Grocery giant Empire Company Ltd. said persistent inflation, changing customer habits due to higher costs and a cyberattack all weighed on its business in its third quarter, reporting net earnings fell by almost 78 per cent from the same period a year earlier.
"This was not a straightforward quarter," said Michael Medline, Empire's president and chief executive on a call with analysts Thursday.
"We saw customers continue to adapt their shopping behaviours due to this inflationary environment, with many people shopping multiple stores, trading down on products, buying more on promotion and filling smaller baskets."
Empire said its net earnings were $125.7 million in the quarter, compared with $203.4 million in net earnings during the same period in 2022.
Its earnings for the quarter ended Feb. 4 amounted to 49 cents per share, down from 77 cents per share in last year's third quarter, when Empire said it incurred "unusually large" lease termination income and higher property sales from Crombie Real Estate Investment Trust.
Its adjusted net earnings totalled $164.8 million, down from $203.4 million a year earlier.
Sales, which were driven by the expansion of FreshCo in Western Canada, higher food inflation and increased fuel sales, reached $7.49 billion compared with $7.38 billion in the prior quarter.
Empire's earnings report came as the Stellarton, N.S.-based company recovers from a cyberattack that shut down its pharmacy services and hampered self-checkout machines, gift card use and the redemption of loyalty points.
The incident left Sobeys customers unable to fill prescriptions for four days and many of the grocer's systems had to be shut down for several weeks.
"These cyberattacks are a nasty piece of business. I wouldn't wish them on my worst enemy,"said Medline.
The estimated result of the attack on adjusted net earnings in the third quarter was $39.1 million, net of initial insurance recoveries, Empire said Thursday. In addition, the attack required certain operational systems to be shut down for several weeks, further impacting third quarter net earnings by at least $15 million or a six cent reduction to its earnings per share.
Empire said the attack temporarily reduced sales and hindered the effectiveness of its operations, especially when rolling out promotions and using management tools.
The company estimated the final effect of the cyberattack on its net earnings over fiscal 2023 and 2024 will be around $32 million net of estimated insurance recoveries.
Last quarter, Empire said the cybersecurity incident was expected to cost $25 million in net earnings after insurance recoveries, but the company declined to reveal the total cost of the disruption.
The company is still in the process of working with its insurance providers to make claims under its policies.
However, it warned there will be a time lag between the initial incurrence of costs and the recognition of insurance proceeds because of the "complexity" of cyber insurance coverage.
The third quarter also saw Empire come under attack for the cost of the groceries it sells, which have been pushed up in price as grocery inflation hit 11.4 per cent in January compared with overall inflation of 5.9 per cent.
The chief executives of Empire, Loblaw Companies Ltd. and Metro Inc. were called to appear in March before a parliamentary committee studying inflated grocery prices.
All three major grocers reported higher profits in the first half of 2022 compared to their average performance over the past five years, according to a recent report by the Agri-Food Analytics Lab at Dalhousie University.
At the committee hearing, the grocery executives argued food price inflation is not caused by profit-mongering and that their margins on food-related profits have remained low.
“It doesn’t matter how many times you say it, write it or tweet it. It simply is not true,” said Medline before the committee.
“The truth is we are at the end of a very long food supply chain that has economic inputs at every step and stage.”
During the analyst call, Medline said the company received hundreds of new requests from its suppliers to raise prices during the third quarter, at comparable volumes to those experienced in the fall of 2022, but he believes the volume of such requests has now peaked.
Chief Financial Officer Matt Reindel said on the call that the company isn't changing its business strategy during inflation.
"Our business fundamentals are strong, and we will be well positioned to deliver stronger results when inflation starts to abate."
Reindel added that he's proud of Empire's continued growth in gross margin, though the cyberattack rendered it nil this quarter, but emphasized that the growth is due to the company's Project Horizon and not inflation.
Empire launched Project Horizon in the first quarter of its fiscal 2021. The three-year strategy includes business growth and the acceleration of e-commerce, and Empire said the project is expected to generate growth in earnings and in adjusted margin over the three-year time frame.
The grocer said Longo's e-commerce business, Grocery Gateway, will be integrated into its Voilà e-commerce offering. Grocery Gateway customers will transition to Voilà over a six-week period, starting in July 2023.
Scene Plus, its loyalty program run in conjunction with Scotiabank and Cineplex Inc., will be launched in Quebec and Thrifty Foods on March 23. Medline said this is the final regional launch for the rewards program.
The company also shared that it expects to open 22 more Farm Boy stores in the next five years with most set to be located in the Greater Toronto Area. Empire already operates 26 Farm Boy supermarkets.
This report by The Canadian Press was first published March 16, 2023.
Companies in this story: (TSX:EMP.A)
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