Empire Company Reports First Quarter Results

STELLARTON, NS, Sept. 12, 2013 /CNW/ - Empire Company Limited ("Empire" or the "Company") (TSX: EMP.A) today announced financial results for its first quarter ended August 3, 2013.  In the first quarter, the Company recorded adjusted net earnings from continuing operations, net of non-controlling interest, of $89.7 million ($1.32 per diluted share) compared to $102.6 million ($1.51 per diluted share) in the first quarter last year.

First Quarter Highlights

• Sales of $4.61 billion, up $100.3 million or 2.2 percent.
• Sobeys' same-store sales decreased 0.1 percent.
• Adjusted EBITDA ⁽¹⁾ of $232.4 million versus $253.2 million last year. 
• Adjusted net earnings from continuing operations ⁽¹⁾, net of non-controlling interest, of $89.7 million ($1.32 per diluted share) versus $102.6 million ($1.51 per diluted share) last year.
• Funded debt to total capital ratio of 19.9 percent compared to 21.5 percent last year.
• Free cash flow reported by Sobeys of $49.7 million.

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(1) Excludes items which are considered not indicative of underlying business operating performance.

Paul D. Sobey, President and CEO of Empire Company Limited stated: "Our first quarter net earnings performance was below expectation, reflecting a highly competitive and promotional food retail operating environment, the discontinued operations of Empire Theatres and additional expenses associated with the acquisition of Canada Safeway.

"Despite a challenging market environment we are confident in the future growth of the Company and remain well positioned to grow earnings and build shareholder value, including the opportunity for profitable growth as a result of the acquisition of Canada Safeway.  Going forward, we will continue to execute on our strategic priorities and growth initiatives to drive sales and strengthen the business, and are committed to reducing costs and increasing efficiencies across the business."

Dividend Declaration

The Board of Directors declared a quarterly dividend of 26.0 cents per share on both the Non-Voting Class A shares and the Class B common shares that will be payable on October 31, 2013 to shareholders of record on October 15, 2013.  These dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation and, therefore, qualify for the favourable tax treatment applicable to such dividends.

Discontinued Operations

Certain assets and liabilities related to ETL Canada Holdings Limited ("Empire Theatres") have been presented as held for sale as a result of the Company having reached definitive sales agreements with two unrelated parties as announced on June 27, 2013 for the sale of substantially all of the theatres.  Closing of the transactions is subject to satisfaction of customary conditions and relevant regulatory approvals, which includes Competition Bureau approval, and is anticipated to occur in the second quarter of fiscal 2014.  Empire Theatres is not obligated to close either transaction without closing the other.  Discontinued operations are discussed and referenced throughout this news release.

CONSOLIDATED FINANCIAL RESULTS

Sales

Consolidated sales for the 13 weeks ended August 3, 2013 were $4.61 billion compared to $4.51 billion in the first quarter last year, an increase of $100.3 million or 2.2 percent.  During this period, sales from the food retailing segment increased $98.9 million or 2.2 percent.

The following table reconciles sales reported by Sobeys to Empire's food retailing segmented sales, and food retailing and investments and other operations' segmented sales to Empire's consolidated sales from continuing operations.

During the first quarter, Sobeys reported sales of $4.59 billion, an increase of $98.2 million or 2.2 percent from the $4.50 billion reported in the first quarter of fiscal 2013.  The growth in Sobeys' reported sales in the first quarter of fiscal 2014 was a result of Sobeys' continued investment in its retail network, the continued implementation of sales and merchandising initiatives and the impact of a highly promotional retail operating environment.  Sobeys' same-store sales decreased 0.1 percent from the prior year.  Sales growth was impacted by low food inflation and increased competitive intensity during the quarter.

Investments and other operations' sales in the first quarter were $3.4 million compared to $2.0 million in the first quarter last year, an increase of $1.4 million.  Sales generated from Empire Theatres have been recorded in discontinued operations.  For the 13 weeks ended August 3, 2013, sales generated from discontinued operations were $55.0 million compared to $48.6 million in the same period last year, an increase of $6.4 million or 13.2 percent.

