Empire Company Reports Fiscal 2016 First Quarter Results

STELLARTON, NS, Sept. 9, 2015 /CNW/ - Empire Company Limited ("Empire" or the "Company") (TSX: EMP.A) today announced financial results for its first quarter ended August 1, 2015. In the first quarter, the Company recorded adjusted net earnings, net of non-controlling interest, of $121.7 million ($1.32 per diluted share) compared to $129.1 million ($1.40 per diluted share) in the first quarter last year, a 5.7 percent decrease.

First Quarter Highlights

• Sales of $6,249.2 million, up $26.5 million or 0.4 percent.
• Sobeys' same-store sales ⁽¹⁾ excluding fuel sales increased 1.2 percent. Including fuel sales, same-store sales increased 0.5 percent.
• EBITDA ⁽¹⁾ of $314.1 million compared to $342.5 million last year, down $28.4 million or 8.3 percent.
• Adjusted EBITDA ⁽¹⁾ of $325.2 million compared to $342.5 million last year, down $17.3 million or 5.1 percent.
• Net earnings, net of non-controlling interest, of $108.8 million compared to $123.1 million last year, a decrease of $14.3 million or 11.6 percent.
• Adjusted net earnings ⁽¹⁾, net of non-controlling interest, of $121.7 million compared to $129.1 million last year, a $7.4 million or 5.7 percent decrease.
• Adjusted EPS ⁽²⁾ (fully diluted) of $1.32 compared to $1.40 last year, a 5.7 percent decrease.
• Free cash flow ⁽¹⁾ generation of $216.8 million compared to $391.3 million last year.
• Funded debt to total capital ⁽¹⁾ ratio of 27.2 percent versus 27.7 percent at May 2, 2015.

"Clearly there has been a significant amount of change in our Safeway business as we focus on the integration," said Marc Poulin, President and CEO, Empire Company Limited. "Although we had identified the various risks associated with integration, including the amount and pace of change required, we underestimated the impact and the time needed for the organization to adapt to those changes. This had a clear and negative impact on our first quarter results. We have identified the core issues and allocated the necessary resources to ensure we bring our performance back in line with our expectations in the coming quarters and we remain confident in our ability to achieve or exceed our three-year synergy run-rate target of $200 million.

In what remains a very competitive retail food environment, the rest of our business performed to our expectations driven by the ongoing roll out of our Better Food for All strategy which continues to resonate with more consumers."

Dividend Declaration

The Board of Directors declared a quarterly dividend of $0.30 per share (pre-split) on both the Non-Voting Class A shares and the Class B common shares that will be payable on October 30, 2015 to shareholders of record on October 15, 2015. These dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation and, therefore, qualify for the favourable tax treatment applicable to such dividends.

Sales

All sales are generated by the food retailing segment.

Consolidated sales for the 13 weeks ended August 1, 2015 were $6,249.2 million compared to $6,222.7 million in the first quarter last year, an increase of $26.5 million or 0.4 percent. The increase in sales was primarily the result of food inflation, and the Co-op Atlantic acquisition and the associated long-term supply and franchise agreements. This increase was partially offset by: (i) store closures associated with the network rationalization; (ii) the lost wholesale food volumes resulting from the loss of wholesale customers; (iii) the decline in oil prices impacting fuel sales; (iv) retail store divestitures occurring during the first quarter of fiscal 2015; and (v) the economic downturn in areas that have been impacted by decreasing oil prices.

During the first quarter of fiscal 2016, Sobeys' same-store sales increased 0.5 percent from the same period last year. Excluding the negative impact of fuel sales, due to downward pressure on oil prices, same-store sales would have increased by 1.2 percent.

EBITDA

Consolidated EBITDA in the first quarter was $314.1 million compared to $342.5 million in the first quarter last year, a $28.4 million or 8.3 percent decrease. EBITDA margin decreased 50 basis points to 5.0 percent in the first quarter of fiscal 2016 from 5.5 percent in the same period last year. The decrease in EBITDA was mainly the result of: (i) a decrease in gross profit in the food retailing segment; (ii) organizational realignment costs; and (iii) distribution centre restructuring costs. This decrease was partially offset by reductions realized in selling and administrative expenses.

The following table adjusts EBITDA for items which are considered not indicative of underlying business operating performance and presents adjusted EBITDA margin for the 13 weeks ended August 1, 2015 compared to the 13 weeks ended August 2, 2014.

Operating Income

Consolidated operating income in the first quarter was $195.5 million, a decrease of $23.9 million or 10.9 percent from the $219.4 million recorded in the first quarter last year. Operating income decreased primarily due to the factors noted in the sales and EBITDA sections above.

Finance Costs

Finance costs, net of finance income, for the 13 weeks ended August 1, 2015 were $32.9 million, a decrease of $10.7 million from the $43.6 million recorded in the same period last year. This decrease is mainly due to the debt repayments in fiscal 2015.

