First Quarter Summary
- Same-store sales excluding fuel increased 0.5%
- Earnings per share of $0.20
- Adjusted earnings per share of $0.32 compared to $0.27 last year
- Project Sunrise transformation on track
STELLARTON, NS, Sept. 14, 2017 /CNW/ - Empire Company Limited
("Empire" or the "Company") (TSX: EMP.A) today announced its
financial results for the first quarter ended August 5, 2017. For the quarter, the
Company recorded adjusted net earnings, net of non-controlling
interest, of $87.5 million
($0.32 per diluted share) compared to
$73.6 million ($0.27 per diluted share) in the first quarter
last year, an 18.9% increase.
"We are encouraged by our first quarter results. Stabilizing
margins, good cost control, and an increase in same-store sales
combined with our important transformational work of Project
Sunrise gives us a level of optimism not seen in the business for
some time," said Michael Medline, President and CEO, Empire Company
Limited. "Having said that, we must continue the heavy lifting of
Project Sunrise, while beginning to make important strides in our
brand and customer experience. We still have a lot of work
ahead of us to thrill our customers and improve our bottom
line."
In the fourth quarter of fiscal 2017, the Company launched
Project Sunrise, a comprehensive three year transformation intended
to simplify organizational structures and reduce costs. The
transformation is expected to result in approximately $500 million in annualized cost savings by fiscal
2020 that will allow the Company to grow its earnings and re-invest
in the business, growing both its sales and earnings. In total, the
Company expects to incur approximately $200
million in one-time costs associated with severance,
relocation, consulting and minor system developments, most of which
is expected to be incurred in the first half of fiscal 2018. Please
see the "Overview of the Business" section of the Company's
Management's Discussion and Analysis ("MD&A") for further
information.
Dividend Declaration
The Board of Directors declared a quarterly dividend of
$0.1050 per share on both the
Non-Voting Class A shares and the Class B common shares that will
be payable on October 31, 2017 to
shareholders of record on October 13,
2017. These dividends are eligible dividends as defined for
the purposes of the Income Tax Act (Canada) and applicable provincial
legislation.
OPERATING RESULTS
|
13 Weeks
Ended
|
|
($)
|
($ in millions,
except per share amounts)
|
August 5,
2017
|
August 6,
2016
|
|
Change
|
Sales
|
$
|
6,273.2
|
$
|
6,186.6
|
$
|
86.6
|
Gross profit
(1)
|
|
1,531.0
|
|
1,490.8
|
|
40.2
|
EBITDA
(1)
|
|
238.8
|
|
238.3
|
|
0.5
|
Adjusted EBITDA
(1)
|
|
278.8
|
|
243.1
|
|
35.7
|
Operating
income
|
|
125.2
|
|
126.6
|
|
(1.4)
|
Finance costs,
net
|
|
28.7
|
|
31.2
|
|
(2.5)
|
Income tax
expense
|
|
30.1
|
|
17.8
|
|
12.3
|
Net earnings
(2)
|
|
54.0
|
|
65.4
|
|
(11.4)
|
Adjusted net earnings
(2)(3)
|
|
87.5
|
|
73.6
|
|
13.9
|
|
|
|
|
|
|
|
EPS (fully diluted)
(2)(3)
|
$
|
0.20
|
$
|
0.24
|
$
|
(0.04)
|
Adjusted EPS (fully
diluted) (2)(3)
|
$
|
0.32
|
$
|
0.27
|
$
|
0.05
|
|
|
|
|
|
|
|
Diluted weighted
average number of shares
outstanding (in millions)
|
|
271.6
|
|
271.7
|
|
|
|
13 Weeks
Ended
|
|
August 5,
2017
|
August 6,
2016
|
Same-store sales
(1) growth (decline)
|
0.5%
|
(1.8)%
|
Same-store sales
growth (decline), excluding fuel
|
0.5%
|
(1.2)%
|
Effective income tax
rate
|
31.2%
|
18.7%
|
(1)
|
See "Non-GAAP
Financial Measures" section of this news release.
|
(2)
|
Net of
non-controlling interest.
|
(3)
|
Earnings per share
("EPS").
|
Sales
Sales for the first quarter increased by 1.4%, as same-store
sales were higher in most areas of the country, driven by increases
in traffic, basket size and more disciplined pricing
strategies. Food inflation was positive for the quarter,
which also had a positive effect on sales.
Gross Profit
The increase in gross profit during the first quarter was a
result of an increase in same-store sales, combined with improved
store execution and promotional strategies, and a continued focus
on stabilizing margin rates. This was reflected in gross
margins that increased from 24.1% to 24.4%.
