Mr. Michael Medline reports

EMPIRE REPORTS FISCAL 2024 FIRST QUARTER RESULTS

Empire Company Ltd. has released its financial results for the first quarter ended Aug. 5, 2023. For the quarter, the company recorded net earnings of $261-million ($1.03 per share) compared with $187.5-million (71 cents per share) last year. For the quarter, the company recorded adjusted net earnings of $196.2-million (78 cents per share) compared with $187.5-million (71 cents per share) last year. The company is excluding from its adjusted metrics: gains associated with the Western Canada fuel sale, costs incurred to plan and implement strategies to optimize the organization and improve efficiencies, and insurance recoveries related to the cybersecurity event.

"Fiscal 2024 is off to a good start, supported by stronger top-line performance in our full-service banners, continued double-digit sales growth in our discount banner and solid control over our retail margins," said Michael Medline, president and chief executive officer, Empire. "Despite the ongoing volatility that the market continues to face, the results we delivered in Q1 demonstrate our team's ability to consistently execute, regardless of the economic environment."

Completed sale of Western Canada retail fuel sites

On Dec. 13, 2022, the company signed a definitive agreement between a wholly owned subsidiary of Sobeys 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. Following regulatory review and approval, the sale (Western Canada fuel sale) was completed on July 30, 2023.

Sustainable business reporting

Environmental, social and governance (ESG) has deep roots in the company's history, and the principles of ESG have been a part of the organization since the company started 116 years ago.

The company published its 2023 sustainable business report in July, 2023, which outlines the company's steady and tangible progress in achieving its ESG goals. This year's report presents key results in areas where the company has the greatest impact across the three pillars of its ESG framework: people, planet and products. Highlights of the progress made this year include: becoming the first grocery retailer in Canada to have science-based climate targets validated by the Science-Based Targets initiative; donating more than 23 million pounds of surplus food to local charities from stores and warehouses through the company's partnership with Second Harvest; raising and donating close to $19-million across Canada to support the Healthier Tomorrows Community Investment strategy; and continued progress on embedding diversity, equity and inclusion (DE&I) more broadly across the organization, with over 90 per cent of directors and above having set DE&I performance and accountability goals. In addition, the company also recently conducted the first climate scenario risk assessment on its operational footprint and published its inaugural Taskforce on Climate-Related Financial Disclosures-aligned report.

The company is focused on several initiatives as part of a continuing ESG journey, such as carbon reduction projects to achieve its scope 1 and 2 climate targets; reducing or eliminating avoidable and hard-to-recycle plastics; expanding the company's efforts to cultivate a fair, equitable and inclusive environment for all; and embedding sustainable business mandates within the company's performance management goals.

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 (earnings per share) 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 (earnings before interest, taxes, depreciation and amortization) margin by focusing on priorities such as:

• Continued focus on stores:
  • Over recent years, the company has accelerated investments in renovations, conversions and new stores, along with store processes, communications, training, technology and tools. 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. The company will continue to focus on driving efficiency and cost-effectiveness through initiatives related to strategic sourcing and supply chain productivity.

Summary results -- first quarter

On July 30, 2023, Empire completed the sale of its Western fuel business to Canadian Mobility Services, a wholly owned subsidiary of Shell Canada. The sale of all 56 retail fuel sites in Western Canada was completed for approximately $100-million, which resulted in a pretax gain of $90.8-million. The impact to net earnings for the quarter ended Aug. 5, 2023, was $71.5-million.

In the first quarter of fiscal 2024, Empire began to pursue strategies to optimize its organization and improve efficiencies (the restructuring). Expenses in the quarter relate to costs incurred to plan and implement these strategies. The impact to net earnings for the quarter ended Aug. 5, 2023, was negative $7.1-million.

On Nov. 4, 2022, Empire experienced IT (information technology) system issues related to a cybersecurity event. In the prior year, the company 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. The impact to net earnings for the quarter ended Aug. 5, 2023, was a recovery of $400,000. 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.

Sales

Sales for the quarter ended Aug. 5, 2023, increased by 1.7 per cent, primarily driven by strong performance across the business. This increase is offset by lower fuel sales due to elevated fuel prices in the prior year and one less week of fuel sales following the Western Canada fuel sale on July 30, 2023.

Gross profit

Gross profit for the quarter ended Aug. 5, 2023, increased by 4.9 per cent, primarily driven by higher sales and favourability in the company's supply chain network.

Gross margin for the quarter increased to 25.7 per cent from 24.9 per cent in the prior year. Gross margin increased primarily as a result of the mix impact of lower fuel sales and lower distribution costs, driven primarily by efficiency initiatives in supply chain. Excluding the mix impact of fuel sales, gross margin was 19 basis points higher than the prior year.

Operating income

For the quarter ended Aug. 5, 2023, operating income from the food retailing segment increased, mainly due to higher sales and gross profit in the current year, as well as the gain on the Western Canada fuel sale, partially offset by higher selling and administrative expenses in the current year. Selling and administrative expenses increased mainly due to continued investment in business expansion (Farm Boy, Voila and FreshCo), higher retail labour costs, and higher depreciation and amortization, partially offset by a decrease in project consultancy costs compared with the prior year.

For the quarter ended Aug. 5, 2023, operating income from the investments and other operations segment decreased primarily as a result of lower equity earnings from Crombie Real Estate Investment Trust, due to higher general and administrative expenses, partially offset by higher development income.

EBITDA

For the quarter ended Aug. 5, 2023, EBITDA increased to $723-million from $594-million in the prior year, mainly as a result of the same factors affecting operating income (which excludes the increase in depreciation and amortization). Adjusted EBITDA margin increased to 7.9 per cent from 7.5 per cent in the prior year.

