Empire Company Ltd. profit rises on strength of Sobeys grocery chain

By Ross Marowits, The Canadian Press

MONTREAL - Empire Company Ltd. (TSX: EMP-A.TO) said its Sobeys grocery division saw increasing evidence during the summer that grocery retailers are headed towards lower prices in the coming months that will strain their ability to grow sales.

The Nova Scotia-based company said same-store sales rose by four per cent during the first quarter, reflecting growth at stores that have been open at least a year.

Half of that amount came from inflation, but price increases fell to less than one per cent by the end of July, with some regions of the country experiencing lower prices.

"We're going from a period of high inflation a year ago to declining inflation to for all intents and purposes no inflation and possibly deflation on the way," Sobeys president and CEO Bill McEwan said during a conference call.

Several of Canada's largest grocery chains have recently pointed towards lowering prices, but Sobeys was the last to report quarterly results, providing the most up-to-date trends.

A strong summer quarter boosted Empire's first-quarter profit to $89.7 million despite challenges facing its real estate operations.

The company said Friday it earned $1.31 per share in the fiscal first quarter ended Aug. 1, up from $75.7 million or $1.15 per share a year earlier.

Excluding capital gains and other items, net income was $72.2 million or $1.05 per share, up from $70.9 million or $1.08 per share a year ago.

The company attributed the higher earnings to an 18.6 per cent increase in profit at Sobeys, the national grocery chain that is its main business. The grocery division's operating income was $121.6 million, up $15.3 million, or 14.4 per cent.

Empire's overall revenue rose five per cent to $3.97 billion, an increase of $190.3 million from a year ago. The grocery division accounted for almost all of the revenue, with only $62 million from real-estate and investment activities.

Empire president and CEO Paul Sobey said the results were consistent with its expectations, driven by strong results at Sobeys and anticipated declines in real estate due to the cyclical nature of these businesses, especially in western Canada.

Real estate revenues fell more than 39 per cent to $15.1 million, while segment operating income decreased by more than half to $9.7 million.

"We're off to a good start in fiscal 2010 and going forward our three priorities have not changed," he told analysts. "We remain committed to investing in businesses that we know and understand."

The company is revamping its private label products by repackaging its Complements brand, expanding its premium Sensations line and introducing a new Signal label.

Analyst David Hartley of BMO Capital Markets Overall said the quarter was marked by no big surprises, although grocery earnings were better than expected and real estate contributions were a little worse than predicted.

"The company is clearly managing well through this downturn based on its sales," he said.

Hartley said the Maritimes-based company and Quebec-based rival Metro Inc. (TSX: MRU-A.TO) are both thriving partly because market leader Loblaw (TSX: L.TO) isn't the mighty competitor it once was.

"It makes it a little easier when the giant is sitting on the sidelines nursing its wounds going forward here that may change and that's where I think investors should exercise some caution with non-Loblaw stocks in the sector."

But Hartley warned the situation could change as Loblaw is working hard to restore its margins to traditional levels and Wal-Mart may expand its grocery presence.

On the Toronto Stock Exchange, Empire's shares closed at $42.79, up $1.04 or 2.49 per cent.