EBITDA

Consolidated EBITDA in the first quarter was $222.2 million compared to $260.7 million in the first quarter last year.  After adjusting EBITDA for items which are considered not indicative of underlying business operating performance, as presented in the following table, resulted in first quarter adjusted EBITDA of $232.4 million compared to $253.2 million in the first quarter last year.

Operating Income

Consolidated operating income in the first quarter was $133.9 million, a decrease of $41.1 million from the $175.0 million recorded in the first quarter last year.  After adjusting operating income for items which are considered not indicative of underlying business operating performance, as presented in the preceding table for EBITDA, resulted in quarterly adjusted consolidated operating income of $144.1 million compared to $167.5 million in the first quarter last year, a decrease of $23.4 million.

Adjusted Net Earnings from Continuing Operations

The table below adjusts reported net earnings from continuing operations, net of non-controlling interest, for items which are considered not indicative of underlying business operating performance.  After factoring in the impact of the adjustments noted in the table, Empire recorded adjusted net earnings from continuing operations, net of non-controlling interest, of $89.7 million ($1.32 per diluted share) for the 13 weeks ended August 3, 2013 compared to $102.6 million ($1.51 per diluted share) recorded in the first quarter last year.

Net Earnings from Continuing Operations

Consolidated net earnings from continuing operations, net of non-controlling interest, in the first quarter equalled $82.6 million ($1.21 per diluted share) compared to $108.1 million ($1.59 per diluted share) in the first quarter last year, a $25.5 million decrease.

Net Loss from Discontinued Operations

Net loss from discontinued operations in the first quarter of fiscal 2014 equalled $17.6 million ($0.26 per diluted share) compared to $0.5 million ($0.01 per diluted share) in the prior year, an increase of $17.1 million, primarily as a result of a net loss from the re-measurement of assets and restructuring costs of $18.3 million, net of tax, in the 13 weeks ended August 3, 2013.

Net Earnings

After the inclusion of the loss from discontinued operations, Empire's consolidated net earnings, net of non-controlling interest, in the first quarter of fiscal 2014 equalled $65.0 million ($0.95 per diluted share) compared to $107.6 million ($1.58 per diluted share) in the first quarter last year, a $42.6 million decrease.

The following table reconciles Empire's segmented net earnings from continuing operations, net of non-controlling interest, to net earnings, net of non-controlling interest, for the 13 weeks ended August 3, 2013 compared to the 13 weeks ended August 4, 2012.

SEGMENTED FINANCIAL RESULTS

The Company operates and reports on two business segments:

FOOD RETAILING

The following table presents the food retailing segment's contribution to Empire's consolidated sales, adjusted EBITDA, EBITDA, adjusted operating income, operating income, adjusted net earnings, net of non-controlling interest, and net earnings, net of non-controlling interest.

Sales

Empire's food retailing segment achieved sales of $4.61 billion for the 13 weeks ended August 3, 2013, an increase of $98.9 million or 2.2 percent over the same quarter last year. The growth in Sobeys' reported sales in the first quarter of fiscal 2014 was a result of Sobeys' continued investment in its retail network, the continued implementation of sales and merchandising initiatives and the impact of a highly promotional retail operating environment. Sobeys' same-store sales decreased 0.1 percent from the prior year. Sales growth was impacted by low food inflation and increased competitive intensity during the quarter.

Gross Profit

Sobeys recorded gross profit for the 13 weeks ended August 3, 2013 of $1,037.8 million, a decrease of $3.0 million or 0.3 percent compared to $1,040.8 million in the same quarter last year.  Gross margin percentage decreased 56 basis points to 22.59 percent in the current quarter compared to 23.15 percent for the quarter ended August 4, 2012.  The decrease in gross margin is a result of a highly promotional retail grocery environment.

EBITDA

Sobeys contributed EBITDA to Empire in the first quarter of $215.2 million (4.67 percent of sales) compared to $240.8 million (5.34 percent of sales) last year, a decrease of $25.6 million or 10.6 percent. EBITDA was impacted by lower gross margin, as mentioned, combined with increased selling and administrative expenses, which were impacted in part by transaction costs of $10.1 million for the proposed Canada Safeway acquisition.

