Empire Reports Fourth Quarter and Fiscal 2023 Results

• Earnings per share ("EPS") and adjusted EPS⁽¹⁾ of $0.72
• Prior year EPS and adjusted EPS of $0.68
• Same-store sales, excluding fuel, increased by 2.6%
• Gross margin, excluding fuel, increased by 58 bps
• Project Horizon successfully completed; added an incremental $500 million in annualized EBITDA
• Repurchased 9.4 million shares ($350 million) in fiscal 2023, an increase of 48% over fiscal 2022
• Capital allocation outlook for fiscal 2024:
• Declared a dividend increase of 10.6%
• Renewed NCIB with the intention to repurchase $400 million of shares in fiscal 2024
• Capital investment program for fiscal 2024 expected to be approximately $775 million

STELLARTON, NS, June 22, 2023 /CNW/ - Empire Company Limited ("Empire" or the "Company") (TSX: EMP.A) today announced its financial results for the fourth quarter and full year ended May 6, 2023. For the quarter, the Company recorded net earnings of $182.9 million ($0.72 per share) compared to $178.5 million ($0.68 per share) last year. The Company is excluding the estimated direct impact of the Cybersecurity Event⁽²⁾, net of insurance recoveries and the estimated one-time costs associated with the integration of Grocery Gateway into Voilà in its Adjusted Metrics⁽¹⁾. For the quarter, the Company recorded adjusted net earnings of $184.9 million ($0.72 per share) compared to $178.5 million ($0.68 per share) last year.

"With our six-year turnaround now complete, we have the tools, team, assets and capabilities needed to thrill our customers, compete and win," said Michael Medline, President & Chief Executive Officer, Empire. "Our focus going forward will be on turbocharging our business, with an even greater emphasis on our stores and supply chain, enhancing our digital capabilities and driving efficiency."

Dividend Declaration

The Company declared a quarterly dividend of $0.1825 per share on both the Non-Voting Class A shares ("Class A shares") and the Class B common shares that will be payable on July 31, 2023 to shareholders of record on July 14, 2023, which reflects an increase in the annualized dividend rate of 10.6%. These dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation.

Normal Course Issuer Bid ("NCIB")

On June 21, 2023, the Company renewed its NCIB by filing a notice of intention with the Toronto Stock Exchange ("TSX") to purchase for cancellation up to 12,600,000 Class A shares representing approximately 9.0% of the public float of 139,497,542 Class A shares as of June 19, 2023, subject to regulatory approval. As of June 19, 2023, there were 152,926,775 Class A shares issued and outstanding.

The Company intends to repurchase approximately $400.0 million of Class A shares in fiscal 2024. The purchases will be made through the facilities of the TSX and/or any alternative Canadian trading systems to the extent they are eligible. The price that Empire will pay for any shares will be the market price at the time of acquisition. The Company believes that repurchasing shares at the prevailing market prices from time to time is a worthwhile use of funds and in the best interests of Empire and its shareholders. Purchases under the renewed NCIB may commence on July 2, 2023 and shall terminate no later than July 1, 2024.

 

Based on the average daily trading volume ("ADTV") of 337,583 shares over the last six months, daily purchases will be limited to 84,395 Class A shares (25% of the ADTV of the Class A shares), other than block purchase exemptions.

The Company has also renewed its automatic share purchase plan with its designated broker allowing the purchase of Class A shares for cancellation under its NCIB during trading black-out periods, subject to regulatory approval.

Under the Company's current NCIB, that commenced on July 2, 2022 and expires on July 1, 2023, the Company received approval from the TSX to purchase up to 10,500,000 Class A shares representing approximately 7.0% of the public float of Class A shares outstanding as of June 17, 2022. As of June 19, 2023, the Company has purchased 10,464,644 shares through the facilities of the TSX at a weighted average price of $36.18 for a total consideration of $378.6 million under the NCIB that commenced July 2, 2022 and expires on July 1, 2023.

Shares purchased during the quarter and year-to-date ended May 6, 2023 compared to the same periods of the previous fiscal year are shown in the table below:

 

PROJECT HORIZON

The Company successfully completed its three-year growth strategy, Project Horizon, at the end of fiscal 2023. As part of this strategy, the Company realized significant benefits from the store renovation program, new store expansion (including FreshCo conversions and Farm Boy expansion), promotional optimization and data analytics, Scene+ (a new loyalty program), personalization of customer offers, growing and enhancing the Own Brand portfolio, and generating strategic sourcing cost efficiencies. The Company achieved management's target of an incremental $500 million in annualized EBITDA.

