, certain financial impacts are not reflected in the adjusted metrics as they relate to sales declines, which management considers are attributable to the cybersecurity event and the associated temporary decline in operational effectiveness during the cybersecurity event. Management estimates that the impact on net earnings in the fourth quarter was insignificant and the impact on the fiscal year ended May 6, 2023, was at least negative $15-million, from impacts such as the temporary loss of advanced planning, promotion, and fresh item management tools, temporary closures of pharmacies, and customers' inability to redeem gift cards and loyalty points.

Empire estimates, based on available information, that the final impact on net earnings over fiscal 2023 and fiscal 2024 will be approximately negative $32-million, net of estimated insurance recoveries.

Scene+

In June, 2022, the company launched a new loyalty strategy through Scene+, one of Canada's leading loyalty programs. Along with Scotiabank and Cineplex, the company is now a co-owner of Scene+. The new loyalty program was successfully launched in Atlantic Canada in August, 2022, followed by Western Canada in September, 2022, Ontario in November, 2022, and Quebec and Thrifty Foods in March, 2023.

As part of the Scene+ rollout, the company launched its next-generation recommendation engine for one-to-one, machine-learning-powered personalization at scale. The recommendation engine is focused on improving customer engagement and offer relevancy. The target algorithms will continue to improve over time, driving progressively better performance and results.

Farm Boy

The acquisition of Farm Boy on Dec. 10, 2018, added 26 locations to the company's Ontario store network. The company expects to open an additional 22 stores in the five years following the acquisition date, mainly in the Greater Toronto Area (GTA). For the fiscal year, the company opened a total of three new stores. As at June 21, 2023, Farm Boy has 47 stores operating in Ontario. In fiscal 2024, the company expects to open two additional Farm Boy stores in Ontario.

FreshCo

In fiscal 2018, the company announced plans to expand its FreshCo discount format to Western Canada with expectations of converting up to 25 per cent of the 255 Safeway and Sobeys full-service format stores in Western Canada to the FreshCo banner.

Through the FreshCo expansion program, the discount business in Western Canada has been on a sharp growth trajectory, driven by store conversions and regional expansion. The value proposition and strong multicultural assortment, along with the addition of the Scene+ loyalty program, have supported the growth and expansion of the discount format.

As at June 21, 2023, FreshCo has 44 stores operating in Western Canada, including four stores opened during fiscal 2023, in line with management's expectations. In fiscal 2024, the company expects to open an additional three FreshCo stores in Western Canada.

Voila

In fiscal 2021, the company introduced its new e-commerce platform, Voila, which is the future of on-line grocery home delivery in Canada. Voila is powered by industry-leading technology provided by Ocado Group PLC, through its automated CFCs (customer fulfilment centres). The company will operate four CFCs across Canada with supporting spokes and curbside pickup. The company will be able to serve approximately 75 per cent of Canadian households, representing approximately 90 per cent of Canadians' projected e-commerce spend.

The first CFC in Toronto began deliveries in June, 2020. The second CFC in Montreal began deliveries in March, 2022. The third CFC in Calgary, which services the majority of Alberta, began deliveries on June 20, 2023. The fourth CFC in Vancouver will service customers in British Columbia; starting in calendar 2025. In fiscal 2021, the company launched Voila curbside pickup, which currently services 98 stores in locations across Canada and is also powered by Ocado technology.

Longo's e-commerce business, Grocery Gateway, will be merged into Voila in July, 2023, thereby capturing logistics and delivery synergies. Operating as a shop in shop will increase the reach of Longo's within Ontario and increase Voila's product count by approximately 2,000 Longo's products. The costs of the integration were charged to earnings in the fourth quarter of fiscal 2023 and were approximately $7-million, net of tax and non-controlling interest.

Voila's future earnings will primarily be impacted by the rate of sales growth, with operational efficiencies, margins, and cost discipline serving as important drivers to manage financial performance.