After adjusting for items which are considered not indicative of underlying business operating performance, as presented in the following table, resulted in an adjusted EBITDA contribution from Sobeys to Empire of $226.2 million (4.91 percent of sales) in the first quarter compared to a $244.7 million (5.43 percent of sales) contribution in the first quarter last year.

Operating Income

Sobeys' operating income contribution to Empire in the first quarter was $127.0 million (2.76 percent of sales) compared to $155.9 million (3.46 percent of sales) in the same quarter last year, a decrease of $28.9 million.

After adjusting Sobeys' operating income for items which are considered not indicative of underlying business operating performance, as presented in the previous table for EBITDA, resulted in an adjusted operating income contribution of $138.0 million (3.00 percent of sales) in the first quarter compared to $159.8 million (3.55 percent of sales) in the first quarter last year, a decrease of $21.8 million.

Net Earnings

During the first quarter of fiscal 2014, Sobeys contributed net earnings, net of non-controlling interest, to Empire of $79.2 million compared to $95.7 million in the first quarter last year, a decrease of $16.5 million or 17.2 percent.  The decrease is a result of lower margins combined with increased selling and administrative expenses, which were impacted by transaction costs of $7.1 million incurred during the first quarter of fiscal 2014 for the proposed Canada Safeway acquisition.

Sobeys contributed adjusted net earnings, net of non-controlling interest, to Empire of $86.9 million compared to $98.3 million in the first quarter last year, a decrease of $11.4 million.

INVESTMENTS AND OTHER OPERATIONS

The table below presents investments and other operations' contribution to Empire's consolidated sales, adjusted EBITDA, EBITDA, operating income, adjusted net earnings from continuing operations, net earnings from continuing operations, net loss from discontinued operations and net (loss) earnings.

Sales

Investments and other operations' sales equalled $3.4 million in the first quarter ended August 3, 2013 versus $2.0 million in the first quarter last year, a $1.4 million increase.  Sales generated from Empire Theatres have been recorded in discontinued operations.  For the 13 weeks ended August 3, 2013, sales from the Company's discontinued operations totalled $55.0 million compared to $48.6 million last year, an increase of $6.4 million or 13.2 percent.

EBITDA

Investments and other operations contributed EBITDA to Empire in the first quarter of $7.0 million compared to $19.9 million last year. After adjusting for items which are considered not indicative of underlying business operating performance, as presented in the following table, resulted in adjusted EBITDA from investments and other operations of $6.2 million compared to $8.5 million last year.

Operating Income

Investments and other operations contributed operating income of $6.9 million in the first quarter ended August 3, 2013 compared to $19.1 million in the first quarter last year, a decrease of $12.2 million.  The contributors to operating income in the first quarter of fiscal 2014 were as follows:

• Equity accounted earnings from the Company's investment in Crombie REIT were $6.7 million in the 13 weeks ended August 3, 2013, up $1.1 million from the $5.6 million recorded in the 13 weeks ended August 4, 2012.  The increase was driven primarily by increased property revenue and the resulting higher property net operating income.
  
  
• Equity accounted earnings from the Company's investments in real estate partnerships (Genstar) were $3.1 million in the 13 weeks ended August 3, 2013, a decrease of $1.5 million compared to $4.6 million recorded in the same period last year, primarily as a result of weaker lot sales during the quarter.
  
  
• Other operations, net of corporate expenses, contributed operating income of $(2.9) million in the first quarter of fiscal 2014, down $11.8 million from the $8.9 million recorded in the same period last year.  The 13 weeks ended August 4, 2012 included dilution gains of $11.4 million.

After adjusting investments and other operations' operating income for items which are considered not indicative of underlying business operating performance, as presented in the previous table for EBITDA, resulted in an adjusted operating income contribution during the first quarter of $6.1 million versus $7.7 million last year.

Net Earnings from Continuing Operations

During the 13 weeks ended August 3, 2013, investments and other operations contributed $3.4 million to Empire's consolidated net earnings from continuing operations compared to a contribution of $12.4 million in the same period last year.  The $9.0 million decrease is primarily attributed to $8.1 million of dilution gains, net of tax, recorded in the first quarter of fiscal 2013.

