Sobeys Leaps To The Top In Oil Rich Alberta, Acquires 213 Grocery Stores From Safeway (market share Loblaws)

        June 12th was a big day for Nova Scotia's biggest company Empire Company Limited (tsx:emp.a).  On that day, Safeway (nyse:swy) agreed to sell it 213 grocery stores for C$5.8 billion.  Sobeys last major move was a 1999 deal involving the Oshawa Group, that takeover only cost the company $1.5 billion but added more than $4 billion in annual sales and increased the number of locations by a factor of two.
The Safeway deal makes sense for Sobeys on a couple fronts. 
1) cost savings !  synergies of $200 million per annum averaged over the next three years.
2) Gives it grocery stores in sought after locations
3) Sobeys becomes a truly national grocery chain (large format supermarket locations go from 3 to 78 in British Columbia) 4) Gives it a leading market share position in Alberta which is significant for a couple reasons  i) Alberta's population growth is the highest among Canadian provinces ii) Alberta household income is some $15,000 higher than the national average meaning consumers could be more open to buying higher priced premium items (private label organic products have a higher profit margin).   July update - Sobeys parent company Empire Co exits the theater business by selling 44 theaters housing 349 screens for $255 million cash.  24 cinemas in Atlantic Canada (179 screens) will go to Cineplex for $200 million.  Landmark Cinemas is paying $55 million for the 20 Empire theatres in the rest of Canada (170 screens).  This is consistent with Empire Company's original plan to use $1 billion from asset sales to pay for Safeway (at fiscal 2013 year end the company had only $455m in cash).

The facts
- Sobeys pro forma annual revenue goes from $16 billion to $24 billion.
- 168 of the 223 Safeway stores (213 grocery, 10 liquor) are in British Columbia (75) and Alberta (93).  49 in Saskatchewan (33) and Manitoba (16).  Another 6 are in Ontario.
- Sobeys also gets 10 liquor stores (already has 29 lcbo stores most in Alberta) and 12 manufacturing facilities.  199 in store pharmacies, 62 fuel stations.
- Fuel business is growing !  189 gas stations in Quebec, 71 in Atlantic Canada and now 62 more in Western Canada.
- In the first half of 2013 $515.1m of the $780.5m in new revenue came from gas sales.  Boosting sales of gas is an effective way to increase revenue and cash flow. 
- As large a deal as it is, the Safeway acquisition doesn't give the company any additional market share in Quebec, and doesn't make much of a difference in Ontario (6 Safeway locations).  All of Ontario's grocery market share is held by Loblaws, Metro Inc, and Sobeys.  Sobeys needs organic growth there, acquisitions are not really an option.

A Next Move For Sobeys

 

 

Sobeys is in an enviable position.  Target (nyse:tgt) is allowing Sobeys to sell its own Compliments branded items at new Target stores across Canada.  Sobeys leads in grocery market share in Atlantic Canada, and discount chain FreshCo is having a lot of success competing with Loblaws and No Frills in Ontario.  Sobeys arguably runs a more diversified business than Loblaw Companies and that makes it a great investment.  Loblaws does have something Sobeys doesn't, a clothing business, but with pressure on apparel suppliers in Bangladesh to spend more refurbishing factories, increasing wages, profit margins may also be under pressure.

•  Lawtons can compete with Shoppers Drug Mart on a national scale. 

Sobeys (EMP.A) Did Well in 2012 Even Compared Loblaw Companies LTD (L), Metro Inc (MRU.A)

Empire Company Ltd (tsx:EMP.A) is the parent of Sobeys Stores Limited, the food retailing unit which contributes 99.0% of revenue to the Empire Group (up from 98.3% in 2011 due to the divestment of Wajax property business but that will change next year due to the inclusion of 236 more gas stations as part of operations). Empire Company is still looking like a solid investment (ebitda margin grew the most out of the three companies however it's still in 3rd place at 5.5%).

It upped its dividend payout to 24 cents a share from 22.5 cents which represents an impressive +6.7% jump (had been 20c for a number of quarters prior to that). That beats Loblaw companies LTD last quarterly dividend payout of 21 cents a share back on April 30, 2012 (no growth quarter on quarter) and 21.5c at Metro Inc (up 12.0% from 19.2c which is a nice return). Metro had no problem hiking dividends, with earnings per share up +12 cents (82-->94c) compared to +14 cents at Empire Company (121-->135c) and -13 cents cents at Loblaw Companies Ltd (58-->45c).

