Empire Company Reports Second Quarter Results

STELLARTON, NS, Dec. 12, 2013 /CNW/ - Empire Company Limited ("Empire" or the "Company") (TSX: EMP.A) today announced financial results for its second quarter ended November 2, 2013.  In the second quarter, the Company recorded adjusted net earnings from continuing operations, net of non-controlling interest, of $78.1 million ($1.15 per diluted share) compared to $82.7 million ($1.21 per diluted share) in the second quarter last year.

Second Quarter Highlights

• Sales of $4.43 billion, up $79.7 million or 1.8 percent.
• Sobeys' same-store sales increased 0.2 percent.
• Adjusted EBITDA ⁽¹⁾ of $214.8 million versus $213.2 million last year. 
• Adjusted net earnings from continuing operations ⁽¹⁾, net of non-controlling interest, of $78.1 million ($1.15 per diluted share) versus $82.7 million ($1.21 per diluted share) last year.
• Funded debt to total capital ratio of 22.4 percent compared to 21.5 percent last year.

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

Marc Poulin, President and CEO of Empire Company Limited stated: "In the second quarter, we achieved same-store sales growth in an environment which remains very competitive.  Although the current market dynamic did impact our overall gross margin, the impact on our adjusted net earnings was largely offset as a result of operating cost control.

"Subsequent to the end of the quarter, we announced the completion of the acquisition of Canada Safeway and are very pleased to have begun the integration in accordance with our plans. Notwithstanding the significant focus on this, we are also advancing our business through our Better Food for All movement and recently opened our first Sobeys Extra store in Burlington, Ontario which offers shoppers extra departments, products, experts, services and savings."

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 January 31, 2014 to shareholders of record on January 15, 2014. 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

On November 1, 2013, the Company announced that Empire Theatres completed the sale of 46 theatres with 397 screens in separate transactions with Cineplex Inc. and Landmark Cinemas as previously announced on June 27, 2013. As a result of the sale, financial results related to Empire Theatres, as previously reported in the investments and other operations segment, have been included in discontinued operations in the condensed consolidated statements of earnings for the 13 and 26 weeks ended November 2, 2013 and November 3, 2012.

CONSOLIDATED FINANCIAL RESULTS

Sales

Consolidated sales for the 13 weeks ended November 2, 2013 were $4.43 billion compared to $4.35 billion in the second quarter last year, an increase of $79.7 million or 1.8 percent.  During this period, sales from the food retailing segment increased $85.4 million or 2.0 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 second quarter, Sobeys reported sales of $4.42 billion, an increase of $86.4 million or 2.0 percent from the $4.33 billion reported in the second quarter of fiscal 2013.  The growth in Sobeys' reported sales in the second quarter of fiscal 2014 was a result of Sobeys' continued investment in its retail network, coupled with the continued implementation of sales and merchandising initiatives.  Sobeys' same-store sales increased 0.2 percent from the prior year.  Sales growth was impacted by low food inflation and increased competition during the 13 weeks ended November 2, 2013.

Investments and other operations' sales in the second quarter were $0.8 million compared to $6.5 million in the second quarter last year, a decrease of $5.7 million.  Sales generated from Empire Theatres have been recorded in discontinued operations.  Up to the date of closing of the Empire Theatres sale of assets on November 1, 2013, sales generated from discontinued operations were $71.9 million in the second quarter of fiscal 2014 compared to $55.3 million last year, an increase of $16.6 million.

EBITDA

Consolidated EBITDA in the second quarter was $196.8 million compared to $223.2 million in the second quarter last year.  EBITDA in the second quarter was largely impacted by lower gross margin and increased selling and administrative expenses as a result of transaction costs related to the Canada Safeway acquisition of $16.8 million and organizational realignment and restructuring costs of $8.4 million.

After adjusting EBITDA for items which are considered not indicative of underlying business operating performance, as presented in the following table, second quarter adjusted EBITDA amounted to $214.8 million compared to $213.2 million in the second quarter last year.      

Operating Income

Consolidated operating income in the second quarter was $106.4 million, a decrease of $31.8 million from the $138.2 million recorded in the second 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, quarterly adjusted consolidated operating income amounted to $124.4 million compared to $128.2 million in the second quarter last year, a decrease of $3.8 million.