EBITDA
EBITDA increased in the first quarter of fiscal 2018 mainly as a
result of the previously mentioned factors affecting sales,
partially offset by increases in selling and administrative
expenses largely as a result of $40.0
million in one-time Project Sunrise costs. Excluding
the effects of these costs, adjusted EBITDA increased by 14.6% to
$278.8 million.
|
13 Weeks
Ended
|
($ in
millions)
|
August 5,
2017
|
August 6,
2016
|
EBITDA
|
$
|
238.8
|
$
|
238.3
|
Adjustments:
|
|
|
|
|
|
Costs related to
Project Sunrise
|
|
40.0
|
|
-
|
|
Historical
organizational realignment costs
|
|
-
|
|
2.7
|
|
Distribution centre
restructuring
|
|
-
|
|
2.1
|
|
|
|
40.0
|
|
4.8
|
Adjusted
EBITDA
|
$
|
278.8
|
$
|
243.1
|
Income Taxes
The effective income tax rate for the quarter of 31.2% was
affected by an adjustment to deferred taxes related to the
flow-through effects to the Company of the completion by Crombie
Real Estate Investment Trust ("Crombie REIT") of a tax
reorganization. Excluding this adjustment, the effective
income tax rate for the quarter would have been 26.2%. In the
prior year quarter, the effective income tax rate of 18.7% was
lower than the Company's statutory rate as properties were sold to
Crombie REIT on a tax deferred basis.
Net Earnings
Consolidated net earnings, net of non-controlling interest, in
the first quarter were primarily impacted by the reasons noted in
the sales and EBITDA sections.
|
13 Weeks
Ended
|
($ in millions,
except per share amounts)
|
August 5,
2017
|
August 6,
2016
|
Net earnings
(1)
|
$
|
54.0
|
$
|
65.4
|
EPS (fully
diluted)
|
$
|
0.20
|
$
|
0.24
|
|
|
|
|
|
Adjustments (net of
income tax):
|
|
|
|
|
|
Costs related to
Project Sunrise
|
|
28.7
|
|
-
|
|
Intangible
amortization associated with the Canada Safeway
acquisition
|
|
4.8
|
|
4.7
|
|
Historical
organizational realignment costs
|
|
-
|
|
2.0
|
|
Distribution centre
restructuring
|
|
-
|
|
1.5
|
|
|
|
33.5
|
|
8.2
|
Adjusted net earnings
(1)
|
$
|
87.5
|
$
|
73.6
|
Adjusted EPS (fully
diluted)
|
$
|
0.32
|
$
|
0.27
|
|
|
|
|
|
Diluted weighted
average number of shares outstanding (in millions)
|
|
271.6
|
|
271.7
|
(1)
|
Net of
non-controlling interest.
|
FINANCIAL PERFORMANCE BY SEGMENT
The Company operates and reports on two business segments:
- Food retailing, which consists of wholly-owned
subsidiary Sobeys Inc. ("Sobeys"), and
- Investments and other operations, which include
investments in Crombie REIT (41.5% equity accounted interest; 40.3%
fully diluted) and interests in Genstar.
FOOD RETAILING
The following table presents Sobeys' contribution to Empire, net
of consolidation adjustments, including a purchase price allocation
from the privatization of Sobeys.
|
13 Weeks
Ended
|
($)
|
($ in
millions)
|
August 5,
2017
|
August 6,
2016
|
Change
|
Sales
|
$
|
6,273.2
|
$
|
6,186.6
|
$
|
86.6
|
Gross
profit
|
|
1,531.0
|
|
1,490.8
|
|
40.2
|
EBITDA
|
|
224.9
|
|
223.4
|
|
1.5
|
Adjusted
EBITDA
|
|
264.9
|
|
228.2
|
|
36.7
|
Operating
income
|
|
111.3
|
|
111.8
|
|
(0.5)
|
Net earnings
(1)
|
|
49.7
|
|
56.6
|
|
(6.9)
|
Adjusted net earnings
(1)
|
|
83.2
|
|
64.8
|
|
18.4
|
(1)
|
Net of
non-controlling interest.
|
INVESTMENTS AND OTHER OPERATIONS
The table below presents investments and other operations'
contribution to Empire's operating income.
|
13 Weeks
Ended
|
($)
|
($ in
millions)
|
August 5,
2017
|
August 6,
2016
|
Change
|
Crombie
REIT
|
$
|
8.4
|
$
|
11.2
|
$
|
(2.8)
|
Real estate
partnerships (Genstar)
|
|
4.1
|
|
5.7
|
|
(1.6)
|
Other operations, net
of corporate expenses
|
|
1.4
|
|
(2.1)
|
|
3.5
|
|
$
|
13.9
|
$
|
14.8
|
$
|
(0.9)
|
Crombie REIT's contribution to Empire decreased for the quarter
principally due to increased costs related to acquisition activity
by Crombie REIT. Genstar's contribution to Empire was lower
than last year due to fewer lot sales in the first
quarter. These decreases were partially offset by an increase
in income from other operations as a result of losses incurred on
sales of properties in the prior year.
