Sobeys Inc. $38 – Toronto symbol SBY

Empire

Sobeys has undergone significant changes since this article was published in 2006, including its delisting by owner Empire Company LTD. See below for that June 2016 update, following an Oct. 2019 update on Empire.

2019:

Empire Company Ltd., $30.50, symbol EMP.A on Toronto (Shares outstanding: 269.1 million; Market cap: $9.4 billion; www.empireco.ca), is a diversified Canadian-firm based in Stellarton, Nova Scotia. It’s handed investors a 22% gain so far this year.

Sobeys owns or franchises more than 1,800 stores across Canada. In addition to Sobeys, the company’s banners include IGA, IGA Extra, FreshCo, Safeway and now Farmboy.

Empire sells and distributes food through its 100% ownership of national grocery retailer Sobeys. It also invests in real estate through both public and private companies.

Sobeys owns or franchises more than 1,500 stores across Canada. In addition to Sobeys, the company’s banners include IGA, Farm Boy, FreshCo and Safeway. Empire’s real estate division includes commercial and residential property operations. It also owns 41.5% of Crombie REIT (symbol CRR.UN on Toronto). That trust invests in retail, office and mixed-use properties.

Canada’s food stores are increasingly competitive: big rivals Loblaw, Metro, Walmart and others are all looking to add market share to enhance value for their investors. Meanwhile, though, Empire continues to report rising sales and profits, and its balance sheet is sound.

We’ll say more about Empire Company in an upcoming Advice for Inner Circle Members email.

Meanwhile, Empire Company is okay to hold.

From 2006:

SOBEYS INC. $38 (Toronto symbol SBY; Conservative Growth Portfolio, Consumer sector; SI Rating: Average; www.sobeys.com) operates 1,300 company-owned and franchised retail grocery stores in 10 provinces, mostly under the “Sobeys” and “Price Chopper” banners.

It is the second-largest food seller in Canada, based on market share, behind Loblaw. Empire Company Ltd. owns 70.6% of the company’s common stock.

Sobeys’ revenues grew at a compounded annual rate of 7.4%, from $9.7 billion in 2002 (fiscal years end April 30) to $12.9 billion in 2006.

Earnings from continuing operations grew from $1.76 a share (total $115.9 million) in 2002 to $2.72 a share ($179.0 million) in 2003. Restructuring and other unusual costs cut income to $2.53 a share ($166.5 million) in 2004. But profits improved to $2.85 a share ($186.7 million) in 2005, and to $2.90 a share ($189.4 million) in fiscal 2006.


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Upgrades equal to three times earnings

Sobeys has spent $1.55 billion in the past three years, mainly on a new distribution centre near Toronto as well as new stores, cash registers, and computerized purchasing and inventory management equipment. That 2.9 times what the company earned over that three-year period.

In its first fiscal quarter ended August 5, 2006, profits grew 2.7%, to $0.76 a share (total $49.9 million) from $0.74 a share ($48.2 million) a year earlier. Upgrades and store renovations cut profits in the most recent quarter by $0.07 a share. Sales grew 1.2%, to $3.31 billion from $3.27 billion, while same-store sales rose 2.8%.

The new systems should help prevent stores from running out of fast-selling goods, and avoid overstocking slower-selling items. That should help improve customer traffic and loyalty.

Sobeys is based in Atlantic Canada, but has steadily expanded to larger markets in Central and Western Canada. In fact, 55% of Sobeys stores are now in Ontario and Quebec.

For example, it recently paid $82 million for the operations of Achille de la Chevrotière Ltée (ADL), which operates 25 grocery stores in northern Quebec and Ontario. ADL also distributes food to other retailers in that region. The new assets should increase Sobeys’ annual sales by 2%.

Sobeys is now expanding the range of non-food items it carries, including pharmaceuticals and seasonal items. These items typically generate higher profit margins than food.

The company recently launched a new private label line of healthy food products, in association with the Heart and Stroke Foundation of Canada.

Called “Compliments Balance”, these new products have fewer calories and less fat than competing products. The company also launched a new line of organic products. Innovations like this should help Sobeys compete with Loblaw’s popular President’s Choice private label products.

Strong balance sheet cuts risk

Despite its increased capital spending, Sobeys balance sheet is still in good shape.

Long-term debt its just 25% of shareholders’ equity, while goodwill and other intangible assets account for 17% of total assets. Sobeys also has $292.2 million or $4.46 a share in cash. That gives it plenty of flexibility to keep investing in new stores and equipment, or make acquisitions.

Sobeys’ stock has struggled in the past three years. It dropped to $27 in April 2004, but got as high as $42 in October 2005.

It now trades at just 12.5 times the $3.03 a share it should make in fiscal 2007. That’s cheap considering its market position, and sales of about $186 a share.

We feel that most of Sobeys’ recent problems are behind it, and that its sales and profit margins will rise steadily over the next few years. That should let Sobeys increase its $0.60 dividend, which now yields 1.6%.

Sobeys is a buy for long-term gains.


For new buying of a grocery retailer, we prefer Loblaw Companies Ltd., $67.57, symbol L on Toronto (Shares outstanding: 407.4 million; Market cap: $24.5 billion; www.loblaw.ca).

Loblaw currently operates over 1,100 supermarkets and 1,300 Shopper Drug Mart pharmacies across Canada. The company continues to report rising sales and earnings—and it now plans to increase that strength by spending $1 billion to open new stores and upgrade existing locations.

The stock trades close to all-time highs, but we still see it as a buy.

This article was originally published in 2006 and is regularly updated.

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