Project Horizon initiatives will continue to provide benefits in fiscal 2024 and beyond, including Scene+, personalization and a continued emphasis on developing the store network through renovations and new store expansion.

Over Project Horizon's three-year timeframe, the Company achieved a compound annual growth rate ("CAGR") in EPS of approximately 13% and an increase in EBITDA margin of approximately 60 basis points, consistent with management's updated expectations provided in the third quarter of fiscal 2023. Differences compared to the original Project Horizon targets of improving EBITDA margin by 100 basis points, which was expected to generate an EPS CAGR of at least 15% was largely due to delays in delivering some key initiatives as a result of the novel coronavirus ("COVID-19" or "pandemic") and the Cybersecurity Event (as defined under the heading "Business Update – Cybersecurity Event"), higher depreciation than originally anticipated resulting from higher capital spend, and the impact of significant and unexpected inflation.

The Company's calculation of the EPS CAGR and the EBITDA margin increase excludes the full impacts of the Cybersecurity Event (due to its unusual nature and the expectation that the timing of certain insurance recoveries will occur after the fiscal year end) and the one-time costs associated with the Grocery Gateway integration. See "Business Updates – Cybersecurity Event" and "Business Updates – Voilà" for more information on these adjustments.

COMPANY PRIORITIES

Over the last six years, the Company has successfully completed two transformation strategies, Project Sunrise and Project Horizon. These strategies have comprehensively reset Empire's foundation, enhanced the Company's data capabilities, deepened the understanding of customers, and prepared the business to effectively capture emerging trends. With these transformation strategies now accomplished and the turnaround complete, the Company aims to grow total adjusted EPS over the long-term through net earnings growth and share repurchases. The Company intends to continue improving sales, gross margin (excluding fuel) and adjusted EBITDA margin by focusing on priorities such as:

Continued Focus on Store:

Over recent years, the Company has accelerated investments in renovations, conversions, and new stores along with store processes, communications, training, technology and tools. Beyond fiscal 2023, investing in the store network will remain a priority, demonstrated by a sustained emphasis on renovations and continued store expansion in Discount. The Own Brands program enhancement will remain a priority through increased distribution, shelf placement and product innovation.

The Company intends to invest capital in its store network and is planning to renovate approximately 20% to 25% of the network over the next three years. This capital investment includes important sustainability initiatives such as refrigeration system upgrades, heating, ventilation and air conditioning ("HVAC") system upgrades and other energy efficiency initiatives.

Enhanced Focus on Digital and Data:

The focus on digital and data will include continued e-commerce expansion with Voilà, loyalty, through Scene+ (see "Business Updates – Voilà" and "Business Updates – Scene+" for more information), personalization, improved space productivity and the continued improvement of promotional optimization. Space productivity will further enhance the customer experience by improving store layouts, optimizing category and product adjacencies and tailoring product assortment for each store. The advanced analytics tools built for promotional optimization will continue to be refined through the partnership between the advanced analytics team and category merchants.

Efficiency and Cost Control:

The Company has significantly improved its efficiency and cost effectiveness through sourcing efficiencies, optimizing supply chain productivity and improving systems and processes. Beyond fiscal 2023, the Company will continue to focus on driving efficiency and cost effectiveness through initiatives related to strategic sourcing and supply chain productivity.

SUMMARY RESULTS – FOURTH QUARTER & FISCAL YEAR

The Company's fourth quarter and fiscal year ends on the first Saturday in May. As a result, the fourth quarter and fiscal year are usually 13 weeks and 52 weeks, respectively, but include results for an additional week every five to six years. The quarters ended May 6, 2023 and May 7, 2022 were 13 and 14 weeks respectively. The years ended May 6, 2023 and May 7, 2022 were 52 and 53 weeks, respectively. The 53rd week of operations in fiscal 2022 accounted for approximately $551.0 million in sales and generated earnings per share of approximately $0.07.

On November 4, 2022, Empire experienced IT system issues related to a Cybersecurity Event. The Company has included in its Adjusted Metrics an adjustment for direct costs such as inventory shrink, hardware and software restoration costs, legal and professional fees, and labour costs, net of insurance recoveries to date. The adjustment to net earnings for the quarter ended May 6, 2023 was a recovery of $5.0 million. The adjustment to net earnings for fiscal 2023 was ($34.1) million.

