Mr. Michael Medline reports

EMPIRE REPORTS FISCAL 2024 THIRD QUARTER RESULTS

Empire Company Ltd. has released its financial results for the quarter ended Feb. 3, 2024. For the quarter, the company recorded net earnings of $134.2-million (54 cents per share) compared with $125.7-million (49 cents per share) last year. For the quarter, the company recorded adjusted net earnings of $153.1-million (62 cents per share) compared with $164.8-million (64 cents per share) last year.

"Our team delivered solid results, in line with our expectations, given a cautious consumer navigating the impacts of higher interest rates," said Michael Medline, president and chief executive officer, Empire. "We are a different Empire Company now, with the capabilities, processes and disciplines in place to stay strong through tougher times as shown in our quarterly results. More than ever, we are focused on identifying novel ways to provide ongoing value to our customers, including through the recent launch of a new 11-week program that lowered or locked prices on approximately 1,000 items across many of our banners."

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+ (see "business updates -- Voila" and "business updates -- Scene+" for more information), 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 Feb. 3, 2024, increased by 0.1 per cent, primarily driven by positive growth across the business, particularly in discount and full-service. This increase was offset by lower fuel sales mainly driven by the sale of all retail fuel sites in Western Canada in the first quarter of fiscal 2024.

Gross profit

Gross profit for the quarter ended Feb. 3, 2024, increased by 4.6 per cent, primarily driven by the impact of the cybersecurity event in the prior year and business expansion (Farm Boy, FreshCo and Voila).

Gross margin for the quarter ended Feb. 3, 2024, increased to 26.5 per cent from 25.4 per cent in the prior year. Gross margin increased primarily as a result of the impact of the cybersecurity event in the prior year, the mix impact of lower fuel sales mainly driven by the Western Canada fuel sale in the first quarter of fiscal 2024 and lower distribution costs primarily driven by efficiency initiatives in supply chain.

Excluding the mix impact of fuel sales, gross margin for the quarter ended Feb. 3, 2024, was 87 basis points higher than in the prior year.

Operating income

For the quarter ended Feb. 3, 2024, operating income from the food retailing segment increased mainly due to higher sales and gross profit, partially offset by higher selling and administrative expenses in the current year. Selling and administrative expenses increased mainly due to higher retail labour costs driven by wage rate increases, continued investment in business expansion (Voila, Farm Boy and FreshCo), restructuring costs, and higher focused investments in the store network, tools, technology and projects to support Empire's strategic initiatives, including depreciation and amortization, partially offset by costs related to the cybersecurity event in the prior year and a decrease in compensation accruals in the current year.

Operating income from the investments and other operations segment for the quarter ended Feb. 3, 2024, decreased primarily as a result of lower equity earnings from Crombie REIT mainly due to fewer property sales in the current year.

EBITDA

For the quarter ended Feb. 3, 2024, EBITDA increased to $521.5-million from $492.5-million in the prior year mainly as a result of the same factors affecting operating income (excluding the increase in depreciation and amortization of $11.2-million). EBITDA margin increased to 7 per cent from 6.6 per cent in the prior year.

Income taxes

The effective income tax rate for the quarter ended Feb. 3, 2024, was 24 per cent compared with 20.7 per cent in the same quarter last year. Consistent with the prior year, the effective tax rate for this quarter is lower than the statutory rate primarily due to the revaluation of tax estimates, not all of which were recurring, non-taxable capital items and consolidated structured entities which are taxed at lower rates.

Net earnings

Adjusted impacts on net earnings

On July 30, 2023, Empire completed the sale of its Western 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 of fiscal 2024 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 relate to costs incurred to plan and implement the restructuring. The impact to net earnings for the quarter and year-to-date ended Feb. 3, 2024, was ($18.8-million) and ($38.3-million), respectively.

On Nov. 4, 2022, Empire experienced 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 Feb. 3, 2024, was an expense of ($100,000) and a recovery of $15.5-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 $156.3-million in capital expenditures for the quarter ended Feb. 3, 2024 (Feb. 4, 2023 -- $143.4-million) including renovations and construction of new stores, investments in advanced analytics technology and other technology systems, FreshCo stores in Western Canada, and Voila customer fulfilment centres (CFCs).

Free cash flow

Free cash flow for the quarter ended Feb. 3, 2024 increased versus prior year primarily as a result of an increase in cash flows from operating activities, higher proceeds on lease modifications and a decrease in capital investments in the current year.

Investments and other operations

For the quarter ended Feb. 3, 2024, 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.