Income taxes

The effective income tax rate for the quarter ended Aug. 5, 2023, was 27.5 per cent, compared with 25.6 per cent in the same quarter in the prior year. The effective tax rate was higher than the statutory rate, primarily due to the revaluation of tax estimates, not all of which are recurring, partially offset by non-taxable capital items. The effective tax rate in the same quarter last year was lower than the statutory rate primarily due to the differing tax rates of various entities.

Capital expenditures

The company invested $123.6-million in capital expenditures for the quarter ended Aug. 5, 2023 (2023 -- $155.5-million), including store renovations, construction of new stores, investments in advanced analytics technology and other technology systems, and investments in Voila customer fulfilment centres (CFC).

In fiscal 2024, capital expenditures are expected to be approximately $775-million, with approximately half of this investment allocated to store 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.

Free cash flow

Free cash flow for the quarter ended Aug. 5, 2023, increased versus prior-year, primarily as a result of an increase in cash flows from operating activities, the receipt of proceeds from the Western Canada fuel sale of approximately $100-million in the current year, as well as lower interest paid in the current year due to the repayment of the $500-million Series 2013-2 notes in the prior year.

Consolidated financial condition

Sobeys's credit rating remained unchanged from the prior quarter. The associated table shows Sobeys's credit ratings as at Sept. 13, 2023.

Through the acquisition of Longo's on May 10, 2021, Sobeys's acquired its existing $75-million demand operating line of credit. On July 20, 2023, Longo's amended this line of credit agreement from $75-million to $100-million. As of Aug. 5, 2023, the outstanding amount of the facility was $44.2-million (2023 -- $19.7-million). Interest payable on this facility fluctuates with changes in the Canadian prime rate.

Normal course issuer bid (NCIB)

On June 21, 2022, the company renewed its NCIB by filing a notice of intention with the Toronto Stock Exchange to purchase for cancellation up to 10.5 million non-voting Class A shares, representing 7 per cent of the 150,258,764 Class A shares outstanding. As at July 1, 2023, under this filing, the company purchased 10.5 million (July 1, 2022 -- 5,659,764) Class A shares at a weighted average price of $36.18 (July 1, 2022 -- $39.11) for a total consideration of $379.9-million (July 1, 2022 -- $221.3-million).

On June 21, 2023, the company renewed its NCIB by filing a notice of intention with the TSX to purchase for cancellation up to 12.6 million Class A shares, representing approximately 9 per cent of the public float of 139,497,542 Class A shares outstanding as of June 19, 2023. 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 the company will pay for any such 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 interest of the company and its shareholders. The NCIB expires on July 1, 2024.

Shares purchased during the quarter ended Aug. 5, 2023, compared with the same periods of the previous fiscal year are shown in the associated table.

The company engages in an automatic share purchase plan with its designated broker, allowing the purchases of Class A shares for cancellation under its NCIB program during trading black-out periods.

Including purchases made subsequent to the end of the quarter, as at Sept. 12, 2023, the company has purchased 3,263,092 Class A shares in fiscal 2024 (Sept. 13, 2022 -- 3,143,281) at a weighted average price of $35.24 (Sept. 13, 2022 -- $39.42) for a total consideration of $115-million (Sept. 13, 2022 -- $123.9-million).

Business updates

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+. With its final launch in Quebec and Thrifty Foods in March, 2023, the new loyalty program was successfully launched nationally.

As part of the Scene+ roll-out, 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.

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, strong multicultural assortment, along with the addition of the Scene+ loyalty program, has supported the growth and expansion of the discount format.

As at Sept. 13, 2023, FreshCo has 45 stores operating in Western Canada. In fiscal 2024, the company expects to open two additional 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. 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 company has three active CFCs located in Toronto, Montreal and Calgary. The fourth CFC in Vancouver will service customers in British Columbia (B.C.) starting in calendar-year 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.

In the quarter ended Aug. 5, 2023, the company completed its merger of Longo's e-commerce business, Grocery Gateway, into Voila, 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.

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 quarter ended Aug. 5, 2023, Voila experienced a sales increase of 7.2 per cent compared with the same quarter in the prior year. According to third party market data, Voila continued to increase its national market share within the e-commerce channel.

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.

The company maintains a variety of insurance coverages, including cyber insurance. 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. While the operational impact of the cybersecurity event is behind the company, management expects that there will be additional insurance recoveries throughout fiscal 2024.

The financial impact of insurance recoveries on net earnings in the quarter ended Aug. 5, 2023, was $400,000. Impacts of the cybersecurity event, including the related insurance proceeds, are excluded from adjusted metrics. The company expects to recognize additional insurance recoveries throughout fiscal 2024, which will continue to be excluded from the adjusted metrics. Please refer to the "Summary results -- first quarter" section of this document for a more detailed discussion, including a reconciliation of these non-generally accepted accounting principles (GAAP) financial measures.

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

Outlook

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+ and 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, which 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. The industry continues to experience heightened levels of inflationary pressures, particularly related to cost of goods sold. 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.

Dividend declaration

The board of directors 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 Oct. 31, 2023, to shareholders of record on Oct. 13, 2023. These dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation.

Conference call information

The company will hold an analyst call on Thursday, Sept. 14, 2023, beginning at 1 p.m. (ET), during which senior management will discuss the company's financial results for the first quarter of fiscal 2024. To instantly join the conference call by phone, please register on-line and 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 via 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.

The replay will be available by dialling 888-390-0541 and entering access code 717682 until midnight Sept. 28, 2023, or on the company's website for 90 days following the conference call.

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 $31.5-billion in annual sales and $16.5-billion in assets, Empire and its subsidiaries, franchisees and affiliates employ approximately 131,000 people.

Additional financial information relating to Empire, including the company's annual information form, can be found on the company's website or on the SEDAR+ website for Canadian regulatory filings.

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