In addition, the Cybersecurity Event required certain operational systems to be shut down for several weeks. The inability to utilize these systems had a temporary negative impact on Empire's sales and operational effectiveness, further impacting third quarter and fiscal 2023 net earnings by at least ($15.0) million (($0.06) per share). There was no incremental impact in the fourth quarter.

Empire is in the process of working with its insurance providers to make claims under its policies. Due to the complexity of the cyber insurance coverage and related claims, there is a time lag between the initial incurrence of costs and the recognition of anticipated insurance proceeds.

Longo's e-commerce business, Grocery Gateway, will be merged into Voilà in July 2023. The Company has included in its Adjusted Metrics an adjustment for the costs of the integration charged to earnings in the fourth quarter of fiscal 2023 which were approximately $7.0 million, net of tax and non-controlling interest.

 

 

Sales

Sales for the quarter ended May 6, 2023 decreased by 5.5% mainly due to the additional week of operations in fiscal 2022 and lower fuel sales, offset by benefits from Project Horizon initiatives and continued strength in the Company's discount banners.

Sales for the fiscal year ended May 6, 2023 increased 1.0%, primarily driven by increased fuel sales and benefits from Project Horizon initiatives, including the expansion of FreshCo in Western Canada. This increase was partially offset by the additional week of operations in the prior year, the impact of the pandemic restrictions in place during various stages of the prior year, changing consumer purchasing behaviours as a result of higher food inflation, and the impact of the Cybersecurity Event in the current year.

Gross Profit

Gross profit for the quarter ended May 6, 2023 decreased by 2.2% mainly as a result of the additional week of operations in fiscal 2022, partially offset by benefits from Project Horizon initiatives, such as promotional optimization and the expansion of FreshCo.

Gross margin for the quarter ended May 6, 2023 increased to 26.4% from 25.6% in the prior year. Gross margin increased primarily as a result of benefits from Project Horizon initiatives, lower supply chain costs and the mix impact of lower fuel sales. Gross margin, excluding the mix impact of fuel, increased by 58 basis points.

Gross profit for the fiscal year ended May 6, 2023 increased by 1.7% primarily as a result of benefits from Project Horizon initiatives, such as the expansion of FreshCo, Voilà and Farm Boy, partially offset by the additional week of operations in fiscal 2022, the Cybersecurity Event and the change in customer purchasing behaviours.

Gross margin for the fiscal year ended May 6, 2023 increased to 25.6% from 25.4% in the prior year. Gross margin was positively impacted by benefits from Project Horizon initiatives offset by the mix impact of lower fuel sales and the Cybersecurity Event. Gross margin, excluding the mix impact of fuel, increased by 43 basis points.

Operating Income 

 

For the quarter ended May 6, 2023, operating income from the Food retailing segment decreased mainly due to higher sales and gross profit in the prior year partially offset by lower selling and administrative expenses in the current year, both resulting from the additional week of operations in the quarter ended May 7, 2022. Selling and administrative expenses decreased primarily due to one less week of operations, resulting in a reduction of retail labour costs and other variable operating expenses, as well as lower annual incentives compared to the prior year. The decrease in selling and administrative expenses was partially offset by planned investments in Project Horizon initiatives (including the expansion of Farm Boy, Voilà and FreshCo) and higher depreciation.

For the quarter ended May 6, 2023, operating income from the Investments and other operations segment increased primarily as a result of higher equity earnings from Genstar, mainly due to higher property sales compared to prior year.

For the fiscal year ended May 6, 2023, operating income from the Food retailing segment decreased mainly due to higher selling and administrative expense and a decrease in other income (driven by $47.0 million of lease terminations in the prior year), partially offset by higher sales and gross profit. Selling and administrative expenses increased primarily as a result of investments in Project Horizon initiatives (including the expansion of Voilà, Farm Boy and FreshCo) as well as higher depreciation, the Cybersecurity Event and increased project costs, partially offset by one less week of operations in the current year, resulting in a reduction of retail labour costs and other variable operating expenses.

For the fiscal year ended May 6, 2023, operating income from the Investments and other operations segment increased primarily as a result of higher equity earnings from Crombie Real Estate Investment Trust ("Crombie REIT"), mainly due to increased sales of properties, partially offset by lower equity earnings from Genstar as a result of higher property sales in the prior year. 

EBITDA

For the quarter ended May 6, 2023, EBITDA increased to $592.3 million from $586.2 million in the prior year mainly as a result of the same factors affecting operating income (which excludes the increase in depreciation and amortization). EBITDA margin increased to 8.0% from 7.5% in the prior year. Adjusted EBITDA margin increased to 8.1% from 7.5% in the prior year.

