Empire Company Limited (EMPA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Empire Company First Quarter FY '27 Conference Call. [Operator Instructions] This call is being recorded on Thursday, September 10, 2026. I would now like to turn the conference over to Katie Brine.

Thank you, Julie. Good morning, and thank you for joining us today for Empire's First Quarter Fiscal 2027 Conference Call. Today, we will provide summary comments on our results and then open the call for questions. This call is being recorded, and the audio recording will be available on the company's website at empireco.ca. There is a short summary document outlining the points of our quarter available on our website as well. Joining me on the call this morning are Pierre St-Laurent, President and Chief Executive Officer; Costa Pefanis, Chief Financial Officer; and Luc L'Archeveque, Chief Customer Officer. Before we begin, I would remind you that as discussion includes forward-looking statements. We caution that these statements are based on management's assumptions and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors. With that, I'll turn the call over to Peter.

Thanks, Katie. Good morning, everyone. We delivered a strong first quarter driven by disciplined execution across the business and continued progress against our strategic priorities. Despite the market environment that remains challenging with customers highly focused on overall value and affordability. Our banners continued to perform well. We delivered a record high first quarter EPS of $1.04, up 14.3% year-over-year. This performance reflects improvement in our core business and benefit from our cost efficiency initiatives. Our Q1 results reflect the strength of our underlying operations as well as the focus we have placed on productivity, efficiency and disciplined execution across the organization. I'll focus on 3 topics today. Our first quarter results and market trends and an update on our strategic priorities and growth initiatives and our new leadership appointment. Starting with Q1 results. Food sales grew 1.7% with same-store sales dropped 1.2%. This reflects positive growth in both our full service and discount businesses. Total e-commerce sales across our platforms and third-party partnerships increased 11.3% year-over-year. Gross margin, excluding fuel, was essentially flat year-over-year. That was in line with our expectation that strong prior year comparison, higher supply chain costs and elevated fuel-related expenses during the quarter. Despite those headwinds, we were pleased with the performance of the core business. We were also pleased with our cost efficiency during the quarter. The improvements we are seeing reflect the benefit of our multiyear focus on productivity and efficiency across the organization. This was our third consecutive quarter with operating leverage. Costa will provide more details on the drivers. Turning to the current environment. Internal inflation remained below [indiscernible] during the quarter. reflecting our continued focus on delivering value for customers while managing supplier cost increases in a disciplined manner. The market environment remained challenging and consumer continue to be focused on value and affordability given fuel price volatility and ongoing trade-related uncertainty. Across North America, retailers are reporting a more cautious customer environment as we are seeing many of the same [indiscernible], we are seeing many of the same trends here in Canada. Against this backdrop, we are pleased to be gaining share in full service while maintaining our position in discount despite the rapid expansion of discount formats across the market. As we continue to expand discount footprint, we expect that growth increasingly support market share gains in the channel. The recent escalation in the Canada and U.S. trade tension has also increased customer interest in supporting Canadian business and products. which is something we are equally passionate about. While purchasing decision will continue to be driven by value, quality and convenience, we believe our deep Canadian routes long-standing relationship Canadian suppliers and portfolio of locally operated banners position us well to serve customers in this environment. As a proud Canadian company, we will continue to invest meaningfully across the country through new stores, new jobs, local partnerships and the ongoing growth of our business to help our country become stronger. Against this backdrop, our priorities are unchanged delivering value for customers, maintaining operational discipline and executing with focus against our priorities. We continue to increase momentum across our 4 strategic priorities: customer, stores, growth and cost efficiency. We have already touched on cost efficiency, so I'll spend a few minutes sharing an update on the