Same store sales: Metro 2Q12 (March 2012) +1.0%; Loblaw Companies (march 24, 2012) -0.7%, Empire Company (June 2012) +0.7%

Although sales were down slightly in the last quarter of 2012 (-1.8%), after accounting for the period length being 1 week shorter empire's total sales were actually up +3.0% or $474.9 million (fiscal 2012 only 52 weeks vs 53 weeks in fiscal 2011). Sales were also +3.0% higher for the year after accounting for 2011's extra week & the impact on sales resulting from acquisitions & divestments of convenience stores/gas stations (sales difference between 2011 and 2012 goes from $290m --> $474.9m). Empire Company's EBITDA (unadjusted) ended 2012 on a strong note, up +$14.4m over last year's quarter compared to only +$13.6m for the entire fiscal year (meaning it actually contracted over the previous three quarters). In 4q12 only $10m ($35.3m for the year) in profit came from investments and other operations up from $6.5m in 2011. In the thid quarter, Sobeys food business contributed $3.94 billion to revenue (out of Empire's $3.98b) while in the fourth quarter it was $4.02 billion (out of Empire's $4.07b) which is about 99.0%. In terms of profit, Sobeys was the source of only 89.54% of Emipre's over the last two quarters.
Ebitda margin for last quarter; Metro Inc still leads the industry at 6.9% (up from 6.7%), Loblaws is still in second place at 5.9% (down from 6.6%); Empire Company, though last went up more than the other two: 5.5% (up from 5.06%).


Business at Empire Theatres appears to be strong with revenue from Empire's non food business up +7.2% to $50.6m (from $47.2m); Most of the revenue in that category comes from cinema operations. For fiscal 2012, that revenue reached $204.5m up from $200.5m.
$10M in ebitda gains in fiscal 2012 are attributed to 'dilution gains' from a change in ownership level of Crombie Reit. Normally it's $74.8m (vs $69.4m) but that changes to $64.6m (vs $62.6m) after removing items not considered part of underlying business.
Funded debt fell -$21.6m to just over $1.1 billion (1.3xebitda). Funded debt/total capital fell -1.7 basis points to 25.0%.

Market Share
If we base the market share each has in Canada's food retailing industry on the food revenue of each company during the last two quarters, we can assume Sobeys is at 23% if we believe Galen Weston Sr (Loblaw Companies) when he puts his company's share at 40% (Sobeys sales last six months $7.9632 billion vs Loblaws $14.034 billion last two reported quarters ending March 24). It follows that Metro Inc has 15% of the market (all of its revenue comes from food).

More information about the grocery industry can be found at another website I launched recently at www.grocerynews.org

Empire Company LTD (EMP.A) Will Marc Poulin Be Able To Fill Bill McEwan's Shoes As President Of Sobeys ? (Loblaw Companies LTD (L), grocery market competition)

          The February 8, 2012 announcement from Empire Company Limited concerning the retirement of Sobeys CEO Bill McEwan came as no surprise to those already aware of his recent health problems, but that doesn't mean there won't be a difficult transition period. Bill McEwan was instramental in growing the company's business both in its size and market penetration (in just the last two years FreshCo was launched followed by full-service next generation IGA stores in Quebec and Ontario). He oversaw implementation of the company's development growth strategy which thus far has been a success. Sobeys went from being mostly just an Atlantic grocer to one with a Canada-wide reach (881 of its 1337 locations are in Ontario, Quebec and Alberta). It was just after he joined in 2000 that Sobeys parent, Empire Company purchased most of the interest it currenty has in Genstar Development Partnership (real estate, at present Empire owns 40% of Genstar only marginally higher than the 35.7% acquired in January of 2001; Genstar is now a bigger part of the company's real estate business since the divestment of Wajax last year).

Mr. McEwan was also instrumental in getting deals done with Target (will supply the chain with private label food products) and Shell (Sobeys not Empire Company made this deal; acquired 250 of Shell's 1,600 Canadian gas stations. That's in addition to the dozen or so Fast Fuel locations already run by Sobeys Atlantic). In fact even Sobeys private label (Compliments) was launched in the middle of his tenure; The brand now includes a portfolio of five distinct product lines; Balance, Organic, Sensations, Greencare in addition to Compliments, which is vital considering main competitor Loblaw Companies has seen demand for its own Green Leaf organic products surge.