CONSOLIDATED FINANCIAL CONDITION
($ in millions,
except per share
and ratio calculations)
|
August 5,
2017
|
May 6,
2017
|
August 6, 2016
(1)
|
Shareholders'
equity, net of non-controlling
interest
|
$
|
3,683.5
|
$
|
3,644.2
|
$
|
3,664.7
|
Book value per common
share (2)
|
$
|
13.57
|
$
|
13.41
|
$
|
13.49
|
Long-term debt,
including current portion
|
$
|
1,818.3
|
$
|
1,870.8
|
$
|
1,936.9
|
Funded debt to total
capital (2)
|
|
33.0%
|
|
33.9%
|
|
34.6%
|
Net funded debt to
net total capital (2)
|
|
30.1%
|
|
31.3%
|
|
31.1%
|
Funded debt to
adjusted EBITDA (2)(3)
|
|
2.2x
|
|
2.3x
|
|
1.8x
|
Adjusted EBITDA to
interest expense (2)(4)
|
|
8.1x
|
|
7.7x
|
|
9.6x
|
Trailing four-quarter
adjusted EBITDA
|
$
|
832.6
|
$
|
796.9
|
$
|
1,079.3
|
Trailing four-quarter
interest expense
|
$
|
102.7
|
$
|
103.1
|
$
|
112.3
|
Current assets to
current liabilities
|
|
0.9x
|
|
0.9x
|
|
0.9x
|
Total
assets
|
$
|
8,688.8
|
$
|
8,695.5
|
$
|
8,879.0
|
Total non-current
financial liabilities
|
$
|
2,455.7
|
$
|
2,502.1
|
$
|
2,663.8
|
(1)
|
Amounts have been
reclassified to correspond to the current period presentation on
the condensed consolidated balance sheets.
|
(2)
|
See "Non-GAAP
Financial Measures" section of this news release.
|
(3)
|
Calculation uses
trailing four-quarter adjusted EBITDA.
|
(4)
|
Calculation uses
trailing four-quarter adjusted EBITDA and interest
expense.
|
Free Cash Flow
Free cash flow (1) is used to measure the change in
the Company's cash available for debt repayment, dividend payments
and other investing and financing activities.
|
13 Weeks
Ended
|
($ in
millions)
|
August 5,
2017
|
August 6,
2016
|
Cash flows from
operating activities
|
$
|
175.5
|
$
|
239.3
|
Add: proceeds on
disposal of property, equipment and investment property
|
|
5.7
|
|
342.6
|
Less: property,
equipment and investment property purchases
|
|
(61.5)
|
|
(126.3)
|
Free cash
flow
|
$
|
119.7
|
$
|
455.6
|
(1)
|
See "Non-GAAP
Financial Measures" section of this news release.
|
The decrease in free cash flow for the 13 weeks ended
August 5, 2017 compared to the 13
weeks ended August 6, 2016, was
mainly due to the sale leaseback agreement entered into with
Crombie REIT in the prior year, combined with decreased cash flows
from operating activities, offset by a decrease in capital
purchases. From an operating activities perspective, although
earnings improved from last year, working capital had a large
accounts payable increase in the prior year causing a deviation on
a comparable basis.
OTHER SIGNIFICANT ITEM
Minimum Wage Increases
The Company estimates the unmitigated financial impact of the
proposed minimum wage increases in Ontario and Alberta could be up to approximately
$25 million in fiscal 2018 and
$70 million in fiscal 2019. These
estimates represent only the wage increase for people in the
business earning less than the anticipated new wage rates, and do
not assume any changes in the compensation of other wage bands.
The Company has developed plans to mitigate the immediate impact
of the proposed minimum wage increases in fiscal 2018 that are
above and beyond the anticipated Project Sunrise savings and
continues to develop further plans to mitigate the proposed minimum
wage increase in fiscal 2019.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements which are
presented for the purpose of assisting the reader to contextualize
the Company's financial position and understand management's
expectations regarding the Company's strategic priorities,
objectives and plans. These forward-looking statements may
not be appropriate for other purposes. Forward-looking
statements are identified by words or phrases such as
"anticipates", "expects", "believes", "estimates", "intends",
"could", "may", "plans", "predicts", "projects", "will", "would",
"foresees" and other similar expressions or the negative of these
terms.
These forward-looking statements include, but are not limited
to, the following items:
- The Company's expectations regarding the impact of Project
Sunrise, including expected cost savings and efficiencies resulting
from this transformation initiative, and the expected timing and
amount of one-time costs, which could be impacted by several
factors, including the time required by the Company to complete the
project as well as the factors identified under the heading "Risk
Management" in the fiscal 2017 annual MD&A; and
- The Company's expectations regarding the impact of proposed
minimum wage increases in Ontario
and Alberta, and the Company's
ability to mitigate the financial impact of these increases which
may be impacted by the Company's mitigation efforts and factors
described under the heading "Minimum Wage Increases".
