Mr. Michael Medline reports

EMPIRE REPORTS FISCAL 2024 SECOND QUARTER RESULTS

Empire Company Ltd. has released its financial results for the second quarter ended Nov. 4, 2023. For the quarter, the company recorded net earnings of $181.1-million (72 cents per share) compared with $189.9-million (73 cents per share) last year. For the quarter, the company recorded adjusted net earnings of $178.3-million (71 cents per share), compared with $189.9-million (73 cents per share) last year. The company is excluding from its adjusted metrics: insurance recoveries related to the cybersecurity event and costs incurred to plan and implement strategies to optimize the organization and improve efficiencies.

"While higher interest rates and overall economic uncertainty are impacting customer purchasing behaviours, the fundamentals of our business remain strong," said Michael Medline, president and chief executive officer of Empire. "We continue to attract more customers in our stores, our promotions are constantly improving, and we continue to protect our margins. We have a clear strategy to deliver against and our team is executing with focus and precision."

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 sourcing of goods not for resale, supply chain productivity and the organizational structure.

Sales

Sales for the quarter ended Nov. 4, 2023, increased by 1.4 per cent, primarily driven by positive growth across the business, particularly in discount. This increase was offset by lower fuel sales, mainly driven by the sale of all its retail fuel sites in Western Canada in the first quarter of fiscal 2024.

Gross profit

Gross profit for the quarter ended Nov. 4, 2023, increased by 2.5 per cent, primarily driven by higher sales and business expansion (FreshCo, Farm Boy and Voila).

Gross margin for the quarter ended Nov. 4, 2023, increased to 25.8 per cent from 25.6 per cent in the prior year. Gross margin increased primarily as a result of the mix impact of lower fuel sales, mainly driven by the Western Canada fuel sale in the first quarter of fiscal 2024 as well as lower distribution costs driven primarily by efficiency initiatives in supply chain. Excluding the mix impact of fuel sales, gross margin for the quarter ended Nov. 4, 2023, was five basis points higher than in the prior year.

Operating income

For the quarter ended Nov. 4, 2023, operating income from the food retailing segment increased mainly due to higher sales and gross profit and gains on lease modifications and terminations in the current year, 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), restructuring costs, higher retail labour costs driven by wage rate increases, and higher depreciation and amortization driven by focused investments in the store network, tools and technology to support the company's strategic initiatives, partially offset by insurance recoveries related to the cybersecurity event.

Operating income from the investments and other operations segment for the quarter ended Nov. 4, 2023, decreased primarily as a result of lower equity earnings from Crombie Real Estate Investment Trust, mainly due to fewer property sales in the current year.

EBITDA

For the quarter ended Nov. 4, 2023, EBITDA decreased to $580.4-million from $584.2-million in the prior year, mainly as a result of the same factors affecting operating income (excluding the increase in depreciation and amortization of $17.7-million). EBITDA margin decreased to 7.5 per cent from 7.6 per cent in the prior year.

For the quarter ended Nov. 4, 2023, adjusted EBITDA decreased to $576.6-million from $584.2-million in the prior year. Adjusted EBITDA margin decreased to 7.4 per cent from 7.6 per cent in the prior year.

Income taxes

The effective income tax rate for the quarter ended Nov. 4, 2023, was 22.3 per cent, compared with 25.4 per cent in the same quarter last year. The effective tax rate for the current and prior-year quarter was lower than the statutory rate primarily due to capital items taxed at lower rates and the benefits of investment tax credits.

Adjusted impacts on net earnings

On July 30, 2023, Empire completed the sale of its Western Canada fuel business to Canadian Mobility Services Ltd., 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 first 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, including changes to its leadership team and organizational structure. Expenses in the second quarter relate to costs incurred to plan and implement the restructuring. The impact to net earnings for the quarter and year to date ended Nov. 4, 2023, was negative $12.4-million and negative $19.5-million, respectively.

On Nov. 4, 2022, Empire experienced IT (information technology) system issues related to a cybersecurity event. 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 and year to date ended Nov. 4, 2023, related to the cybersecurity event was a recovery of $15.2-million and $15.6-million, respectively. Empire continues to work 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.

Capital expenditures

The company invested $134.6-million in capital expenditures for the quarter ended Nov. 4, 2023 (Nov. 5, 2022: $254.7-million), including renovations and construction of new stores, investments in advanced analytics technology and other technology systems, FreshCo stores in Western Canada and Voila CFCs (customer fulfillment centres). The decrease in year-to-date capital spend compared with the prior year is primarily related to differences in planned timing of the capital spend.

Free cash flow for the quarter ended Nov. 4, 2023, increased versus prior year primarily as a result of a decrease in capital investments in the current year, partially offset by a decrease in cash flows from operating activities.