     For a grocery chain that added more than +$200M to operating income, +$6B to sales and pushed parent company Empire's dividends past 80 cents a share, Bill McEwan's generous compensation ($1.9M cash bonus in 2010 in addition to a 3.8% raise) is easy to justify. Only two years prior to making him CEO, Sobeys completed the takover of IGA's parent company the Oshawa Group, in a mega deal that more than doubled sales; That added another dimension to his new job, tasking him with integrating the two companies, does he convert IGA into Sobeys stores or not ? what about Price Choppers? He left the brands intact except for Price Choppers, but that's a different story. Price Chopper locations are gradually being replaced by FreshCo which also markets itself as a discount retailer, meaning they will continue to attract the same type of customers. Sobeys is about half as big as Loblaws (sales) the same as it was back in 2000, but remaining the second largest in what has become an ultra-competitive industry is itself impressive.

His story is remarkable to say the least. He started out bagging groceries at a Ferraro supermarket as a teenager in British Columbia. At around 18, he entered university and began studying Arts before cutting his studies short two years later, opting instead to go back to work at the supermarket. His passion for the food business gave him unique insight as well as put him in contact with the right people and by the 1990's he was a vice-president at A&P in the United States.

Now onto Marc Poilin, who is he ? For starters, he has a masters degree in business (though Bill McEwan did more than alright without one), has 26 years experience in the food retailing business (started out with Provigo - now owned by Loblaws) and 1 year experience as president of a major grocer (IGA).

His job won't be easy; Food price inflation especially for meats (record high and going up) means Sobeys will eventually be forced to raise prices more than customers are accustomed to (2Q2011: Sobeys prices decline -1% even though cost of goods actually went up). Sobeys has not yet raised prices the way it would have liked and that's because of an unprecedented amount of promotional discounting also known as 'disinflation' attributable to intense competition. Not helping the situation is Wal-Mart which now carries more grocery food items than it did a year ago.

Bill McEwan has routinely been awarded top tier industry-level recognition. In 2005 he received the Global Pencil Award. In 2009 supermarketnews named him a top 75 food retailing executive and on April 10, 2012 the Retail Council of Canada gave him the lifetime achievement award (highest award in Canada). The leadership change will become become official on June 29, 2012.

Also of note:

- Empire Company's current president Paul Sobey took over the reigns of the company in 1998, only two years before Bill McEwan joined so it'll be interesting to see if his departure leads to any changes at Empire's board.

- On April 26, 2007 Sobeys and Empire Co officially become one company (Empire) after Sobeys agreed to be bought out for $1.06B (72.1% --> 100%). So until 2006 Sobeys annual report statements were made by itself not part of Empire Company reports.

To those of you who visit my site regularly looking for new posts I apologize for not writing as much lately. I've had a busy couple months and am getting ready to launch a couple new websites. One of them is grocerynews.org (already started but has a lot of work ahead) and the other one I'm working on will be located at techstocks.co (.co not .com). Thanks for visting and appreciate the comments !

Sobeys challenging Loblaw Companies' dominance in Canada's grocery market (superstore competition, provigo, no frills, loblaws)

   Between the years of 2008 and 2011, annual sales at Empire-Sobeys Ltd rose 12% to over $16B (53 weeks ended 2Q12 up from $15.5B the year prior, in the 1st qtr $4.15B up 3.2% while operating income for the qtr was stable at $150M) compared to only 4.9% for Loblaw Companies (in the 3q11 sales were 2% higher qoq, 2q11 qtr Loblaw sales didn't grow at all qoq steady at $7.27B (rev up 6% though quarter to quarter)/ income up 16m, ebit up 3m) and 0.8% for Metro Inc (fiscal 2011 $11.431B). Since 2006 the first full year that A&P Canada was part of Metro, Metro's sales have increased by only 4.3% compared to 24.7% for Sobey's; Minor boost for Sobeys came in 2007 when it acquired BC chain Thrifty Foods for $260M, for the past six years Sobeys has led the industry in same-store sales growth. Sobeys latest quarterly dividend was 22.5 cents per share. When we look at the last fiscal year annual revenue at Loblaw Cos was up only 0.3% compared to 3% for Sobeys (Sobeys 12 month period ended in May 2011, Loblaws January 2011). Most of the increase in Sobeys revenue came from 1) Larger new stores (in terms of square footage, closing the gap between it and Superstore 2) Modest inflation 3) Product/services innovation. Investments/other operations provided roughly 1.2% of revenue ($51.1M). Food retailing sales up 3.3% in the quarter (surpassing $4B to $4.106B). Consolidated funded debt fell 12.8% to $1.1004 billion. In the discount market Loblaw's No Frills leads all other grocers, just the 152 No Frills stores in Ontario made $3.4B in sales in 2010 more than Sobey's FreshCo and Metro's Food Basics combined. (June edition: Grocery Trade Review)