Net Earnings from Continuing Operations

Consolidated net earnings from continuing operations, net of non-controlling interest, in the second quarter equalled $60.5 million ($0.89 per diluted share) compared to $90.3 million ($1.33 per diluted share) in the second quarter last year, a $29.8 million decrease.  The decline is the result of lower gross profit, transaction and finance costs related to the Canada Safeway acquisition, organizational realignment and restructuring costs and lower gains on disposal of assets compared to the prior year.

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 $78.1 million ($1.15 per diluted share) for the 13 weeks ended November 2, 2013 compared to $82.7 million ($1.21 per diluted share) recorded in the second quarter last year.

Net Earnings from Discontinued Operations

Up to the date of closing of the Empire Theatres sale of assets on November 1, 2013, the Company recorded net earnings from discontinued operations in the second quarter of fiscal 2014 of $108.7 million ($1.59 per diluted share) compared to $1.6 million ($0.02 per diluted share) in the prior year, an increase of $107.1 million, primarily as a result of the gain, net of tax, on the sale of Empire Theatres' assets of $105.3 million in the 13 weeks ended November 2, 2013.

Net Earnings

After including earnings from discontinued operations, Empire's consolidated net earnings, net of non-controlling interest, in the second quarter of fiscal 2014 equalled $169.2 million ($2.48 per diluted share) compared to $91.9 million ($1.35 per diluted share) in the second quarter last year, an increase of $77.3 million.

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 and 26 weeks ended November 2, 2013 compared to the 13 and 26 weeks ended November 3, 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 $4.43 billion for the 13 weeks ended November 2, 2013, an increase of $85.4 million or 2.0 percent over the same quarter last year. The growth in Sobeys' reported sales in the second quarter of fiscal 2014 was a result of Sobeys' continued investment in its retail network, coupled with the continued implementation of sales and merchandising initiatives. Sobeys' same-store sales increased 0.2 percent from the prior year. Sales growth was impacted by low inflation and increased competition during the 13 weeks ended November 2, 2013.

Gross Profit

Sobeys recorded gross profit for the 13 weeks ended November 2, 2013 of $993.3 million, a decrease of $2.9 million or 0.3 percent compared to $996.2 million in the same quarter last year.  Gross margin percentage decreased 51 basis points to 22.49 percent in the current quarter compared to 23.00 percent for the quarter ended November 3, 2012. The decrease in gross margin is a result of a highly promotional retail grocery environment.

EBITDA

Sobeys contributed EBITDA to Empire in the second quarter of $190.1 million (4.29 percent of sales) compared to $211.7 million (4.88 percent of sales) last year, a decrease of $21.6 million. EBITDA was largely impacted by lower gross margin and increased selling and administrative expenses as a result of transaction costs of $16.8 million related to the Canada Safeway acquisition, and a reduction in gains on the disposal of assets compared to the prior year.

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 $203.8 million (4.60 percent of sales) in the second quarter compared to a $201.7 million (4.65 percent of sales) contribution in the second quarter last year.

Operating Income

Sobeys' operating income contribution to Empire in the second quarter was $99.8 million (2.25 percent of sales) compared to $127.5 million (2.94 percent of sales) in the same quarter last year, a decrease of $27.7 million.  As mentioned, this decrease is the result of a heightened competitive environment, higher depreciation and amortization expense, transaction costs related to the Canada Safeway acquisition and lower gains on the disposal of assets.

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, adjusted operating income contribution amounted to $113.5 million (2.56 percent of sales) in the second quarter compared to $117.5 million (2.71 percent of sales) in the second quarter last year, a decrease of $4.0 million.

Net Earnings

During the second quarter of fiscal 2014, Sobeys contributed net earnings, net of non-controlling interest, to Empire of $56.3 million compared to $83.4 million in the second quarter last year. The decrease is largely the result of lower gross profit, transaction and finance costs related to the Canada Safeway acquisition and lower gains on the disposal of assets compared to the prior year.

Sobeys contributed adjusted net earnings, net of non-controlling interest, to Empire of $71.7 million compared to $75.8 million in the second quarter last year, a decrease of $4.1 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 earnings from discontinued operations and net earnings.

Sales

Investments and other operations' sales equalled $0.8 million in the second quarter ended November 2, 2013 versus $6.5 million in the second quarter last year, a $5.7 million decrease.  Sales generated from Empire Theatres have been recorded in discontinued operations. Up to the date of closing of the Empire Theatres sale of assets on November 1, 2013, sales from the Company's discontinued operations totalled $71.9 million in the second quarter of fiscal 2014 compared to $55.3 million last year, an increase of $16.6 million.

