Expect more cuts at Sobeys as ‘sales challenges’ continue amid botched Safeway integration
Hollie Shaw | September 15, 2016 | Last Updated: Sep 15 4:27 PM ET
More from Hollie Shaw | @HollieKShaw
Brent Lewin/BloombergNova Scotia-based Empire, which owns Sobeys, says its earnings were affected by stores are in Western Canada.
TORONTO — More pain is likely in store for Sobeys owner Empire Co. as the grocery retailer seeks to cut costs and drive up flagging sales in the wake of its botched integration of the Western Canadian Safeway chain.
“Our cost base is too high given our sales challenges across the country, and therefore it is critical that we optimize our cost structure so we can reinvest cost savings to drive the top line,” François Vimard, Empire’s interim chief executive, told analysts on a conference call Thursday after the retailer reported a 40 per cent drop in quarterly earnings, steeply missing analyst estimates.
“Our cost base is too high given our sales challenges across the country, and therefore it is critical that we optimize our cost structure so we can reinvest cost savings to drive the top line,” François Vimard, Empire’s interim chief executive, told analysts on a conference call Thursday after the retailer reported a 40 per cent drop in quarterly earnings, steeply missing analyst estimates.
“We will need to work over the next few months to identify additional cost reductions aimed at improving our efficiency.”
Former CFO Vimard, who replaced Marc Poulin after the former CEO’s abrupt ouster in July following deep fourth-quarter losses, did not detail where the new cuts would come. Last year, the retailer announced it would cut about 1,300 jobs in 2016 and 2017 in order to reorganize its distribution centres in Ontario and Alberta.
On Thursday the operator of Sobeys, Safeway and IGA stores reported earnings of $65.4 million in the period ended Aug. 6, or 24 cents per share, compared with profit of $108.8 million, (39 cents), in the same period last year.
Former CFO Vimard, who replaced Marc Poulin after the former CEO’s abrupt ouster in July following deep fourth-quarter losses, did not detail where the new cuts would come. Last year, the retailer announced it would cut about 1,300 jobs in 2016 and 2017 in order to reorganize its distribution centres in Ontario and Alberta.
On Thursday the operator of Sobeys, Safeway and IGA stores reported earnings of $65.4 million in the period ended Aug. 6, or 24 cents per share, compared with profit of $108.8 million, (39 cents), in the same period last year.
That fell far below analyst mean consensus estimates of 36 cents per share, according to Thomson Reuters. Empire’s shares are down 21 per cent this year, and closed at $19.98 on Thursday, down three per cent.
The retailer’s sales fell one per cent to $6.19 billion from $6.25 billion despite the retailer’s move to slash prices on household staples.
Same-store sales, a key metric of retail strength, tumbled 1.8 per cent, but would have risen 0.6 per cent excluding its troubled Western Canadian and gasoline sales. Rivals Loblaw and Metro grew their same-store sales by 0.4 per cent and 3.9 per cent, respectively, in their most recent fiscal quarters.
Sobeys pinned the sales slide to a negative impact from cutting prices to draw customers back to its stores and an overall economic downturn in the oilpatch.
The retailer has been struggling for more than a year to integrate the Safeway chain in the wake of acquiring the business in 2013. In the fourth quarter, Empire posted a $942.6 million loss, taking a $1.3 billion impairment charge. That came just one quarter after the retailer took a writedown of $1.59 billion on the value of Canada Safeway.
Asked by an analyst Thursday if investors could expect further charges and costs in the coming quarters, Vimard did not discount the possibility.
“Depending on what it is… there could, but it’s too early for me to make a call like that,” he said. The company remains focused on improving store execution — making sure all of the shelves are stocked, for example — and simplifying its business model.
In recent months Sobeys began a program dubbed “simplify buy and sell,” focused on reducing myriad supply-chain hiccups, and has cut prices on key goods to improve so-called “shelf-price competitiveness” in relation to other retailers.
The price cuts took a toll on the retailer’s margins in the quarter: Gross margin decreased 20 basis points to 24.1 per cent, from 24.3 per cent in the same period last year. At the same time, retail competition across the country is not letting up.
“You have an ongoing steady onslaught from Costco and you a newfound aggressiveness from Walmart,” said Kevin Grier, food industry analyst based in Guelph, Ont., noting both of them continue to grow their grocery market share.
“Walmart was known traditionally for every-day low pricing, but their flyers are now much more promotional,” he added, offering deep promotions on selected goods each week. “Conventional grocers like Sobeys are under the most pressure from those two.”
At the same time, analysts say Sobeys has been hurt by its lack of a discount banner outside of Ontario, where it operates FreshCo.
“Meaningful integration challenges, higher relative prices, and the trend toward discount stores have damaged customer loyalty and led to 13 straight quarters of negative inflation-adjusted same-store sales,” TD analyst Michael Van Aelst said in a note to clients this week. “The next step must be to address Empire’s lack of a discount banner outside Ontario, though this could be painful initially.”
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