For the fiscal year ended May 6, 2023, EBITDA decreased to $2,263.0 million from $2,330.8 million in the prior year mainly as a result of the same factors affecting operating income. EBITDA margin decreased to 7.4% from 7.7% in the prior year. Adjusted EBITDA margin decreased to 7.6% from 7.7% in the prior year.

 

Income Taxes

The effective income tax rate for the quarter ended May 6, 2023 was 25.3% compared to 23.1% last year. The effective tax rate was lower than the statutory rate primarily due to the revaluation of tax estimates, not all of which are recurring. The effective tax rate in the same quarter last year was lower than the statutory rate primarily due to benefits related to investment tax credits and capital items taxed at lower rates.

The effective income tax rate for the fiscal year ended May 6, 2023 was 24.6% compared to 25.0% last year. The current year effective tax rate was lower than the statutory rate primarily due to the revaluation of tax estimates, not all of which were recurring, the benefit of consolidated structured entities and capital items that are taxed at lower rates. The effective tax rate in the prior year was lower than the statutory rate primarily due to consolidated structured entities and capital items, both of which are taxed at lower rates, and benefits related to investment tax credits.

Net Earnings

 

Capital Expenditures

The Company invested $243.1 million and $796.7 million in capital expenditures⁽¹⁾ for the quarter and fiscal year ended May 6, 2023, respectively (2022 – $273.4 million and $767.2 million) including renovations and construction of new stores, investments in advanced analytics technology and other technology systems, FreshCo stores in Western Canada and Voilà Customer Fulfilment Centres ("CFC").

For fiscal 2024, capital spend is expected to be approximately $775 million, with approximately half of this investment allocated to renovations and new store expansion, and approximately $50 million allocated toward sustainability initiatives such as refrigeration system upgrades, HVAC system upgrades and other energy efficiency initiatives. The Company is planning to renovate approximately 20% to 25% of the network over the next three years.

 

Free Cash Flow

 

Free cash flow for the quarter ended May 6, 2023 increased versus prior year primarily as a result of a decrease in payments of lease liabilities, net of payments received for finance subleases, a decrease in acquisitions of property, equipment, investment property and intangibles and an increase in cash flows from operating activities. The increase in cashflow from operating activities is driven by favourable working capital changes, partially offset by lower net earnings and higher income taxes paid.

Free cash flow for the fiscal year ended May 6, 2023 decreased versus prior year primarily as a result of a decrease in cash flows from operating activities and lower proceeds on disposal of assets and lease terminations. The decrease in cash flows from operating activities is driven by unfavourable working capital changes, higher income taxes paid and lower net earnings.

FINANCIAL PERFORMANCE BY SEGMENT

Food Retailing

 

Investments and Other Operations

 

CONSOLIDATED FINANCIAL CONDITION

 

During fiscal 2023, DBRS Morningstar ("DBRS") upgraded Sobeys' credit rating from BBB (low) to BBB and changed the trend from positive to stable while S&P Global ("S&P") remained unchanged from the prior year. The following table shows Sobeys' credit ratings as at May 6, 2023:

 

Pursuant to an agreement dated November 3, 2022, Empire amended and restated its senior, unsecured revolving term credit agreement extending the maturity date to November 4, 2027. The principal amount was reduced from $250.0 million to $150.0 million. As of May 6, 2023, the outstanding amount of this facility was $48.8 million (2022 – $47.3 million). Interest payable on this facility fluctuates with changes in the Canadian prime rate or bankers' acceptance rates.

Pursuant to an agreement dated November 3, 2022, Sobeys amended and restated its $650.0 million senior, unsecured revolving term credit agreement extending the maturity date to November 4, 2027. As of May 6, 2023, the outstanding amount of this facility was $306.9 million (2022 – $ nil) and Sobeys has issued $70.4 million in letters of credit against the facility (2022 – $75.1 million). Interest payable on this facility fluctuates with changes in the Canadian prime rate or bankers' acceptance rates.

For additional information on Empire's long-term debt, see note 15 of the Company's audited consolidated financial statements for the fiscal year ended May 6, 2023.

BUSINESS UPDATES

Cybersecurity Event

On November 4, 2022, Empire experienced IT system issues related to a cybersecurity event (the "Cybersecurity Event" or "Event"). Upon discovery, the Company immediately activated its incident response and business continuity plans, including the engagement of world-class experts, isolated the source and implemented measures to prevent further spread.

