SOBEYS INC. $42 (Toronto symbol SBY; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 65.5 million; Market cap: $2.8 billion; SI Rating: Average) is Canada’s secondlargest grocery retailer, after Loblaw. It operates around 1,300 stores, mainly in Central and Atlantic Canada. Major banners include Sobeys, Foodland, IGA and Price Chopper. Empire Company owns 70% of Sobeys.

Like Loblaw, Sobeys has expanded into non-food merchandise. It has also re-modeled many of its stores, and installed new computerized cash registers. Over half of Sobeys’ stores now use the same computerized inventory system, which should cut its long-term operating costs.

The company also plans to streamline more of its distribution activities, including consolidating its operations into a planned automated facility near Toronto.

These moves are starting to pay off. In its second fiscal quarter ended November 4, 2006, Sobeys earned $0.72 a share, up 2.9% from $0.70 a year earlier. If you disregard restructuring costs, per-share profits grew 10.5%, to $0.84 from $0.76.

Total sales rose 1.9%, to $3.25 billion from $3.19 billion, mainly due to new stores and its plan to expand older ones. The recent acquisition of 25 grocery stores in northern Quebec and Ontario also contributed to the sales growth. On a same-store basis, sales rose 2.4%.

Thanks to the improving earn- ings, Sobeys’ stock has gained roughly 15% in the past six months. It now trades at just 13.7 times the $3.07 it will probably earn in fiscal 2007. The $0.60 dividend yields 1.4%.

Ongoing cost controls will probably dampen Sobeys’ earnings growth in the next few years. However, it seems Sobeys has avoided the sort of supply disruptions that have hurt Loblaw in the past year.

Sobeys is a buy.