September 11, 2008 / 1:19 PM / 9 years ago

Empire operating profit gets lift from Sobeys

OTTAWA (Reuters) - Empire Co Ltd (EMPa.TO) said on Thursday quarterly operating earnings climbed 16 percent, as gains in its core Sobeys supermarket chain offset weakness in its real estate division.

Canada’s No. 2 grocer behind Loblaw (L.TO), Sobeys is part of a sector being squeezed by rising food costs at a time when discounter Wal-Mart (WMT.N) expands its food business in Canada.

Sobeys said promotional price cuts only slightly offset its ability to pass food cost increases through to consumers.

In an effort to keep customers, many grocers have been cutting prices, which pressures profit margins.

Wal-Mart Canada recently cut prices on grocery staples in Ontario and said it would not rule out a similar strategy in other provinces.

“It is important for us to capture that...cost of goods inflation in retail pricing and we don’t see that there’s any way that that can be avoided or resisted by a retailer that’s taking a rational approach,” Sobeys President Bill McEwan said on a conference call with analysts.

“It’s still going to be intensely competitive, but some forces are too compelling to ignore, and this inflation factor is one of them.”

Empire’s quarterly net profit fell sharply after last year’s results were flattered by a big capital gain of C$81.9 million, or C$1.24 per share, from selling investments to pay for the privatization of Sobeys.

In the most recent quarter, the company recorded a C$4.8 million capital gain from a property sale.

For the 13 weeks ended Aug 2, Empire said net earnings fell to C$75.1 million ($70.2 million), or C$1.14 a share, from C$142.3 million, or C$2.16, in the same period last year.

Operating profit, excluding capital gains and net of tax, grew to C$70.3 million, or C$1.07 a share, from C$60.4 million, or 92 Canadian cents.

Analysts on average had forecast earnings of C$1.10 a share before items, according to Reuters Estimates.

Revenue grew 7.4 percent to C$3.78 billion.

Scotia Capital analyst Ryan Balgopal had forecast profit of C$1.02 a share, citing stable food prices in Ontario, benign food cost inflation and benefits from a new business management software system.

“We continue to believe that more aggressive pricing activity will resume by year-end,” Balgopal said in a recent note. “Our views are supported by the recent price cuts at Wal-Mart.”

Stellarton, Nova Scotia-based Empire said its food unit revenue was 7.9 percent higher at C$3.71 billion as sales at Sobeys stores open at least one year rose by 3 percent.

Sobeys operating income grew 10.8 percent to C$105.5 million as operating margin, or operating income divided by revenue, rose to 2.84 percent from 2.77 percent.

Real estate revenue was 30 percent lower at C$24.6 million, while revenue from investments and other operations, including the Empire Theatres chain, dipped 2 percent to C$42.1 million.

At quarter’s end, Empire’s investment portfolio had a market value of C$423.4 million. It includes a 27.6 percent stake in Wajax Income Fund WJX_u.TO and a 47.9 percent interest in Crombie REIT CRR_u.TO.

Empire shares fell 1.4 percent to C$47.20 on the Toronto Stock Exchange on Thursday. So far this year, the stock has gained about 9.5 percent, compared with an decline of about 7 percent for the TSX consumer staples sector .GSPTTCS.

($1=$1.07 Canadian)

Reporting by Susan Taylor; editing by Frank McGurty

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