June 25, 2010 / 2:52 PM / in 7 years

UPDATE 2-Empire earnings rise, stock slips

* Earnings of C$1.07 share vs 94 Canadian cents a year ago

*Increases dividend to 80 Canadian cents

*Shares fall on continuing deflationary pressures

By Solarina Ho

TORONTO, June 25 (Reuters) - Empire Co Ltd EMPa.TO, operator of Canada’s second biggest grocery chain, on Friday reported a 15.5 percent rise in quarterly net earnings, but profit margins at its Sobeys stores slipped and the stock declined.

The company said retail food-price deflation was still a drag on its business, and it sees the downward pressure on prices persisting. It said deflation accelerated to 2 percent in its fourth quarter ended May 1 from 1.5 percent in the third quarter.

Concerns about the food business were offset in part by the performance of its real estate operations and an increase in its dividend by 7.5 percent to 80 Canadian cents a year.

“Deflation in the fourth quarter was more severe than we anticipated, and we think it’s going to be a slower climb back,” said Chief Financial Officer Paul Beesley during a conference call with analysts.

The company said it expected to pull out of the deflationary trend in the next two to three quarters.

Deflation “was probably 0.5 to 0.75 percent more than what management expected. We did expect deflation to pressure results this quarter,” said Philip Bassil, an analyst at Beacon Securities Ltd.

HIGHER PROFIT

Empire’s profit rose to C$73.5 million ($70.88 million), or C$1.07 a share, in its fourth quarter from C$62.1 million, or 94 Canadian cents, in the same period a year earlier.

Earnings before capital gains and other items rose to $71.9 million, or C$1.05, from $62.9 million, or 95 Canadian cents.

Revenues rose 3.4 percent to C$3.84 billion from C$3.71 billion.

Sales in Sobeys stores opened at least a year, or same-store sales, rose 0.5 percent.

Operating income margin at Sobeys in the fourth quarter after adjusting for special items receded to 2.62 percent compared from 2.75 percent in the year-earlier quarter.

Analysts, on average, had forecast earnings of C$1.06 a share on revenues of C$3.92 billion, according to Thomson Reuters I/B/E/S.

Empire benefited from a 74.5 percent rise in its residential real estate business, which showed net operating earnings of C$10.6 million compared with C$2.7 million a year ago.

Last month, Empire -- which owns or franchises over 1,300 grocery stores across the country -- converted eight Price Chopper stores into the new FreshCo discount food chain, which focuses on fresh, produce and meat.

The company said on Friday it plans to add several dozen locations over the next year and a half.

“Ontario is definitely the most competitive market in Canada and probably North America, so a discount offering is definitely the way to penetrate that market,” said Bassil.

Bassil has a buy rating on Empire with a target share price of C$61, citing the C$1.5 billion invested in improvements in productivity and efficiency over the last five years, which he said should begin paying off next year.

Empire shares closed down 83 Canadian cents, or 1.6 percent, at C$51.07 on the Toronto Stock Exchange.

($1=$1.037 Canadian)

Editing by Frank McGurty

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