Is the pandemic fuelling Empire Co?…

Empire Company is a leading Canadian food retailing and real estate company. The company operates under retail banners that include Sobeys, Safeway, IGA, Foodland, FreshCo, Thrifty Foods, and Farm Boy. Empire Company has a 41.5% equity interest in Crombie REIT and equity interest in residential real estate through Genstar.

Its portfolio of properties consists of high-quality grocery and drug store anchored shopping centers, freestanding stores, and mixed-use developments primarily in Canada’s major urban and suburban markets. In addition, the company also operates a pharmacy business with free-standing locations through Lawton’s Drug Stores. Empire Company owns and operates fuel and convenience stores, and liquor operations.

Empire’s reportable segments are food retailing (Sobeys Inc.), and investments and other operations. The food retailing segment is carried out through Sobeys, which is the larger segment accounting for nearly 85% of the operating income. Sobeys is one of the only two national grocery retailers in Canada, serving millions of Canadians through more than 1,500 retail stores and 350 retail fuel locations, operating in all ten provinces and in more than 900 communities across Canada.

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Investment Data

Revenue Growth & Market Exposure

With more than a century’s experience under its belt, Empire Company has built a strong reputation as Canada’s most trusted grocer. Customers prefer the Empire brand for its fresh and quality products. The company continues to benefit from its strategic acquisitions such as FreshCo, Farm Boy, and Voila.

Within two years since the acquisition, Empire now has 42 confirmed Farm Boy locations in Ontario and is on track to open eight new Farm Boy stores and 10-15 FreshCo stores in FY 2021. The company along with an alliance with Ocado had launched a central pickup, home-delivery online grocery shopping business, Voila, and is establishing four customer fulfillment centers across Canada which will be targeted towards serving ~75% of Canadian households representing ~90% of Canadians’ e-commerce spend.

Empire is improving its private label business through the rebranding of the entire complement portfolio. The company is working towards gaining efficiency and intends to simplify the organizational structure and reduce costs. Empire Company is also pursuing data analytics and artificial intelligence to drive smarter merchandising decisions and more relevant customer communications. Given its strong national reputation, and a century’s old existence, Empire Company is in a good position to meet the evolving needs of its customers due to the current high demand for online grocery. 

Customers’ shopping behavior has changed and shifted more towards online grocery. As a result, Empire Company registered a 315% growth in e-commerce sales in the third quarter of 2021. The company also reported a more than 9% increase in sales driven by market share gains in the Food retailing segment, and the expansion of FreshCo in Western Canada and Farm Boy in Ontario. Empire, however, witnessed lower fuel sales as a result of COVID-19 and temporary store closures in Western Canada pending conversion to FreshCo.

Dividends

Empire Company is experiencing consistent cash flow generation, on the back of a strong top line, margin improvement, and successful capturing of Project Sunrise’s benefits. Empire Company is a dividend aristocrat and has been raising its dividends handsomely over the last 25 years.

It last raised its dividend by 8% and has grown them at a 6.5% CAGR over the last decade. It currently has a dividend yield of 1.4% and a very reasonable payout ratio of 20%. Empire repurchased shares worth $100 million so far. The company has announced its intention to continue share repurchases in the future as well.

Empire’s cash flows are very safe. Empire’s food retail stores such as Sobeys’, FreshCo, Safeway, IGA, are well known across Canada. A large majority of Sobeys’ sales are generated from food products which are necessary products and hence recession-proof. Its Lawton Drugs store is also a critical business. Moreover, Empire’s stake in Crombie REIT also diversifies its earnings. 

Empire Company’s strategic acquisitions should prove to be incremental to the company’s earnings. In addition, its Sunrise project also contributed to improved efficiency and cost competitiveness over the past three years. The company is also making good progress on its Project Horizon which is a new three-year growth strategy program targeting to generate an EPS growth of at least 15% CAGR over the three years and an incremental $500 million in annualized EBITDA by FY2023.

Empire expects to incur ~$15-$20 million in SG&A expenses, in the upcoming quarter on COVID-19 related costs. Empire has also forecasted increased marketing costs. Capital spending is expected to be between $650-$675 million, in FY2021, with ~50% being directed towards renovations and new stores. Empire plans to renovate ~30% of its store network. Rising demand for food and medicines should act as a tailwind for this Canadian Dividend Aristocrat.

Competition

Empire’s food retailing business, Sobeys, competes with other national and regional food distribution companies, non-traditional competitors, and online retailers. The company is expanding online shopping as well as delivery options as it faces acute pressure from online grocery stores. On the conventional front, Empire competes with Metro Inc, a leading food and pharmaceutical Canadian company, and Loblaw Companies which is another leading grocery chain in Canada. Empire’s real estate operations compete with numerous other managers and owners of real estate properties.

Bottom Line

Empire Company has a strong national presence in the Canadian retail food and food distribution industry. As one of the largest food retailers in Canada, Empire Company was amongst the leading beneficiaries of the COVID-19 pandemic. As the consumer buying pattern evolves during COVID-19, and new lockdown restrictions being imposed by certain provincial governments, the company expects the shift from restaurants and hospitality businesses will remain in grocery stores.

Empire is renovating its stores, making strategic acquisitions, working towards achieving annualized savings, and becoming more customer-centric to adjust to the new normal. Growing dividends, recession-proof business model, established market share position and strong geographic diversification should support future dividend hikes by the company.