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 non-voting 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 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 Feb. 3, 2024, the company purchased 6,015,656 Class A shares (Feb. 4, 2023 -- 5,114,295) under this filing at a weighted average price of $36.63 (Feb. 4, 2023 -- $36.92) for a total consideration of $220.4-million (Feb. 4, 2023 -- $188.8-million).

Shares purchased are shown in the 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.

As at March 12, 2024, the company has purchased 1,173,587 Class A shares (March 14, 2023 -- 1,021,572) subsequent to the end of the quarter ended Feb. 3, 2024. In fiscal 2024, as at March 12, 2024, the company has purchased 9,464,668 Class A shares (March 14, 2023 -- 7,356,194) at a weighted average price of $35.92 (March 14, 2023 -- $37.46) for a total consideration of $340-million (March 14, 2023 -- $275.6-million). The company intends to repurchase approximately $400-million of Class A shares in fiscal 2024.

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 15 million members.

The company's key priority with Scene+ is to accelerate program engagement by focusing on scaling personalization. By using machine learning and 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 grown significantly, driven by store conversions and regional expansion. The value proposition and strong multicultural assortment, along with the addition of the Scene+ loyalty program, has supported the growth and expansion of the discount format.

As at March 13, 2024, FreshCo has 47 stores operating in Western Canada, which completes the openings planned for fiscal 2024.

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.

In the quarter ended Feb. 3, 2024, Voila experienced a sales increase of 16 per cent compared with the same quarter in the prior year. According to third party market data, Voila's national market share within the e-commerce channel continues to be higher versus the same quarter in the prior year.

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.

Other items

Farm Boy -- acquisition of remaining interest

As part of the Farm Boy acquisition, members of the Farm Boy senior management team (the stakeholders) retained a 12-per-cent interest in Farm Boy, resulting in a non-controlling interest. The parties entered into put and call options such that the stakeholders could put, and Sobeys could call, the remaining 12 per cent at any time after five years following the acquisition date. Since the date of acquisition, the company recorded a financial put liability based on the present value of the amount payable on exercise of the put option in accordance with IFRS (international financial reporting standards) 9. On Jan. 6, 2024, the company received formal notice from the stakeholders exercising their put options.

Subsequent to the quarter ended Feb. 3, 2024, the company acquired the remaining 12-per-cent non-controlling interest in Farm Boy for $77.1-million and the put option liability was settled in cash. Farm Boy's key management team will remain unchanged following this transaction.

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 B.C. Safeway unionized employees. Employee buyouts provide flexibility and stability for the company to better manage labour and operational costs. During the quarter ended Feb. 3, 2024, the company initiated the buyout process, and has offered the impacted employees the ability to elect to accept the buyout packages. As a result, the company expensed $3.8-million in the quarter ended Feb. 3, 2024, and expects to record additional amounts of $5.6-million in the fourth quarter of fiscal 2024.

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. The strike ended on Jan. 13, 2024, after an agreement was reached. The impact of the strike on net earnings for the quarter ended Feb. 3, 2024, was not material.

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.

The company entered into an agreement to purchase a parcel of land for approximately $110-million, subject to the company completing due diligence procedures. If successful, the transaction is expected to close in the fourth quarter of fiscal 2024 and will increase the expected fiscal 2024 capital spend from $775-million to $885-million. The land is being acquired for a potential future development.

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 industry continues to experience heightened levels of inflationary pressures, particularly related to cost of goods sold. During the quarter ended Feb. 3, 2024, the company continued to comply with the federal government's request to identify ways to help further stabilize prices for consumers. 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 quarter ended Feb. 3, 2024, the company's internal food inflation continued to be slightly below the reported consumer price index for food purchased from stores of 4.2 per cent (2023- -- 11.3 per cent).

The company continues to be well positioned to pursue long-term growth despite the impacts of global economic uncertainties. Same-store sales will fluctuate over the short term, given the negative sales impact in the prior year related to the cybersecurity event, and the continued impacts of inflation and interest rates on consumer behaviour and its effect on current-year sales.

Dividend declaration

The board of directors declared a quarterly dividend of 18.25 cents per share on both the Class A shares and the Class B common shares that will be payable on April 30, 2024, to shareholders of record on April 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, March 14, 2024, beginning at 12 p.m. (Eastern Daylight Time) during which senior management will discuss the company's financial results for the third quarter of fiscal 2024. To instantly join the conference call by phone, please register yourself 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 mode only. 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 675305 followed by the pound key until midnight March 28, 2024, or on the company's website for 90 days following the conference call.

About Empire Company Ltd.

Empire Company 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 $30.7-billion in annual sales and $16.6-billion in assets, Empire and its subsidiaries, franchisees and affiliates employ approximately 131,000 people.

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