This Cybersecurity Event and the precautionary response caused some temporary challenges in the third quarter. For example, availability of some products was temporarily impacted, pharmacy services were shut down for four days while some in-store services, such as self-checkouts, gift cards and redemption of Scene+ points were impacted for approximately one week. Other than this, customers would have noticed very few changes to their normal shopping experience.

Empire's security teams, supplemented by leading cyber defense firms, worked to remediate this incident, implemented preventative measures, including proactively shutting down certain systems out of an abundance of caution, and took steps to supplement existing security monitoring, scanning and protective measures. During restoration efforts, the Company established certain workaround processes to ensure continuity of supply chain, product availability, costing and retail pricing. Empire completed its controlled and phased approach to systematically bringing information and administrative systems back online early in the fourth quarter of fiscal 2023.

The Company regards the protection of personal information as critically important and has taken all required steps with privacy regulators and potentially impacted individuals.

The Company has a multi-layered security approach involving cyber software tools, controls, policies, standards and procedures pertaining to security access, system development, change management and problem and incident management. This Cybersecurity Event has reinforced the importance of the investments already made in the cybersecurity area, as well as upcoming investments in the IT systems and people. Continuous enhancement of the Company's IT infrastructure will strengthen its defense against future such incidents.

The Company maintains a variety of insurance coverages, including cyber insurance. Empire is in the process of working with its insurance providers to make claims under its policies. Due to the complexity of the cyber insurance coverage and related claims, there is a time lag between the initial incurrence of costs and the recognition of anticipated insurance proceeds. While the operational impact of the Cybersecurity Event is behind the Company, management expects that there will be additional insurance recoveries in fiscal 2024.

The Cybersecurity Event is considered an unusual item and has been excluded from the Company's assessment of Project Horizon. For comparative purposes, the Company is presenting Adjusted Metrics to exclude certain impacts of the Cybersecurity Event. The net financial impact of incremental direct costs, inventory shrink and insurance recoveries on net earnings in the fourth quarter and fiscal year ended May 6, 2023, were $5.0 million and ($34.1 million, respectively. Please refer to the "Summary Results – Fourth Quarter and Fiscal Year" sections of this document for a more detailed discussion, including a reconciliation of these non-generally accepted accounting principles ("GAAP") financial measures.

In addition, certain financial impacts are not reflected in the Adjusted Metrics as they relate to sales declines which management considers are attributable to the Cybersecurity Event and the associated temporary decline in operational effectiveness during the Cybersecurity Event. Management estimates that the impact on net earnings in the fourth quarter was insignificant and the impact on the fiscal year ended May 6, 2023, was at least ($15) million, from impacts such as the temporary loss of advanced planning, promotion, and fresh item management tools, temporary closures of pharmacies and customers' inability to redeem gift cards and loyalty points.

Empire estimates, based on available information, that the final impact on net earnings over fiscal 2023 and fiscal 2024 will be approximately ($32.0) million, net of estimated insurance recoveries.

Scene+

In June 2022, the Company launched a new loyalty strategy through Scene+, one of Canada's leading loyalty programs. Along with Scotiabank and Cineplex, the Company is now a co-owner of Scene+. The new loyalty program was successfully launched in Atlantic Canada in August 2022, followed by Western Canada in September 2022, Ontario in November 2022 and Quebec & Thrifty Foods in March 2023.

As part of the Scene+ rollout, the Company launched its next generation recommendation engine for one-to-one, machine learning powered personalization at scale. The recommendation engine is focused on improving customer engagement and offer relevancy. The target algorithms will continue to improve over time, driving progressively better performance and results.

Farm Boy

The acquisition of Farm Boy on December 10, 2018 added 26 locations to the Company's Ontario store network. The Company expects to open an additional 22 stores in the five years following the acquisition date, mainly in the Greater Toronto Area ("GTA"). For the fiscal year, the Company opened a total of three new stores. As at June 21, 2023, Farm Boy has 47 stores operating in Ontario. In fiscal 2024, the Company expects to open two additional Farm Boy stores in Ontario.

FreshCo

In fiscal 2018, the Company announced plans to expand its FreshCo discount format to Western Canada with expectations of converting up to 25% of the 255 Safeway and Sobeys full-service format stores in Western Canada to the FreshCo banner.

Through the FreshCo expansion program, the discount business in Western Canada has been on a sharp growth trajectory, driven by store conversions and regional expansion. The value proposition, strong multicultural assortment along with the addition of the Scene+ loyalty program has supported the growth and expansion of the discount format.