Income Taxes

The Company's effective income tax rate for the first quarter of fiscal 2016 was 26.8 percent compared to 25.3 percent for the first quarter of fiscal 2015. The increase in the effective tax rate is primarily attributed to partial non-taxable proceeds on the disposition of certain stores in the same period last year.

Net Earnings

Consolidated net earnings, net of non-controlling interest, in the first quarter equaled $108.8 million ($1.18 per diluted share) compared to $123.1 million ($1.33 per diluted share) in the first quarter last year. 

The following table adjusts net earnings, net of non-controlling interest, for items which are considered not indicative of underlying business operating performance.

FINANCIAL PERFORMANCE BY SEGMENT

The Company operates and reports on two business segments:

1) Food Retailing, which consists of wholly-owned subsidiary Sobeys Inc. ("Sobeys"), and

2)Investments and Other Operations, which as of August 1, 2015 included investments in Crombie Real Estate Investment Trust ("Crombie REIT") (41.5 percent equity accounted interest; 40.2 percent fully diluted) and interests in Genstar.

FOOD RETAILING

The following table presents Sobeys' contribution to Empire's consolidated sales, gross profit, EBITDA, adjusted EBITDA, operating income, net earnings, net of non-controlling interest, and adjusted net earnings, net of non-controlling interest.

Sales

Sobeys reported sales of $6,249.2 million for the 13 weeks ended August 1, 2015, an increase of $26.5 million or 0.4 percent from $6,222.7 million reported in the same quarter last year.  The increase in sales was primarily the result of food inflation, and the Co-op Atlantic acquisition and the associated long-term supply and franchise agreements. This increase was partially offset by: (i) store closures associated with the network rationalization; (ii) the lost wholesale food volumes resulting from the loss of wholesale customers; (iii) the decline in oil prices impacting fuel sales; (iv) retail store divestitures occurring during the first quarter of fiscal 2015; and (v) the economic downturn in areas that have been impacted by decreasing oil prices.

During the first quarter of fiscal 2016, Sobeys' same-store sales increased 0.5 percent from the same period last year. Excluding the negative impact of fuel sales, due to downward pressure on oil prices, same-store sales would have increased by 1.2 percent.

Gross Profit    

For the first quarter of fiscal 2016, Sobeys' gross profit was $1,516.0 million, a decrease of $29.9 million or 1.9 percent compared to $1,545.9 million for the same period last year. For the first quarter of fiscal 2016, gross margin decreased 50 basis points to 24.3 percent compared to 24.8 percent in the same period last year. 

The decrease in gross margin during the quarter was a result of the learning curve and associated time needed for the organization to adapt to the significant changes from the technical integration of the Safeway operations. Significant organizational, training, and education gaps related to the IT system, process integration and reorganizational changes have been identified and are being aggressively addressed. It is expected these challenges will be mitigated over the coming quarters and remedied by the end of fiscal 2016.

In addition, gross profit and gross margin continued to be impacted during the 13 weeks ended August 1, 2015 by the factors impacting sales, as well as synergies related to Safeway, store divestitures and network rationalization.  These were offset by:  (i) continued competitive intensity; (ii) a highly promotional environment; and (iii) a weaker Canadian dollar ("CAD") relative to the United States dollar ("USD") which affected the CAD cost of USD purchases.

For the 13 weeks ended August 1, 2015, the decline in the price of oil, which had an impact on fuel sales, did not have a material impact on gross profit.

EBITDA

EBITDA contribution from Sobeys to Empire in the first quarter of fiscal 2016 was $303.1 million (4.9 percent of sales) compared to a $329.4 million (5.3 percent of sales) contribution in the same quarter last year, a decrease of $26.3 million or 8.0 percent. The decrease in EBITDA was mainly the result of:  (i) a decrease in gross profit noted above; (ii) organizational realignment costs; and (iii) distribution centre restructuring costs. This decrease was partially offset by reductions realized in selling and administrative expenses.

The following table adjusts EBITDA for items which are considered not indicative of underlying business operating performance and presents adjusted EBITDA margin for the 13 weeks ended August 1, 2015 compared to the 13 weeks ended August 2, 2014.

Operating Income

Sobeys' operating income contribution to Empire in the first quarter was $184.6 million compared to $206.2 million in the first quarter last year, a decrease of $21.6 million or 10.5 percent.  Operating income decreased primarily due to the factors noted in the gross profit and EBITDA sections above.

Net Earnings

Sobeys contributed net earnings, net of non-controlling interest, to Empire in the first quarter of $101.4 million compared to $113.5 million in the same period last year, a decrease of $12.1 million. This decrease is due to the reasons noted in the sales, gross profit and EBITDA sections above. 

The table below reconciles net earnings, net of non-controlling interest, to adjusted net earnings, net of non-controlling interest, for the 13 weeks ended August 1, 2015 compared to the 13 weeks ended August 2, 2014.

INVESTMENTS AND OTHER OPERATIONS

The table below presents investments and other operations' contribution to Empire's EBITDA, operating income (loss) and net earnings.

