Empire says healthier food offering and Safeway deal will keep it competitive

STELLARTON, N.S. - The parent company of Sobeys Inc.'s said Thursday that a focus on fresh and healthy food and the acquisition of Canada Safeway will keep the grocery chain competitive in an increasingly cutthroat environment.

Empire Company Ltd. (TSX: EMP.A) said that while the industry remained "very competitive" in the second quarter, depressing overall gross margin, the impact on adjusted earnings was largely offset by operating cost controls.

"The Canada Safeway acquisition, together with ongoing improvement to our store environment, our offering and our focus on executing our sales and productivity initiatives positions us well for sustainable and profitable growth," chief executive Marc Poulin said in a conference call with analysts to discuss the company's second-quarter results.

But he also warned that upcoming results will still feel the impact of costs associated with the integration of Canada Safeway.

"You've got to take this overall as part of an overall commitment to deliver on the synergies we've identified through the acquisition," Poulin said.

"They do come with initial cost and therefore, I think you can fully anticipate that in Q3 and even Q4 and Q1 next year, you will see a series of one-time costs associated with the restructuring of the business in order to deliver those synergies that will bring the company in a much better place in the long term."

Nova Scotia-based Empire posted an increase in profits for the quarter, but said net earnings contributed by Sobeys declined to $56.3 million from $83.4 million in the second quarter of last year due to lower gross profit and transaction and finance costs related to Empire's acquisition of Canada Safeway.

The grocery business has become increasingly competitive amid consolidation and price wars as giants like Loblaws (TSX:L), pit themselves against Sobeys and Metro (TSX:MRU), as well as U.S. retailers such as Walmart, Target and Costco.

Consolidation is seen as a move by Canadian grocers to lower overall costs and increase buying power with manufacturers.

Shortly after Sobeys announced its plan to buy the Canadian assets of U.S. grocer Safeway for $5.8 billion this summer, Loblaw acquired Shoppers Drug Mart (TSX:SC) for $12.4 billion in cash and stock.

Even online retailer Amazon has got in on the grocery pace, announcing last month that it will be delivering food directly to Canadians' doorsteps.

Empire said the integration of Safeway was going well, adding that "employee morale is high,"

"We are also advancing our business and improving our overall customer value proposition through our better food for all movement," the company said.

Sobeys launched a new line of products in November, developed with celebrity chef Jamie Oliver, who is also acting as a spokesperson for the grocer.

The Nova Scotia-based company said Thursday its second-quarter profit rose to $169.2 million from $91.9 million a year ago.

The consolidated net earnings, which included earnings from discontinued operations, equalled $2.48 per diluted share and compared with $1.35 per diluted share in the second quarter last year.

However, adjusted net earnings from continuing operations were $78.1 million or $1.15 per diluted share, compared with $82.7 million or $1.21 per diluted share in the year-ago period. Sales rose to $4.43 billion for the quarter ended Nov. 2, from $4.35 billion.

Sobeys reported sales of $4.42 billion, an increase of $86.4 million or two per cent from $4.33 billion.

Before the end of the quarter, Empire completed the sale of 46 movie theatres to Cineplex Inc. and Landmark Cinemas by its Empire Theatres division, a deal that had been announced in June.

Note to readers: CORRECTS previous year's sales figure to $4.35 billion