March 14, 2014 / 5:19 PM / 3 years ago

Empire Co shares dive as tough Canada grocery market takes toll

TORONTO, March 14 (Reuters) - Shares of Empire Co Ltd , which operates Sobeys, Canada's No. 2 grocery chain, dropped as much as 4 percent on Friday after the company reported quarterly results earlier this week that came in far below expectations.

Shares were down 3.4 percent at C$65.79 on the Toronto Stock Exchange around midday after falling as low as C$65.20, their weakest level since April 2013. This followed a 3 percent drop on Thursday.

Several analysts cut their price targets for the shares after the company said inventory losses, or "shrink", related to launching new programs hit its results as did costs associated with its C$5.7 billion ($5.14 billion) acquisition of Canada Safeway last year.

"We found the results of Canada Safeway to be disappointing versus our expectation, and we believe that the shrink issue ... only partially explains the overall earnings shortfall versus our expectation," BMO Capital Markets analyst Peter Sklar said in a note.

Canada Safeway contributed C$1.62 billion to Empire's total sales in the third quarter, the company said. Empire said its total revenue in the quarter rose more than 40 percent to C$6.02 billion. The addition of Safeway stores doubled Sobeys' reach in Western Canada.

A highly competitive environment, a weaker Canadian dollar and ongoing drug regulatory reform were also key factors that weighed on the quarter's results, executives told analysts in a conference call after markets closed on Thursday.

Passing cost increases related to the weaker Canadian dollar on to customers has not been easy, they added.

"It's unfortunately a market that is digesting significant additional square footage. Everybody is fighting for their ground tooth and nail," Chief Executive Marc Poulin said.

"Everybody is watching everybody and nobody wants to be the first to blink. So these dynamics don't make for a market where it's easy to pass along any cost increase in pricing."

Empire's Sobeys competes against companies such as Loblaw Cos Ltd, Canada's No. 1 grocer, and U.S.-based retailer Wal-Mart Stores Inc in the crowded Canadian market. Sobeys cemented its position as the country's No. 2 grocer when it bought Canada Safeway.

After markets closed on Wednesday, Empire reported net earnings that fell to C$40,000, or nil Canadian cents a share, in the third quarter from C$74.1 million, or C$1.09 a share, a year earlier.

Adjusted earnings were 84 Canadian cents a share, below analysts' estimate of C$1.23 a share, according to Thomson Reuters I/B/E/S.

$1=$1.11 Canadian Reporting by Solarina Ho; Editing by Peter Galloway

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