Net Earnings

Investments and other operations contributed $(14.2) million to Empire's consolidated net earnings in the first quarter fiscal 2014 compared to a contribution of $11.9 million in the same period last year.  The $26.1 million decrease is primarily attributed to a higher net loss from discontinued operations of $17.1 million, accompanied by lower operating income from continuing operations of $9.0 million, as discussed.  The increase of $17.1 million in net loss from discontinued operations is primarily due to a net loss from the re-measurement of assets and restructuring costs of $18.3 million, net of tax, in the 13 weeks ended August 3, 2013.

Investments and other operations contributed adjusted net earnings from continuing operations of $2.8 million for the 13 weeks ended August 3, 2013 compared to $4.3 million in the first quarter last year.

FINANCIAL CONDITION

The Company's overall financial condition has improved since the start of the fiscal year as evidenced by the capital structure and key financial condition measures presented in the table below.

Consolidated funded debt has decreased $21.2 million from the $969.5 million reported at the start of the fiscal year and has decreased $2.4 million from the end of the first quarter last year.  The decrease in consolidated funded debt from last quarter was due to a $5.5 million decline in funded debt at Sobeys and a decline in debt levels in investments and other operations of $15.7 million.

On July 31, 2013, the Company announced that it closed its previously announced offering of 21.1 million subscription receipts at a price of $76.00, along with the syndicate of underwriters exercising in full their over-allotment option of 3.165 million subscription receipts, for total gross proceeds of $1,844.1 million.  As at August 3, 2013, the net proceeds from the sale of the subscription receipts were held in trust by CST Trust Company, the subscription receipt agent, pending the satisfaction of the conditions precedent to closing (the "Escrow Release Condition") in connection with Sobeys' acquisition of substantially all of the assets and select liabilities of Canada Safeway.

Subsequent to the close of the first quarter, on August 8, 2013, in connection with the financing associated with Sobeys' acquisition of substantially all of the assets and select liabilities of Canada Safeway, Sobeys completed a private placement of $500.0 million in aggregate principal amount of 3.52 percent Notes, Series 2013-1 due August 8, 2018 (the "Series 2013-1 Notes") and $500.0 million aggregate principal amount of 4.70 percent Notes, Series 2013-2 due August 8, 2023 (the "Series 2013-2 Notes" and together with the Series 2013-1 Notes, the "Notes"). The aggregate net proceeds were approximately $987.0 million after deducting underwriting fees and the purchase discount on the Series 2013-1 Notes.  These net proceeds are held in escrow pending the satisfaction of the Escrow Release Condition.  If the Escrow Release Condition is satisfied on or before March 31, 2014, Sobeys will use the net proceeds to partially fund the acquisition.  If the Escrow Release Condition is not satisfied or if the acquisition is terminated, the Notes will be subject to a special mandatory redemption. The redemption price for any special mandatory redemption would be 100 percent of the aggregate principal amount of the Notes, together with accrued and unpaid interest on the Notes from the date of settlement up to but not including the date of the special mandatory redemption.

FORWARD-LOOKING INFORMATION

This news release contains forward-looking information that reflects management's current expectations related to matters such as future financial performance and operating results of the Company.  Expressions such as "anticipates", "expects", "believes", "estimates", "could", "intend", "may", "plans", "will", "would" and other similar expressions or the negative of these terms are generally indicative of forward-looking statements.  Forward-looking statements contained in this news release include those relating to our expectations that we will improve our cost structure and productivity which may be impacted by economic and competitive conditions.

By its very nature, forward-looking information requires the Company to make assumptions and is subject to inherent risks and uncertainties which give rise to the possibility that the Company's expectations or objectives will not prove to be accurate.  These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.  These uncertainties and risks are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including the Risk Management section of the annual Management's Discussion and Analysis report and the Short Form Prospectus filed July 24, 2013.

Readers are urged to consider these and other risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information.  The forward-looking information in this news release reflects the Company's expectations as at September 12, 2013 and is subject to change after this date.  The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company other than as required by applicable securities laws.