Food retailing market share in Canada among grocers: Loblaw Companies 43%, Sobeys 21%, Metro Inc 16%. (Atlantic Farm Focus: Sobeys to supply Target)

Sobeys same store sales growth was 1.7% in the 1st quarter of the company's 2012 fiscal year (ended August), that compares to Loblaw Companies reported 1.3% in its 3rd qtr (ended October) and -0.1% in its 2nd; Sobeys led the industry in same store sales for six consecutive years (the latest a 1.3% increase in 2011).  In the 2nd qtr Sobeys same store sales +1.9% vs +2.5% for Loblaws.  Loblaws earnings in the quarter ended October 2011 totalled $236M up 19.8% even though revenue increased only 2.0% to $9.7B, only the second quarter to quarter increase since a 3.5% decrease back in March (4Q sales grew strongly at over 3%). Loblaws revenue has been inconsistent quarter to quarter due to flat food sales and lower sales in drugstore, apparel and general merchandise. Parent Empire Company Limited has actually been controlled by the Sobeys clan since 1947 when Frank Sobey bought it for its land and ability to be transformed into an investment company. 1947 was also the year Sobeys opened its first supermarket store in Pictou. It was on the eve of Sobeys' 100th anniversary celebration of JW's birthday (JW was originally a marketer of meats) that Sobeys purchased Empire Company outright, acquiring the 27.9% of shares it didn't already own for $1.06B on April 26, 2007 for $58/share ($2-4 premium over the fair market value). In the fourth quarter of fiscal 2011 sobeys attributed the drop of 13.8% in sales from other operations to lower box office attendance due to movies having less consumer appeal. In the discount food market FreschCo is a new invention by Sobeys aimed squarely at Loblaws' No Frills ($3.4B in revenue or about 11% of Loblaw Companies annual sales). No Frills has been in business since 1978. Only about 12% of the grocer market in the maritimes is in the discount market, that's in stark contrast to Ontario (45%) and Quebec (33%). No Frills sold $3.4B worth of goods in Ontario alone in 2010 more than its two main competitors combined. (June edition: Grocery Trade Review)

In 2011 Sobeys expanded 12 stores (down from 13 in 2010/11 in 2009), opened 44 (up from 41 in 2010/47 in 2009) and closed 39 locations (down from 52 in 2010). Sobeys went private in 2007 when it became a subsidiary of Empire Company Limited following Empire's purchase of $1.06b worth of Sobeys outstanding common shares bringing its interest up to 100%. The company's 2011 revenue is 61% higher than it was in 2002 (145% increase in book value per share: 47.76).

Brand Diversification and the Ethnic Market
Sobeys has also been more open to diversification of its brands; After Metro acquired A&P it spent $200M to completely convert Loeb/A&P locations into Metro stores, however Sobeys chose a different route; After acquiring Price Choppers in the 1990's it left the brand largely intact for more than a decade before rebranding it as FreshCo, the other acquisition IGA/Oshawa Group ($1.5B deal in 1998 tripled its size and made it into a national company) was left intact. Initially, Sobeys did this in a bid to win over customers through customer appreciation efforts however brand diversification appears to have benefited Sobeys in the long run because it has allowed it to tap into different markets more effectively (Loblaws gained a bigger market share after it acquired T&T and launched No Frills and now Sobeys is doing the same with FreshCo, that chain has proven popular among ethnic customers, a consumer base that already represents over 35% of shoppers in Ontario and will represent 31% of all Canadians by 2031. (Sobeys takes on Loblaws/Weston to court discount and ethnic shoppers)

Sobeys has experienced tremendous growth over the last decade even before its recent success, between 2001 and 2006 Sobeys stock price rose by over 68%. Sobeys also has a significant stake in Canadian real estate (45.9% of Crombie real estate investment trust, 40% of Genstar Development Partnership) and with Canadian real estate prices climbing (average home price up 6.5% in September/# of properties sold up 2.7% qoq) those investments are bound to pay off for Sobeys. Crombie reit's properties include both high end assets (Barrington Place Shops, Cogswell Tower, CIBC Skyscraper in Halifax) and more traditional retail assets (Greenfield Park IGA plaza, Quebec). Sobeys also holds 100% ownership of Canada's second largest chain of movie theaters, Empire Theatres (Sobeys has operated cinemas since 1984). 2011 is also the year Sobeys converted most of its mainline locations into 24 hour supermarkets taking away from Superstore a key competitive advantage. About 85% of Empire's assets are associated with the food retailing business. Sobeys first reached $1 billion in sales in 1987, in 1999 (2000 fiscal year) Empire-Sobeys sales surpassed $10 billion for the first time (reflecting the first full year the Oshawa Group was part of it). Although revenue increased 75% that year, net income fell 35.7% to $86.7m.