other 3. Starting with customers. Our investment in customer value are resonating. We are seeing very encouraging improvement in price perception and growing recognition in the value available at all of our banners. In the current environment, we continue to strengthen our value proposition through promotions, loyalty, own brand, personalization and our value size offers. We are encouraged by the program we are seeing in our customer data and we remain committed to delivering value confirming [indiscernible] you are shopping at Sobeys, FreshCo, Safeway, IG, [indiscernible] and any other banners. Turning to stores. We continue to invest in our store work to support long-term growth. We opened 4 new stores during Q1 plus the addition of 4 stores. We now expect to complete more than 25 new stores this year, up from our prior expectation of more than 20. We are pleased with the performance of recently opened stores. We are meeting or exceeding our expectations and reinforce singular confidence in the strength on our growth pipeline. These investments are now expecting to generate for approximately 2% square footage growth and strengthen our ability to serve customers across the country. We continue to evolve our approach to real estate balance signal efficiency. While our related strategy continue to evolve our investment discipline remains the same. We pursue attractive white space opportunities and deploy capital where we believe it will generate the highest return for shareholders. And we continue to focus on making our store more efficient and customer focus. This includes the continued rollout of electronic shelf labels with over 400 stores now live across the country as well as initiatives to enhance in-store signage, improved store conditions and evolve our ways of working to spend less time on manual tasks and more time focused on customers. On growth, we have accomplished a lot since we last spoke and this remains a top priority for us. A key milestone in our discount expansion strategy was the opening of our first FreshCo store in Atlantic Canada in August and early customer response are very increasing. We also completed the Mayrand acquisition in June and in August program for a new mainland location in -- Quebec. While we're still in early stage of the integration, we are excited about the opportunity ahead and the potential to expand this business. We continue to grow our store footprint. And just in the last month, we opened 2 new Freshco stores in Calgary, a new IGX [indiscernible] Montreal -- new IG [indiscernible] a new Safeway in Vancouver on [indiscernible] development and a new fresh flow in [indiscernible] entry. These openings reflect our growth pipeline and our comment to serving more customers in communities across Canada. We also continue to strengthen our pharmacy businesses, which remain an attractive growth platform for Empire. In August, we welcomed Nitu Singh, our new SVP pharmacy. Nitu who will report to our Chief Pharmacy and Development Officer, Doug Nathanson, brings more than 20 years of industry experience and has already hit the ground running. Last month, we announced the acquisition of 9 more lease pharmacies colocated with Longo stores in Ontario. These pharmacy will be integrated into our national pharmacy operations and rebranded as [indiscernible] pharmacy. While the acquisition is modest in size, strategically, it is important. It expands our network in markets where we already have strong customer relationships and reflect our disciplined approach to growing this business through both organic initiatives and targeted acquisitions. Finally, I'm pleased to welcome Lara Skriptsky to Empire's executive leadership team as our new Chief Technology and Transformation Officer. With more than 20 years of experience, most recently having spent 12 years in a leading global consumer brand. Lara [indiscernible] track record of driving transformation, organizing technology platform and enhancing the customer experience. Julia Knox will work closely with Lara to ensure a seamless transition. Overall, this first quarter reinforces that we are confident -- strategy and outlook for the year ahead. Our [indiscernible] are competing effectively. Our growth initiatives are gaining traction and our focus on productivity and efficiency is delivering results. As a result, we continue to expect adjusted EPS growth in the high end of our long-term financial framework in fiscal -- our focus remains very clear, delivering value for customers, driving sustainable growth and strengthen our business for the long term. With a strong start to the year, we remain well positioned to deliver an attractive return to our shareholders. Dynamic environment creates opportunity for strong operators differentiate themselves and that is what we will continue to do. With that, I'll turn the call over to Costa.