NON-GAAP FINANCIAL MEASURES

There are measures included in this news release that do not have a standardized meaning under GAAP and therefore may not be comparable to similarly titled measures presented by other publicly traded companies.  The Company includes these measures because it believes certain investors use these measures as a means of assessing financial performance.

Empire's definition of the non-GAAP terms are as follows:

• Same-store sales are sales from stores in the same location in both reporting periods.
• Gross profit is calculated as sales less cost of sales.
• Gross margin is gross profit divided by sales.
• Operating income, or earnings before interest and taxes ("EBIT"), is calculated as net earnings before non-controlling interest, finance costs (net of finance income) and income taxes.
• Adjusted operating income is operating income excluding items which are considered not indicative of underlying business operating performance.
• Operating income margin is operating income divided by sales.
• Earnings before interest, taxes, depreciation and amortization ("EBITDA") is calculated as operating income plus depreciation and amortization of intangibles.
• Adjusted EBITDA is EBITDA excluding items which are considered not indicative of underlying business operating performance.
• EBITDA margin is EBITDA divided by sales.
• Interest expense is calculated as interest expense on financial liabilities measured at amortized cost plus losses on cash flow hedges reclassified from other comprehensive income.
• Adjusted net earnings from continuing operations is net earnings from continuing operations excluding items which are considered not indicative of underlying business operating performance.
• Funded debt is all interest bearing debt, which includes bank loans, bankers' acceptances and long-term debt.
• Net funded debt is calculated as funded debt less cash and cash equivalents.
• Total capital is calculated as funded debt plus shareholders' equity, net of non-controlling interest.
• Net total capital is total capital less cash and cash equivalents.
• Funded debt to EBITDA ratio is funded debt divided by trailing four-quarter EBITDA.
• EBITDA to interest expense ratio is trailing four-quarter EBITDA divided by trailing four-quarter interest expense.
• Funded debt to total capital ratio is funded debt divided by total capital.
• Net funded debt to net total capital ratio is net funded debt divided by net total capital.
• Book value per common share is shareholders' equity, net of non-controlling interest, divided by total common shares outstanding.
• Current assets to current liabilities ratio is current assets divided by current liabilities.
• Free cash flow is calculated as cash flow from operating activities, plus proceeds on disposal of property, equipment and investment property, less property, equipment and investment property purchases.

CONFERENCE CALL INFORMATION

The Company will hold an analyst call on Thursday, September 12, 2013 beginning at 1:30 p.m. (Eastern Daylight Time) during which senior management will discuss the Company's financial results for the first quarter ended August 3, 2013.  To join this conference call, dial (888) 231-8191 outside the Toronto area or (647) 427-7450 from within the Toronto area. To secure a line, please call 15 minutes prior to the conference call. You will be placed on hold until the conference call begins.  The media and investing public may access this conference call via a listen mode only. You may also listen to a live audiocast of the conference call by visiting the Company's website located at www.empireco.ca.

Replay will be available by dialing (855) 859-2056 and entering passcode 45725330 until midnight September 19, 2013, or on the Company's website for 90 days following the conference call.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

To view and download the Company's unaudited condensed consolidated financial statements for the first quarter of fiscal 2014 ended August 3, 2013, please access the following link:

Q1 Fiscal 2014 Unaudited Condensed Consolidated Financial Statements

This information is also available for download at www.sedar.com or by accessing the Investor Centre of the Company's website at www.empireco.ca.

ABOUT EMPIRE

Empire Company Limited (TSX: EMP.A) is a Canadian company headquartered in Stellarton, Nova Scotia.  Empire's key businesses include food retailing and related real estate.  With over $17 billion in annual sales and approximately $9.0 billion in assets, Empire and its subsidiaries directly employ approximately 47,000 people.

Additional financial information relating to Empire, including the Company's Annual Information Form, can be found on the Company's website at www.empireco.ca or at www.sedar.com.

PDF available at: http://stream1.newswire.ca/media/2013/09/12/20130912_C5081_DOC_EN_30696.pdf

SOURCE: EMPIRE COMPANY LIMITED