Online Grocery Home Delivery Service and Real Estate Development to Improve Market Share: Empire Company Limited (TSX: EMP.A) is a Stellarton, Canada-based company, which operates in food retailing and related real estate. The group runs its food retailing division via Sobeys Inc. (a fully owned subsidiary), which serves the food shopping needs of several millions of Canadians. The food retailing segment owns over 1,500 retail stores across all 10 provinces under retail banners that comprise Safeway, Foodland, Thrifty Foods, Lawtons Drugs, Sobeys, IGA, FreshCo, and Farm Boy as well as more than 350 retail fuel locations.

Growth Drivers and Business Outlook:

• Launch of Online Grocery Home Delivery Services: The business released Voilà par IGA and Voilà by Sobeys and, the brand and name for its online grocery home delivery service for the GTA (Greater Toronto Area), Ottawa and cities in the province of Quebec. The group is developing its first CFC (Customer Fulfillment Centre) in the GTA, with delivery to clients scheduled to test and soft launch in the spring of 2020. The company is likely to increase its market share in the urban region, with the launch of online grocery home delivery services.

• Invest in Innovation: The group is focusing on innovations and will implement advanced analytics and artificial intelligence to drive smarter merchandising decisions, improve store efficiency and deliver more relevant customer communication.

• Project Sunrise is expected to enhance operational efficiency: This project is launched to simplify organizational structures and reduce costs. The management is expecting to deliver annualized benefits of CAD500 million by the end of FY20.

Q3FY20 Operational Highlights for the Period ended 1^st February 2020

 (Source: Q3 FY20 Reports, Company Website)

EMP declared its quarterly results, wherein the company’s sales were reported at CAD 6,395.2 million, up 2.4% on y-o-y basis, primarily driven by the expansion of FreshCo in Western Canada along with internal food inflation and higher fuel prices. Gross margin stood at 24.4%, as compared to 24.2% in the corresponding period of the last year. The business reported 3% growth in its gross profit to CAD 1,557.7 million while operating income stood at CAD 235 million, up 113.6% on y-o-y basis. The increase in the operating income was driven by a decline in the selling and administrative expenses, and improved earnings from the food retailing segment. The group reported net earnings of CAD1 20.5 million, representing a growth of 83.1% on y-o-y basis. During the quarter, the group invested CAD 106.4 million and CAD348.2 million in capital expenditure for the quarter and year-to-date ended February 1, 2020, which was utilized for renovations of existing stores and construction of new stores, followed by the construction of an e-commerce centre and development of FreshCo locations in Western Canada.

Valuation Methodology: Price to Cash Flow Based Relative Valuation

P/Cash Flow Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of EMP.A closed at CAD 27.70 with a market capitalization of ~CAD 7.45 billion. The stock made a 52-week low and high of CAD 23.88 and CAD 37.43, respectively. We believe that the company is well poised to deliver strong growth on account of initiative taken in the recent time. We have valued the stock using the price to cash flow based relative valuation method. For this, we have considered peers like Metro Inc (TSX: MRU), Loblaw Companies Ltd (TSX: L), Dollarama Inc (TSX: DOL), etc., and arrived at a target price which is offering a lower double-digit upside return (in % terms).  Hence, we give a ‘Buy’ recommendation on the stock at the closing price of CAD 27.70, down 3.25% as on 19^th March 2020 closing.

EMP Daily Technical Chart (Source: Thomson Reuters)

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