For the quarter ended Nov. 4, 2023, income from investments and other operations decreased primarily as a result of lower equity earnings from Crombie REIT mainly due to fewer property sales compared with the prior year.

Sobeys's credit rating remained unchanged from the prior quarter. An attached table shows Sobeys's credit ratings as at Dec. 13, 2023.

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 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. As of Nov. 4, 2023, the company purchased 3,305,547 Class A shares (Nov. 5, 2022: 2,885,713) under this filing at a weighted average price of $37.04 (Nov. 5, 2022: $37.52) for a total consideration of $122.5-million (Nov. 5, 2022: $108.3-million).

Shares purchased are shown in an attached 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 blackout periods.

Including purchases made subsequent to the end of the quarter, as at Dec. 12, 2023, the company has purchased 6,666,571 Class A shares in fiscal 2024 (Dec. 13, 2022: 4,423,140) at a weighted average price of $36.45 (Dec. 13, 2022: $38.20) for a total consideration of $243-million (Dec. 13, 2022: $169-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. Scene+ has now grown to over 14 million members.

The company's key priority with Scene+ is to accelerate program engagement by focusing on scaling personalization. By using machine learning and AI (artificial intelligence) algorithms, personalization recommendations will be improved, delivering the right message to the right customer at the right time through the right channels.

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 Dec. 13, 2023, FreshCo has 46 stores operating in Western Canada. In fiscal 2024, the company expects to open one additional FreshCo store 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 starting in calendar year 2025. To service the remaining Canadian households located outside of the core CFC service areas, the company also launched Voila curbside pickup, which currently services 98 stores in locations across Canada and is also powered by Ocado technology.

In the first quarter of fiscal 2024, 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 has increased the reach of Longo's within Ontario and increased Voila's product count. The company now offers products from Sobeys, Farm Boy and Longo's through the Voila platform.

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

In the second quarter ended Nov. 4, 2023, Voila experienced a sales increase of 15.4 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 finalize 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 insurance recoveries recognized throughout fiscal 2024.

The financial impact of insurance recoveries on net earnings in the quarter and year to date ended Nov. 4, 2023, was a recovery of $15.2-million and $15.6-million, respectively. 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.

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.

Other items

Labour buyouts

On Oct. 20, 2023, United Food and Commercial Workers (UFCW) 1518 and UFCW 247 ratified new agreements with the company. The new agreements allow the company to offer voluntary buyouts to senior British Columbia Safeway unionized employees. Employee buyouts provide flexibility and stability for the company to better manage labour and operational costs.

Distribution centre strike

On Oct. 14, 2023, teammates at a distribution centre in Ontario went on strike after negotiations between the union and the company were unsuccessful in agreeing on the terms of a new collective bargaining agreement. There are strong contingency plans in place to ensure Ontario stores have continuity of supply for customers. The strike is not expected to have a material financial impact.

Western Canada fuel sale

On Dec. 13, 2022, the company signed a definitive agreement between a wholly owned subsidiary of Sobeys and Canadian Mobility Services, 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 Western Canada fuel sale was completed on July 30, 2023.

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+, personalization, space productivity and promotional optimization), and driving efficiency and cost-effectiveness through initiatives related to sourcing of goods not for resale, supply chain productivity and the organizational structure.

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. During the second quarter of fiscal 2024, the company complied with the federal government's request for all major Canadian grocery retailers to submit plans to help further stabilize food prices for Canadians. Although it is difficult to estimate how long these inflationary pressures will last, the company continues to focus on supplier relationships and negotiations to ensure competitive pricing for customers whose shopping behaviours become more price sensitive in a heightened inflationary environment. In the second quarter of fiscal 2024, the company's internal food inflation continued to be slightly below the reported consumer price index for food purchased from stores of 6.1 per cent (2023: 11.1 per cent).

Same-store sales will fluctuate over the short term, given the negative sales impact in the prior year related to the cybersecurity event as well as and the continued impacts of inflation on consumer behaviour and its effect on current year sales. Over the first five weeks of the third quarter of fiscal 2024, the company's same-store sales growth, excluding fuel, has improved compared with the second quarter ended Nov. 4, 2023.

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 Jan. 31, 2024, to shareholders of record on Jan. 15, 2024. 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, Dec. 14, 2023, beginning at 12 p.m. Eastern Standard Time, during which senior management will discuss the company's financial results for the second quarter of fiscal 2024. To instantly join the conference call by phone, please register 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.

The replay will be available by dialling 888-390-0541 and entering access code 295603 until midnight, Dec. 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 $31.6-billion in annual sales and $16.4-billion in assets, Empire and its subsidiaries, franchisees and affiliates employ approximately 131,000 people.

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