In the fourth quarter of fiscal 2023, the company's four e-commerce platforms (Voila, Grocery Gateway, IGA.net and ThriftyFoods.com) experienced a combined sales decline of 13.5 per cent compared with the same quarter in the prior year (excluding the additional week of operations in the prior year). The decrease is primarily driven by higher on-line sales in the fourth quarter of fiscal 2022 as a result of the pandemic, which had an outsized impact on the company's non-Voila e-commerce businesses. According to third party market data, Voila continues to outperform the market over the last fiscal year.

Outlook

With the company's turnaround complete, management aims to grow total adjusted EPS over the long term through net earnings growth and share repurchases. The company intends to continue improving sales, gross margin (excluding fuel) and adjusted EBITDA margin by focusing on priorities such as: a continued focus on stores (investing in renovations, Discount expansion and Own Brands program enhancement), an expanded focus on digital and data (through key strategic initiatives including Voila, Scene+, personalization, space productivity and promotional optimization), and driving efficiency and cost-effectiveness through initiatives related to strategic sourcing and supply chain.

For fiscal 2024, capital spend is expected to be approximately $775-million, with approximately half of this investment allocated to renovations and new store expansion and approximately $50-million allocated toward sustainability initiatives such as refrigeration system upgrades, HVAC system upgrades and other energy efficiency initiatives. The company is planning to renovate approximately 20 per cent to 25 per cent of the network over the next three years.

During fiscal 2024, the company intends to purchase approximately $400-million in Class A shares under an NCIB. The company has declared a quarterly dividend that reflects an increase in the annualized dividend rate of 10.6 per cent, marking the 28th consecutive year of dividend increases.

The company continues to be well positioned to pursue growth despite the impacts of global economic uncertainties such as higher than normal inflation and supply chain challenges. The industry continues to experience heightened levels of inflationary pressures, particularly related to cost of goods sold and fuel. Although it is difficult to estimate how long these pressures will last, the company is focused on supplier relationships and negotiations to ensure competitive pricing for customers whose shopping behaviours become more price sensitive in a heightened inflationary environment.

On Dec. 13, 2022, the company signed a definitive agreement between a wholly owned subsidiary of Sobeys Inc. and Canadian Mobility Services Ltd., a wholly owned subsidiary of Shell Canada, to sell all 56 retail fuel sites in Western Canada for approximately $100-million. Closing of the transaction is subject to customary conditions, including regulatory approvals. The company expects the transaction to close in the first half of fiscal 2024.

Conference call information

The company will hold an analyst call on Thursday, June 22, 2023, beginning at 11:30 a.m. Eastern Daylight Time, during which senior management will discuss the company's financial results for the fourth quarter of fiscal 2023. To instantly join the conference call by phone, please register yourself on-line to be connected into the conference call automatically. You can also be entered to the call by an operator by dialling 888-390-0546 outside the Toronto area or 416-764-8688 from within the Toronto area.

To secure a line, please call 10 minutes prior to the conference call; you will be placed on hold until the conference call begins. The media and investing public may access this conference call through a listen-only mode. You may also listen to a live audiocast of the conference call by visiting the Quick Links section of the company's website and then navigating to the Empire Company quarterly results call link.

Replay will be available by dialling 888-390-0541 and entering access code 984059 until midnight, July 6, 2023, or on the company's website for 90 days following the conference call.

Selected financial information

The attached financial information is derived from the company's audited annual consolidated financial statements for the year ended May 6, 2023. The information does not include all disclosures required by international financial reporting standards (IFRS) and should be read in conjunction with the company's 2023 audited consolidated financial statements available on SEDAR or by accessing the investor centre section of the company's website.

The company's 2023 annual report will be available on or about July 28, 2023, and can be accessed through the investor centre section of the company's website and also on SEDAR.

About Empire Company Ltd.

Empire is a Canadian company headquartered in Stellarton, N.S. Empire's key businesses are food retailing (through wholly owned subsidiary Sobeys Inc.) and related real estate. With approximately $30.5-billion in annual sales and $16.5-billion in assets, Empire and its subsidiaries, franchisees and affiliates employ approximately 131,000 people.

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