As at June 21, 2023, FreshCo has 44 stores operating in Western Canada including four stores opened during fiscal 2023, in line with management's expectations. In fiscal 2024, the Company expects to open an additional three FreshCo stores in Western Canada.

Voilà

In fiscal 2021, the Company introduced its new e-commerce platform, Voilà, which is the future of online grocery home delivery in Canada. Voilà is powered by industry-leading technology provided by Ocado Group plc ("Ocado"), through its automated CFCs. The Company will operate four CFCs across Canada with supporting spokes and curbside pickup. The Company will be able to serve approximately 75% of Canadian households representing approximately 90% of Canadians' projected e-commerce spend.

The first CFC in Toronto began deliveries in June 2020. The second CFC in Montreal began deliveries in March 2022. The third CFC in Calgary which services the majority of Alberta, began deliveries on June 20, 2023. The fourth CFC in Vancouver will service customers in British Columbia ("B.C.") starting in calendar 2025. In fiscal 2021, the Company launched Voilà curbside pickup, which currently services 98 stores in locations across Canada and is also powered by Ocado technology.

Longo's e-commerce business, Grocery Gateway, will be merged into Voilà in July 2023 thereby capturing logistics and delivery synergies. Operating as a 'shop in shop' will increase the reach of Longo's within Ontario and increase Voilà's product count by approximately 2,000 Longo's products. The costs of the integration were charged to earnings in the fourth quarter of fiscal 2023 and were approximately $7.0 million, net of tax and non-controlling interest.

Voilà's future earnings will primarily be impacted by the rate of sales growth, with operational efficiencies, margins, and cost discipline serving as important drivers to manage financial performance.

In the fourth quarter of fiscal 2023, the Company's four e-commerce platforms (Voilà, Grocery Gateway, IGA.net and ThriftyFoods.com) experienced a combined sales decline of 13.5% compared to the same quarter in the prior year (excluding the additional week of operations in the prior year). The decrease is primarily driven by higher online sales in the fourth quarter of fiscal 2022 as a result of the pandemic, which had an outsized impact on the Company's non-Voilà e-commerce businesses. According to third-party market data, Voilà continues to outperform the market over the last fiscal year.

Outlook

With the Company's turnaround complete, management aims to grow total adjusted EPS over the long-term through net earnings growth and share repurchases. The Company intends to continue improving sales, gross margin (excluding fuel) and adjusted EBITDA margin by focusing on priorities such as: a continued focus on stores (investing in renovations, Discount expansion, and Own Brands program enhancement), an expanded focus on digital and data (through key strategic initiatives including Voilà, Scene+, personalization, space productivity and promotional optimization), and driving efficiency and cost effectiveness through initiatives related to strategic sourcing and supply chain.

For fiscal 2024, capital spend is expected to be approximately $775 million, with approximately half of this investment allocated to renovations and new store expansion, and approximately $50 million allocated toward sustainability initiatives such as refrigeration system upgrades, HVAC system upgrades and other energy efficiency initiatives. The Company is planning to renovate approximately 20% to 25% of the network over the next three years.

During fiscal 2024, the Company intends to purchase approximately $400 million in Class A shares under an NCIB. The Company has declared a quarterly dividend which reflects an increase in the annualized dividend rate of 10.6%, marking the 28^th consecutive year of dividend increases.

The Company continues to be well positioned to pursue growth despite the impacts of global economic uncertainties such as higher than normal inflation and supply chain challenges. The industry continues to experience heightened levels of inflationary pressures, particularly related to cost of goods sold and fuel. Although it is difficult to estimate how long these pressures will last, the Company is focused on supplier relationships and negotiations to ensure competitive pricing for customers whose shopping behaviours become more price sensitive in a heightened inflationary environment.

On December 13, 2022, the Company signed a definitive agreement between a wholly-owned subsidiary of Sobeys Inc.'s ("Sobeys") and Canadian Mobility Services Limited, a wholly-owned subsidiary of Shell Canada, to sell all 56 retail fuel sites in Western Canada for approximately $100.0 million. Closing of the transaction is subject to customary conditions, including regulatory approvals. The Company expects the transaction to close in the first half of fiscal 2024.