Thanks, Pierre. Good morning, everyone. I'll begin with our first quarter results and then discuss capital allocation. We delivered a solid start to the year with Q1 fiscal '27 EPS of $1.04, up 14.3% from last year. The results reflected sales growth -- this is in [indiscernible], including benefits from our e-commerce changes and share repurchases. While we benefited from the previously announced pension and gain, this was offset by lower year-over-year contribution from other income and share of earnings from equity investments. We delivered good top line growth this quarter, and we let the gap between same-store and total sales growth to widen in the quarters ahead as the contribution from new stores begins to ramp up as they mature. Excluding the mix impact of fuel sales, gross margin was consistent with last year. Strong execution in full service offset higher fuel related life chain costs, demonstrating the resilience of our business. While performance can vary from quarter to order, our focus remains on driving sustainable improvement over time, and we continue to target annual gross margin expansion and excluding fuel of 10 to 20 basis points. Turning to SG&A. Our focus on cost of efficiency continues to deliver stronger results. Excluding depreciation and amortization, our SG&A rate improved by 80 basis points, driven by lower year-over-year incentive program expenses, patent settlement gain and better overall cost efficiency in the business, including e-commerce operational improvements. These [indiscernible] more than offset continued business expansion investment in the business, including stores, tools and technology and higher retail salaries. We continue to advance initiatives optimized supplier and procurement spend, leverage new technology and digital capabilities and enhance how work gets done across the business. As these initiatives mature, they're helping create capacity to reinvest in growth while supporting operating leverage. As we look ahead, SG&A performance may not progress in a straight line each quarter. but we're confident in our ability to generate operating leverage on an annual basis. As a result, EBITDA was $712 million, higher by 6.1% year-over-year, and our EBITDA margin was 8.4% higher by 28 basis points year-over-year. This was the strongest EBITDA performance that we've delivered since Project Horizon and began more than 10 years ago. Our effective tax rate was 26.1% compared to 26% last year. And now I'll move on to capital allocation. Our strong balance sheet and cash generation provides us the flexibility to invest in the business pursue strategic opportunities and return capital to shareholders. We continue to expect fiscal '27 capital expenditures of approximately $850 million with about half allocated to renovations and new store expansion. These new stores are expected to grow our net square footage by about 1.5% year-over-year, and that's before taking into account the new Mayrand stores. As of today, we have recoursed approximately 2 million shares for a total consideration of $95 million. Moving on to real estate. In Q1, we disposed of our equity interest in Zensar proceeds of $71 million and a gain of $4 million. And while this was a great investment, we felt that -- we felt that it was the right time to date. We will deploy these proceeds to accelerate growth of our business. The sale of Zensar for [indiscernible] guidance on other income and share of earnings from equity investments, and we continue to anticipate fiscal '27 contribution to range from $90 million to $110 million. Based on our current visibility, we expect the quarterly cadence for the rest of the year to be approximately 15% in Q2, 20% -- in closing, Q1 earnings potential of our core operations and the early benefits of the strategic actions we began to implement across the business. We delivered EPS growth of 14.3%, generated operating leverage and improved EBITDA margin to 8.4% and continue to invest for the future. Despite a dynamic operating environment, we continue to expect adjusted EPS growth at the high end of our financial remarks of 8% to 11% in fiscal '27 supported by gross margin expansion and operating leverage. With that, I'll turn back to Katie for your questions.

Thank you, Costa. Julie, you may open the line for questions at this time.

[Operator Instructions] Your first question comes from Chris Li from Desjardins.

My first question is here, as you mentioned, the consumer remains challenged, and industry tonnage is a little bit softer. Just curious to see, are you seeing any notable changes in the competitive environment is intense -- remaining stable? Or have you seen sort of an uptick in the quarter?

I will ask my Chief Customer Officer to answer this question, and I will complete the [indiscernible].

So no, we haven't seen anything in market in the case, promotional activities being different than the previous quarters. It is very stable. This is based obviously on [indiscernible] data.

Okay. Perfect. And my follow-up is, I know you don't provide any quarterly guidance, but I just wanted to ask what are you seeing in terms of Q2 to date -- in terms of same-store sales, are you seeing a bit of a stabilization versus what you reported in Q1? Just any directional comment would be helpful.

It's a bit early to answer this question. Q2 and particularly because there's some timing effect for the long weekend liberally. Last year was already here in this year. So it's a bit early to look at it. But in terms of customer behaviour, it remained unchanged so far -- where we're going to land up for the Q2 where a lot is [indiscernible] on that. We need to wait another full 2, 3 weeks to see the full impact of that timing on a year-to-year basis, but too early. But don't see any major changes. So the market tonnage is something we will measure at the end of the quarter. And -- but again, sentiment remained the same. The promo intensity remained the same. Customer behavior, it's nothing new. I think customers are looking for value, they are making different choices considering the fuel prices [indiscernible] , but it's -- all that stuff is not something new for us. It's manageable, and our merchandising team is doing an amazing job to navigate through it. .