Operating Income

Investments and other operations contributed operating income of $10.9 million in the 13 weeks ended August 1, 2015 versus $13.2 million in the same period last year, a decrease of $2.3 million. 

The contributors to operating income in the first quarter of fiscal 2016 were as follows:

• Equity accounted earnings from the Company's investment in Crombie REIT were $7.4 million in the 13 weeks ended August 1, 2015, up slightly from the $7.3 million recorded in the first quarter of fiscal 2015.
• Equity accounted earnings from the Company's investments in real estate partnerships (Genstar) were $4.9 million in the 13 weeks ended August 1, 2015, a decrease of $3.1 million compared to $8.0 million recorded in the same period last year primarily as a result of fewer lot sales.
• Other operations, net of corporate expenses, contributed operating loss of $1.4 million in the first quarter of fiscal 2016, an improvement of $0.7 million from the $2.1 million recorded in the same quarter last year.

Net Earnings

Investments and other operations contributed $7.4 million to Empire's consolidated net earnings in the first quarter of fiscal 2016 compared to $9.6 million in the same period last year.  The $2.2 million decline is primarily attributed to a decline in Genstar's net earnings contribution as a result of fewer lot sales.

CONSOLIDATED FINANCIAL CONDITION

The financial condition measures are presented in the table below.

The ratio of funded debt to total capital decreased 0.5 percentage points to 27.2 percent at August 1, 2015 from 27.7 percent at May 2, 2015.

Shareholders' equity, net of non-controlling interest, increased $302.8 million or 5.2 percent over the first quarter last year to $6,078.1 million.  Book value per common share increased to $65.82 at August 1, 2015 versus $62.56 at August 2, 2014.

Free Cash Flow

Free cash flow is used to measure the change in the Company's cash available for debt repayment, dividend payments, and other investing and financing activities. The following table reconciles free cash flow to GAAP cash flows from operating activities for the 13 weeks ended August 1, 2015 and the 13 weeks ended August 2, 2014.

Free cash flow for the first quarter of fiscal 2016 was $216.8 million compared to $391.3 million in the first quarter of fiscal 2015. This decrease in free cash flow was the result of a reduction in cash flows from operating activities and a decrease in proceeds on disposal of property, equipment and investment property, primarily due to the divestiture of 11 stores during the first quarter of fiscal 2015 required as part of the Canada Safeway acquisition.

FORWARD-LOOKING INFORMATION

This news release contains forward-looking information that reflects management's current expectations related to matters such as future financial performance and operating results of the Company.  Expressions 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 are generally indicative of forward-looking statements.  Forward-looking statements contained in this news release include anticipated results from the Canada Safeway acquisition including: (i) our ability to achieve performance in line with our expectations which may be impacted by the effectiveness of the integration and training efforts; and (ii) the ultimate achievement of synergies, which may be impacted by a number of factors, including the effectiveness of integration efforts.

By its very nature, forward-looking information requires the Company to make assumptions and is subject to inherent risks and uncertainties which give rise to the possibility that the Company's expectations or objectives will not prove to be accurate.  These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.  These uncertainties and risks are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including the "Risk Management" section of the annual MD&A.

Readers are urged to consider these and other risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information.  The forward-looking information in this news release reflects the Company's expectations as at September 9, 2015 and is subject to change after this date.  The Company does not undertake to update any forward-looking statements that may be made from time to time 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 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 taxes, and depreciation and amortization of intangibles.
• EBITDA margin is EBITDA divided by sales.
• Adjusted EBITDA is EBITDA excluding items which are considered not indicative of underlying business operating performance. These adjustments include items which are non-recurring or one-time in nature and items that 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 their comparative period.
• Adjusted EBITDA margin is adjusted EBITDA divided by sales.
• 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.
• Adjusted net earnings are net earnings, net of non-controlling interest, excluding items which are considered not indicative of underlying business operating performance. These adjustments include items which are non-recurring or one-time in nature and items that 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 their comparative period.
• 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 EBITDA ratio is funded debt divided by trailing four-quarter EBITDA.
• EBITDA to interest expense ratio is trailing four-quarter 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.
• 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.

For a more complete description of Empire's non-GAAP terms, please see Empire's MD&A for the first quarter ended August 1, 2015. 

CONFERENCE CALL INFORMATION

The Company will hold an analyst call on Thursday, September 10, 2015 beginning at 11:30 a.m. (Eastern Daylight Time) during which senior management will discuss the Company's financial results for the first quarter of fiscal 2016 ended August 1, 2015.  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 23627656 until midnight September 17, 2015, or on the Company's website for 90 days following the conference call.

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

To view and download the Company's unaudited interim condensed consolidated financial statements for the first quarter of fiscal 2016 ended August 1, 2015, please access the following link:

Q1 Fiscal 2016 Unaudited Interim Condensed Consolidated Financial Statements

This information is also available for download at www.sedar.com or by accessing the Investor Centre section of the Company's website at www.empireco.ca.

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 $24.0 billion in annualized sales and $11.6 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

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