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 plans to purchase for cancellation Class A shares under the normal course issuer bid, which may be impacted by market and macro-economic conditions, availability of sellers, changes in laws and regulations, and the results of operations;
• The Company's aim to increase total adjusted EPS through net earnings, growth, and share repurchases, as well as its intention to continue improving sales, gross margin (excluding fuel) and adjusted EBITDA margin, all of which could be impacted by several factors including a prolonged unfavourable macro-economic environment and unforeseen business challenges, as well as the factors identified in the "Risk Management" section of the fiscal 2023 MD&A;
• The Company's plans to further grow and enhance the Own Brand portfolio, which may be impacted by future operating costs and customer response;
• The Company's plan to invest capital in its store network including store expansions and renovations and renovate approximately 20% to 25% of the network over the next three years which could be impacted by cost of materials, availability of contractors, operating results, and other macro-economic impacts;
• The Company's expectation that it will continue its e-commerce expansion with Voilà, which may be impacted by future operating and capital costs, customer response and the performance of its technology provider, Ocado;  
• The Company's expectation that it will continue to focus on driving efficiency and cost effectiveness initiatives which could be impacted by supplier relationships, labour relations, and other macro-economic impacts;
• Management's expectations regarding the scope and impact of the Cybersecurity Event, and the estimate of the impact on its financial results in 2024. These statements and expectations may be impacted by several factors including the nature, amount and timing of the insurance outcome;
• The FreshCo expansion in Western Canada and Farm Boy expansion in Ontario, including the Company's expectations regarding future operating results and profitability, the amount and timing of expenses, the projected number of store openings, and the location, feasibility and timing of construction, all of which may be impacted by construction schedules and permits, the macro-economic environment and labour relations;
• The Company's expectations regarding the amount and timing of expenses relating to the completion of any future CFC, which may be impacted by supply of materials and equipment, construction schedules and capacity of construction contractors;
• The Company's plan to integrate Voilà and Grocery Gateway may be impacted by pre-existing supplier relationships;
• The Company's expectation of the impacts of cost inflationary pressures, which may be impacted by supplier relationships and negotiations and the macro-economic environment; and
• The Company's expectations on the timing of the disposition of 56 retail fuel sites in Western Canada, which may be impacted by regulatory approval and closing conditions.

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 fiscal 2023 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 the 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 & FINANCIAL METRICS

There are measures and metrics included in this News Release that do not have a standardized meaning under GAAP and therefore may not be comparable to similarly titled measures and metrics presented by other publicly traded companies. Management believes that certain of these measures and metrics, including gross profit and EBITDA, are important indicators of the Company's ability to generate liquidity through operating cash flow to fund future working capital requirements, service outstanding debt and fund future capital expenditures and uses these metrics for these purposes.

In addition, management adjusts measures and metrics, including operating income, EBITDA and net earnings in an effort to provide investors and analysts with a more comparable year-over-year performance metric than the basic measure by excluding certain items. These items may impact the analysis of trends in performance and affect the comparability of the Company's core financial results. By excluding these items, management is not implying they are non-recurring.

The Company includes these measures and metrics because it believes certain investors use these measures and metrics as a means of assessing financial performance. Empire's definition of the non-GAAP terms included in this News Release are as follows:

• The Cybersecurity Event adjustment includes the impact of incremental direct costs such as inventory shrink, hardware and software restoration costs, legal and professional fees, labour costs and insurance recoveries. Management believes that the Cybersecurity Event adjustment results in a useful economic representation of the underlying business on a comparative basis. The adjustment does not include management's estimate of the full financial impact of the Cybersecurity Event, as it excludes the net earnings impacts related to the estimated decline in sales and operational effectiveness from impacts such as the temporary loss of advanced planning, promotion and fresh item management tools, the temporary closure of pharmacies, and customers' temporary inability to redeem gift cards and loyalty points.
• The Grocery Gateway Integration adjustment includes the impact of the asset write-off related to the grocery gateway name and facility assets, severance, IT project costs and other costs.
• Same-store sales are sales from stores in the same location in both reporting periods.
• Same-store sales, excluding fuel are sales from stores in the same location in both reporting periods excluding the fuel 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.
• Adjusted operating income is operating income excluding certain items to better analyze trends in performance. These items are excluded to allow for better period over period comparison of ongoing operating results. Adjusted operating income is reconciled to operating income in its respective subsection of the "Summary Results – Fourth Quarter & Fiscal Year" section.
• EBITDA is calculated as net earnings before finance costs (net of finance income), income tax expense, depreciation and amortization of intangibles.

