Empire Company Limited

Empire Company Limited (TSX: EMP.A) is a Canadian company headquartered in Stellarton, Nova Scotia. Empire’s key businesses are food retailing and related real estate. With approximately Cad 27.2 billion in annual sales and CAD 14.8 billion in assets, Empire and its subsidiaries, franchisees and affiliates employ approximately 127,000 people.

Investment Rationales

• Focus on improving margins: The Company launched Project Horizon, three-year strategy regarding growth plan, focused on core business expansion and e-commerce acceleration. The Company is targeting an incremental CAD 500 million in annualized EBITDA and an improvement in EBITDA margin of 100 basis points by fiscal 2023 by (i) growing market share and (ii) building on its cost and margin discipline.

• One-stop-shop:The pandemic has impacted how people shop for food. People are shopping less frequently and with larger basket sizes. With this shift in people’s behaviour when shopping, many are moving to one-stop-shop grocery stores that meet all their household needs and online grocery. The company is trying to mark its impact as a suitable one-stop-shop for food and grocery.

• Boost in E-Commerce Business: In Canada, online grocery sales had continued to grow, although at a slower pace than when COVID-19 began. The Company’s e-commerce businesses in Quebec and British Columbia reported growth of 370% in sales for Q1 FY21.

Results – First Quarter Fiscal 2021

• Sales for the quarter ended August 1, 2020, increased by 9.0% driven by the impact of COVID-19 on the Food retailing segment, the expansion of FreshCo in Western Canada and the opening of new stores.
• The company posted an increase of 11.3% in gross profit for the first quarter primarily as a result of the impact of COVID-19 on sales and sales mix between banners. Temporary store closures in Western Canada partially offsets this increase.
• EBITDA increased to CAD 582.5 million from CAD 460.0 million in the prior year mainly as a result of the same factors affecting operating income. EBITDA margin increased to 7.9% from 6.8%.
• The Company invested CAD 119.8 million in capital expenditures for the first quarter fiscal 2021 including renovations, construction of new stores, construction of an e-commerce fulfilment centre and building of FreshCo locations in Western Canada. In fiscal 2021, capital spending is expected to be between CAD 650 million and CAD 675 million with approximately half of this investment allocated to renovations and new stores.
• The Company will open 10 to 15 FreshCo stores in Western Canada and expand the Farm Boy presence by eight stores in Ontario.
• The Company believes its cash and cash equivalents on hand, approximately CAD 770.0 million in unutilized, aggregate credit facilities as of August 1, 2020, and cash generated from operating activities will enable the Company to fund future capital investments.

Risk Associated to Investment

Investment in the stock is subject to inherent risks, uncertainties, and other factors. The outbreak of COVID-19 has resulted in restrictions and shutdowns, leading to increased safety protocols in stores and distribution centres, shifts in consumer demand and consumption, and volatile financial markets.

Share price performance

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative) – Price to Earnings

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

In the first quarter of fiscal 2021, the Company launched its new three-year strategy, Project Horizon, a growth plan focused on core business expansion and e-commerce acceleration. The group is focused on building the foundation of its advanced analytics capabilities, which will drive improvements in customer-facing elements such as store footprints, customer promotions and availability of product on a shelf. Furthermore, the group has significantly improved its efficiency and cost competitiveness, during the last three years through Project Sunrise while the Company further finds opportunities to remove non-value-added costs, contain costs as the top line grows and optimize margins.

Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 38.47 on 14 October 2020. We have considered Metro Inc, Saputo Inc, Loblaw Companies Ltd, George Weston Ltd etc. as the peer group for the comparison.

North West Company Inc

North West Company Inc (TSX: NWC) is a retailer of food and everyday products and services in two geographical segments, Canada and International. Its stores offer food, family apparel, housewares, appliances, outdoor products and services, such as post offices, income tax return preparation, quick-service prepared food, commercial business sales, money transfers and cheque cashing.

Investment Rationales

• Robust financial performance: The company's revenue grew 23% to CAD 648.5 million in the second quarter of 2020 from CAD 527.3 million in the first quarter of 2020. Net earnings increased CAD 44.6 million to CAD 62.6 million for the same period.

• Increase in the same-store sale:Food sales increased 20.2% and were up 19.1% on a same-store basis, and general merchandise sales increased 41.1% and were up 54.8% on a same-store basis.

• Reducing Debts: The Company's debt-to-equity ratio at the end of the second quarter was 0.78:1 compared to 0.97:1 last year. This step itself reflects the company’s ability to generate positive cash flows.

• Stable dividend income:The company declared a quarterly dividend of CAD 0.36 per share, an increase of CAD 0.03 per share or 9.1% compared the last dividend of CAD 0.33 per share. The group has a track record of increasing dividend payment, which is encouraging from an income investor’s standpoint.

Source: Company

Source: Company

• The company’s second-quarter consolidated sales increased by 23.0% to CAD 648.5 million, led by same-store sales gains. The impact of new store sales was mainly driven by re-opening of the Company’s Cost-U-Less (CUL) store in St. Thomas and the favourable result of foreign exchange on the translation of International Operations sales.

• The company reported an increase in gross profit of 28.2% driven by higher sales. The rise in gross profit was primarily due to favourable changes in product sales blend, and higher inventory turns contributing to lower markdowns and less inventory shrinkage.

• Net earnings increased CAD 44.6 million to CAD 62.6 million, and diluted earnings per share were CAD 1.25 per share compared to CAD 0.35 per share last year due to the factors discussed above.

SEGMENT INFORMATION

The Company is operating in two geographical segments, Canada and International. The following key information are presented by geographic segment:

Source: Company

Giant Tiger Transaction

On July 5, 2020, the Company accomplished their previously announced sale of 36 of the Company's 46 Giant Tiger stores to Giant Tiger Stores Limited for a cash consideration of CAD 45.0 million. The Giant Tiger deal resulted in a pre-tax gain of CAD 24.7 million or CAD 20.0 million net of tax. This Transaction is also expected to have a positive impact on earnings from operations of approximately CAD 4.0 million in 2H2020.

Risk Associated to Investment

While the company foresees revenue to remain above average through the duration of COVID-19 based on its role as an essential service offering, but there is downside risk to this outlook related to increased outbreaks of COVID-19 and potentially severe economic challenges.

Share price performance

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Earnings

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

Q2FY20 was a decent quarter for the company as it came out with the robust performance, increase in same store sales, reducing debts and a healthy dividend pay-out ratio. All these factors give a glimpse of strong foundations led by the company. The company foresees revenue to remain above average through the duration of COVID-19 based on its role as an essential service provider. The Giant Tiger transaction is also expected to have a positive impact on earnings from operations of approximately CAD 4.0 million in 2H2020. Further, at the last traded price, the stock was offering a dividend yield of 4.23%. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 34.03 on October 14, 2020. We have considered Sleep Country Canada Holdings Inc, Aecon Group Inc, and Leon’s Furniture Ltd etc. as a peer group for the comparison purpose.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.