By its nature, forward-looking information requires the Company
to make assumptions and is subject to inherent risks, uncertainties
and other factors which may cause actual results to differ
materially from forward-looking statements made. For more
information on risks, uncertainties and assumptions that may impact
the Company's forward-looking statements, please refer to the
Company's materials filed with the Canadian securities regulatory
authorities, including the "Risk Management" section of the
Company's Annual Information Form and Annual MD&A.
Although the Company believes the predictions, forecasts,
expectations or conclusions reflected in the forward-looking
information are reasonable, it can provide no assurance that such
matters will prove correct. Readers are urged to consider the
risks, uncertainties and assumptions carefully in evaluating
forward-looking information and are cautioned not to place undue
reliance on such forward-looking information. The forward-looking
information in this document reflects the Company's current
expectations and is subject to change. The Company does not
undertake to update any forward-looking statements that may be made
by or on behalf of the Company other than as required by applicable
securities laws.
NON-GAAP FINANCIAL MEASURES
There are measures included in this news release that do not
have a standardized meaning under generally accepted accounting
principles ("GAAP") and therefore may not be comparable to
similarly titled measures presented by other publicly traded
companies. The Company includes these measures because it
believes certain investors use these measures as a means of
assessing financial performance.
Empire's definition of the non-GAAP terms are as follows:
- Same-store sales are sales from stores in the same location in
both reporting periods.
- Gross profit is calculated as sales less cost of sales.
- Gross margin is gross profit divided by sales.
- Earnings before interest, taxes, depreciation and amortization
("EBITDA") is calculated as net earnings before finance costs (net
of finance income), income tax expense, and depreciation and
amortization of intangibles.
- Adjusted EBITDA is EBITDA excluding certain items to better
analyze trends in performance. These adjustments result in a truer
economic representation on a comparative basis. The Company no
longer adjusts for items that are insignificant to current period
results or the comparative period.
- Interest expense is calculated as interest expense on financial
liabilities measured at amortized cost plus losses on cash flow
hedges reclassified from other comprehensive income or loss.
- Adjusted net earnings are net earnings, net of non-controlling
interest, excluding certain items to better analyze trends in
performance and financial results. These adjustments result in a
truer economic representation of the underlying business on a
comparative basis. The Company no longer adjusts for items that are
insignificant to current period results or the comparative
period.
- Free cash flow is calculated as cash flows from operating
activities, plus proceeds on disposal of property, equipment and
investment property, less property, equipment and investment
property purchases.
- Funded debt is all interest bearing debt, which includes bank
loans, bankers' acceptances and long-term debt.
- Net funded debt is calculated as funded debt less cash and cash
equivalents.
- Total capital is calculated as funded debt plus shareholders'
equity, net of non-controlling interest.
- Net total capital is total capital less cash and cash
equivalents.
- Funded debt to total capital ratio is funded debt divided by
total capital.
- Net funded debt to net total capital ratio is net funded debt
divided by net total capital.
- Funded debt to adjusted EBITDA ratio is funded debt divided by
trailing four-quarter adjusted EBITDA.
- Adjusted EBITDA to interest expense ratio is trailing
four-quarter adjusted EBITDA divided by trailing four-quarter
interest expense.
- Book value per common share is shareholders' equity, net of
non-controlling interest, divided by total common shares
outstanding.
For a more complete description of Empire's non-GAAP terms,
please see Empire's MD&A for the fiscal year ended May 6, 2017.
CONFERENCE CALL INFORMATION
The Company will hold an analyst call on Thursday, September 14, 2017 beginning at
8:30 a.m. (Eastern Daylight Time)
during which senior management will discuss the Company's financial
results for the first quarter of fiscal 2018. To join this
conference call, dial (888) 231-8191 outside the Toronto area or (647) 427-7450 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 Company's website located at
www.empireco.ca.
Replay will be available by dialing (855) 859-2056 and entering
passcode 77932482 until midnight September
21, 2017, or on the Company's website for 90 days following
the conference call.
ABOUT EMPIRE
Empire Company Limited (TSX: EMP.A) is a Canadian company
headquartered in Stellarton, Nova
Scotia. Empire's key businesses are food retailing and related
real estate. With approximately $23.9
billion in annualized sales and $8.7
billion in assets, Empire and its subsidiaries, franchisees
and affiliates employ approximately 125,000 people.
Additional financial information relating to Empire, including
the Company's Annual Information Form, can be found on the
Company's website at www.empireco.ca or on SEDAR at
www.sedar.com.
SOURCE Empire Company Limited