Your next question comes from Tamy Chen from BMO Capital Markets.

I'm just trying to reconcile your comments about you're are not happy with the performance of your newer/recently opened stores. But your food same-store sales I think is softer than some of us expected. And especially given that the competitors having strike issues. So -- can you just help me reconcile that? Like is it -- are we starting to see all this square footage growth for the new stores [indiscernible] are hitting the ground well, everybody's is exiting -- tonnages giving up some of that to the new stores.

Okay. So on new stores, I mentioned the recent opening, which was in Q2. It was not in Q1 to answer your question. I know you're trying to reconcile number and I understand that. So my message was more the most -- they recently store-opening , the recent store opening or -- do that, especially in a sense you can. What else -- what was question that's right. . Okay. I don't have it in numbers, but one thing I can say is at the beginning of the strike, we saw a slight positive impact in produced in Quebec but it took as usual 2, 3 weeks to [indiscernible] strong contingency plans like we did in the past. We know that type of thing, and [indiscernible] did the same thing. And I think since then, no significant impact, and it was in Q4. It was not in Q1.

Sort of getting a bigger picture is the square footage growth continues in the industry just by you? And so how do you think about that over the next 1 to 2 years just in terms of same-store tonnage for [indiscernible] how to maintain your fair share versus your competitors -- everyone seems to be adding or possibly even just accelerating the pace of new store being.

That's a good question. So right now -- so when we're investing in real estate, we're investing for longer, right now, we're facing unique conditions at the cycle, my first degree at university what was in the economics. It's clearly a cycle. When we look at different indicators and when you are listing economists, is obvious that vendors should not -- at their best. I think over time, this will improve. So if you think about the fuel price, if you think about market customer confidence, and you look at uncertainties. It's current situation in the future [indiscernible]. And we're investing capital long term, not for next week. So our approach in investing capital is not on average. We're not looking at total number across the country. We're looking at opportunities market by market. And we had a strong portfolio for brands, and we're using it as a leverage to [indiscernible] customers. That's our approach. So over time, what will be the result of that. So right now, it's tough to, I would say, make association with current number with a long-term investment then, right? So we're facing a unique condition right now could be just better in the future. We remain confident that in the future things are going to -- we're doing the right thing. We're very disciplined in our approach in everything we do at Empire and this going to [indiscernible] us over time, and we're very confident about that. So -- and everybody is having different strategy. We believe in our strategy, obviously. And the early results, our new store opening are very encouraging. We did select locations which was very wide space for us. And this is the approach we continue to ask.

Your next question comes from John Zamparo from Scotia Bank.

Pierre, it sounds like you're fairly constructive on the ability to operate in a tougher consumer environment. I wonder if you could talk about how your business performed through the quarter? Was there any meaningful change in the [indiscernible]?

Naturally, we are improving focused on disciplined execution and focusing [indiscernible]. And there's many in our business where we have control. And I'm very pleased with the performance of the team. If you look at [indiscernible] gross margin, the focus on cost. People are looking for the [indiscernible] company that whatever we had a long-term view of long-term forecast, and it won't change. I think tough condition are creating opportunities. And right now, we're trying to leverage every single opportunity that tougher conditions are bringing to the business. So we have reason to improve things right now because we have to. And we will benefit from -- so all the actions we're taking right now, the control we have on the business right now, when condition will improve, I'm very confident that our results will be great.

Okay. Understood. And then I wanted to ask about SG&A. A lot of moving parts to that this quarter. I wonder if you can share what core SG&A growth was this quarter absent those items? And I know you don't look quarter-to-quarter, but is it fair to say for this year, you're targeting an SG&A growth rate excluding those items that is below the pace of sales growth?.

I'll ask Costa to answer this question. No one is better positioned to answer this question than Costa.

So to answer the question, excluding the puts and takes that we talked about in the prepared remarks, we continue to see that our SG&A run rate is stable and declining when you take into consideration the cost of the inflationary pressures on the business, so we're very happy to say that our operating leverage continues to be a big piece of the strategy, especially in the conditions that we're facing right now. So the answer is we continue to optimize around our spend so that we can get better value out of what we're doing.