The following table reconciles net earnings to EBITDA:

 

• EBITDA margin is EBITDA divided by sales.
• Adjusted EBITDA is EBITDA excluding certain items to better analyze trends in performance. These items are excluded to allow for better period over period comparison of ongoing operating results. Adjusted EBITDA is reconciled to EBITDA in its respective subsection of the "Summary Results – Fourth Quarter & Fiscal Year" section.
• Adjusted EBITDA margin is adjusted EBITDA divided by sales.
• Free cash flow is calculated as cash flows from operating activities, plus proceeds on disposal of property, equipment and investment property and lease terminations, less acquisitions of property, equipment, investment property and intangibles, interest paid and payments of lease liabilities, net of payments received from finance subleases.
• Book value per common share is shareholders' equity, net of non-controlling interest, divided by total common shares outstanding.

The following table shows the calculation of Empire's book value per common share as at May 6, 2023, May 7, 2022 and May 1, 2021:

 

• Funded debt is all interest-bearing debt, which includes bank loans, bankers' acceptances, long-term debt and long-term lease liabilities.
• Total capital is calculated as funded debt plus shareholders' equity, net of non-controlling interest.

The following table reconciles the Company's funded debt and total capital to GAAP measures as reported on the balance sheets as at May 6, 2023, May 7, 2022 and May 1, 2021, respectively:

 

• Adjusted net earnings is net earnings, net of non-controlling interest, excluding certain items to better analyze trends in performance. These items are excluded to allow for better period over period comparison of ongoing operating results. Adjusted net earnings is reconciled in its respective subsection of the "Summary Results – Fourth Quarter & Fiscal Year" section.
• Adjusted EPS (fully diluted) is calculated as adjusted net earnings divided by diluted weighted average number of shares outstanding.
• Funded debt to total capital ratio is funded debt divided by total capital.
• Funded debt to adjusted EBITDA ratio is funded debt divided by trailing four-quarter EBITDA.
• Adjusted EBITDA to interest expense ratio is trailing four-quarter EBITDA divided by trailing four-quarter interest expense.
• Management calculates interest expense as interest expense on financial liabilities measured at amortized cost and interest expense on lease liabilities.

The following table reconciles finance costs, net to interest expense:

 

For a more complete description of Empire's non-GAAP measures and metrics, please see the section headed "Non-GAAP Financial Measures & Financial Metrics" in Empire's MD&A for the fourth quarter ended May 6, 2023 available on SEDAR at www.sedar.com, which section is incorporated by reference into this press release.

CONFERENCE CALL INFORMATION

The Company will hold an analyst call on Thursday, June 22, 2023 beginning at 11:30 a.m. (Eastern Daylight Time) during which senior management will discuss the Company's financial results for the fourth quarter of fiscal 2023. To instantly join the conference call by phone, please use the following URL to easily register yourself and be connected into the conference call automatically: https://emportal.ink/42Ysyht. You can also be entered to the call by an Operator by dialing (888) 390-0546 outside the Toronto area or (416) 764-8688 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 "Quick Links" section of the Company's website located at www.empireco.ca, and then navigating to the "Empire Company Limited Quarterly Results Call" link.

Replay will be available by dialing (888) 390-0541 and entering access code 984059 until midnight July 6, 2023, or on the Company's website for 90 days following the conference call.

SELECTED FINANCIAL INFORMATION

The following financial information is derived from our audited annual consolidated financial statements for the year ended May 6, 2023. The information does not include all disclosures required by International Financial Reporting Standards ("IFRS") and should be read in conjunction with the Company's 2023 audited consolidated financial statements available at www.sedar.com or by accessing the Investor Centre section of the Company's website at www.empireco.ca.

 

 

 

2023 ANNUAL REPORT

The Company's audited consolidated financial statements and the notes thereto for the fiscal year ended May 6, 2023 and MD&A for the fiscal year ended May 6, 2023, which includes discussion and analysis of results of operations, financial position and cash flows will be available today, June 22, 2023. These documents can be accessed through the Investor Centre section of the Company's website at www.empireco.ca and also at www.sedar.com.

The Company's 2023 Annual Report will be available on or about July 28, 2023 and can be accessed through the Investor Centre section of the Company's website at www.empireco.ca and also at www.sedar.com.

ABOUT EMPIRE

Empire Company Limited (TSX: EMP.A) is a Canadian company headquartered in Stellarton, Nova Scotia. Empire's key businesses are food retailing, through wholly-owned subsidiary Sobeys Inc., and related real estate. With approximately $30.5 billion in annual sales and $16.5 billion in assets, Empire and its subsidiaries, franchisees and affiliates employ approximately 131,000 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