EBITDA

Investments and other operations contributed EBITDA to Empire in the second quarter of $6.7 million compared to $11.5 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 $11.0 million compared to $11.5 million last year.      

Operating Income

Investments and other operations contributed operating income of $6.6 million in the second quarter ended November 2, 2013 compared to $10.7 million in the second quarter last year, a decrease of $4.1 million.  The contributors to operating income in the second quarter of fiscal 2014 were as follows:

• Equity accounted earnings from the Company's investment in Crombie REIT were $5.4 million in the 13 weeks ended November 2, 2013, up $1.2 million from the $4.2 million recorded in the 13 weeks ended November 3, 2012.
• Equity accounted earnings from the Company's investments in real estate partnerships (Genstar) were $8.0 million in the 13 weeks ended November 2, 2013, an increase of $3.4 million compared to $4.6 million recorded in the same period last year.
• Other operations, net of corporate expenses, contributed operating income of $(6.8) million in the second quarter of fiscal 2014, down $8.7 million from the $1.9 million recorded in the same period last year.  The 13 weeks ended November 2, 2013 included organizational realignment and restructuring costs of $8.4 million and dilution gains of $4.1 million (13 weeks ended November 3, 2012 - $nil and $nil).

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 second quarter of $10.9 million versus $10.7 million last year.

Net Earnings from Continuing Operations

During the 13 weeks ended November 2, 2013, investments and other operations contributed $4.2 million to Empire's consolidated net earnings from continuing operations compared to a contribution of $6.9 million in the same period last year.  The 13 weeks ended November 2, 2013, included organizational realignment and restructuring costs, net of tax, of $5.1 million and dilution gains, net of tax, of $2.9 million (13 weeks ended November 3, 2012 - $nil and $nil).  After adjusting for these items, investments and other operations contributed adjusted net earnings from continuing operations of $6.4 million for the 13 weeks ended November 2, 2013 compared to $6.9 million in the second quarter last year.

Net Earnings

Investments and other operations contributed $112.9 million to Empire's consolidated net earnings in the second quarter of fiscal 2014 compared to a contribution of $8.5 million in the same period last year.  The increase of $104.4 is due primarily to the gain, net of tax, of $105.3 million on the sale of Empire Theatres' assets in the 13 weeks ended November 2, 2013.

FINANCIAL CONDITION

The Company's overall financial position and liquidity remain healthy as evidenced by the capital structure and key financial condition measures presented in the table below.

At the end of the second quarter, Empire's consolidated ratio of funded debt to total capital was 22.4 percent (November 3, 2012 - 21.5 percent) with cash and cash equivalents of $792.5 million (May 4, 2013 - $455.2 million).

Shareholders' equity, net of non-controlling interest, increased $405 million or 11.4 percent over the second quarter last year to $3.96 billion. Book value per share increased to $58.23 at the end of the second quarter versus $54.82 at the start of the fiscal year.

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 have sustainable and profitable growth 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 December 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.

SUBSEQUENT EVENT

Subsequent to the close of the second quarter, on November 4, 2013, Sobeys, through its Asset Purchase Agreement with Safeway Inc. and its subsidiaries, closed the transaction to purchase substantially all of the assets and select liabilities of Canada Safeway for a cash purchase price of $5.8 billion, subject to a working capital adjustment. The agreement provides for the purchase of 213 full service grocery stores under the Safeway banner in Western Canada, 200 in-store pharmacies, 62 co-located fuel stations, 10 liquor stores, 4 primary distribution centres and 12 manufacturing facilities, plus the assumption of certain liabilities.

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, December 12, 2013 beginning at 2:30 p.m. (Eastern Standard Time) during which senior management will discuss the Company's financial results for the second quarter ended November 2, 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 10 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 18464086 until midnight December 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 second quarter of fiscal 2014 ended November 2, 2013, please access the following link:

Q2 Fiscal 2014 Unaudited Condensed Consolidated Financial Statements

This information is also available for download at www.sedar.com or by accessing the Investor Centre section 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 $10.3 billion in assets, Empire and its subsidiaries, including franchisees and affiliates, employ more than 124,000 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/2013/12/12/20131212_C8884_DOC_EN_34883.pdf

SOURCE: Empire Company Limited