Agreement With Target Canada Gives Sobeys Deeper Market Access
    On September 23, 2011 Target Canada announced that an agreement had been reached with Sobeys in which Sobeys will become the primary supplier of grocery items. The deal is big for Sobeys because it will be able to sell its own private label items outside of its own locations of Sobeys, FreschCo, IGA, etc. A similar agreement made in the US between Target and SuperValu Inc significantly boosted SuperValu's revenue and market access (operates over 2,500 locations but that number nearly doubles when Target and other stores it serves as primary distributor are included). 125-135 Target locations are slated to open begining in 2013. Since the news broke about a month ago Sobey's stock is up 6.2%. In the discount supermarket sector Sobeys' FreschCo competes directly with Loblaw's No Frills throughout much of Canada (though FreshCo hasn't yet been introduced to key areas such as Halifax), while Superstore (Real Canadian or Atlantic depending on the region, the superstore brand represents 1/5th of Loblaw's corporate run locations), Provigo (taken over in 1998/1999, presently Provigo is the largest brand by locations, 2X as many as Superstore), Maxi. Great Food and Zehr's take on Sobeys, IGA and Foodland head to head in regular priced food retailing in central and eastern Canada. About 30% (<400) of all Loblaw locations are discount 'no-frills' (removal of non-essential items to keep prices low) grocery stores (no-frills/valuemart/freshmart/wholesale club), that compares to less than 20% (252) for Sobeys' thrifty foods/freshco. No Frills sold $3.4B worth of goods in Ontario alone in 2010. (June edition: Grocery Trade Review)

On November 15, 2011 announced that it had reached a deal with the National Bank of Canada involving the sale of 15,000 tonnes worth of CO2 greenhouse gas emission gas credits (annually) to the bank, allowing the bank to be a neutral emitter (Sobeys currently has an excess of credits in Quebec due to improvements at IGA locations where harmful refrigeration gasses have been replaced).
Stats from the last two reported quarters
Empire-Sobeys - Fiscal 1q12 & 4q11: revenue was $8.3415 billion up 6.1% from the 1q11 & 4q10 ($7.8585), ebitda $512.8m up 6.3% from $485.8m, profit $171.7m up 7.5% from $159.8m.
Loblaw Companies - Fiscal 2q11 & 3q11: revenue was $16.841b up 1.2% from 2q10 & 3q10 ($16.646), ebitda $1143m up 7% from $1068m, profit $433m up 14.6% from $378m.
Metro Inc. - Fiscal 3q11 & 4q11: revenue was $6.233b up 1.8% ($11.4306b up 0.8% for the fiscal year)
ebitda $420.7 million down 2.9% ($773.4m up 6.8% for the year) with net earnings of $211m down 1.1% ($386.3m up 3.4% for the year).

For Empire-Sobeys, food retailing made up 98% of sales and 90% of operating income in both 2011 & 2010. The commercial real estate business contributes about 30% of funds from real estate operations even though it only contributes less than 15% of real estate revenue. Food Retailing: net debt/net total capital ratio was at its lowest level in 2011, hitting 13.4% it was as high as 32% just three years ago (2008). There are about 286 standalone Sobeys locations across Canada (25% of the company's locations). In fiscal 2011 57 freschco stores were opened, which exceeds units opened by main competitor No Frills. In 2005 it acquired the Oshawa Group, owner of IGA Canada. In March 2002 Sobeys sold Serca Foodservice to SYSCO for $411M.

Sobeys sells Wajax Income Fund but Maintains Interest in Halifax property owner Crombie Reit
->Since March 2006 Sobeys sold 105 properties to Crombie REIT raising $897m in 2 transactions.
->In 2010 Sobeys lowered its debt to capital ratio from 32.7% down to 29.3% and consequently (in May) both Standard & Poor's and DBRS raised Sobeys credit rating.
->In 2011 Sobeys divested itself of Wajax stock by selling 27.5% of Wajax Income Fund for $121.3m (used the proceeds to pay down debt). The market value of all of its real estate investment holdings was $451.2m on May 7, 2011 compared to $487.7m a year earlier (decrease was entirely due to the divestment of its Wajax investment which was worth $117.9m in 2010).
->During fiscal 2010 food retailing/real estate represented 94% of net income. At the end of 2010 total locations (food retailing) under the various banners numbered 1,334 (28.1m square feet) in 836 communities. In 2011 free cash flow fell to $132.6m from 350.1M.