Empire Company (TSE: EMP.A) is a retailer whose key businesses are Food Retailing, Investments, and Other Operations. The Food Retailing division operates through Empire’s subsidiary Sobeys and represents nearly all of the company’s income.
This segment owns, affiliates, or franchises more than 1,500 stores in 10 provinces under retail banners, such as Sobeys, Safeway, IGA, Foodland, FreshCo, Thrifty Foods, and more.
Empire’s Earnings Results
The company recently reported earnings for its fourth quarter of Fiscal 2022. Earnings per share came in at C$0.68, which was below analysts’ consensus estimate of C$0.69. In the past nine quarters, Empire has missed earnings estimates only three times.
Nevertheless, the company saw strong revenue growth of 13.3% year-over-year, with revenue hitting C$7.8 billion compared to C$6.9 billion. The increase in revenue can be attributed to an additional week of operations, higher fuel and food inflation, and the acquisition of Longo’s.
However, same-store sales decreased 2.5% year-over-year when excluding fuel sales. This is mostly due to the tough comparisons from last year when the company’s sales benefited from COVID-19.
In addition, gross profit only increased by 11.6%, meaning that the company hasn’t demonstrated that it has operating leverage. Indeed, its gross margin has contracted from 25.9% to 25.6%.
The drop in gross margin was caused by the higher fuel sales, higher supply-chain costs, and sales mix changes. Interestingly, the gross profit margin increased 17 basis points when excluding fuel sales.
Empire’s Dividend and Buybacks
For income-oriented investors, Empire pays a 1.47% dividend yield on an annualized basis. When taking a look at Empire’s historical dividend yield, you can see that it has trended downwards:
At 1.47%, the current yield is on the low end of the range, indicating that income-oriented investors are paying a premium relative to yields they have been able to receive in the past.
Although the dividend isn’t very attractive, the company has been returning a significant amount of capital to shareholders through buybacks. Indeed, it repurchased C$249 million worth of shares during Fiscal Year 2022 and has intentions to buy back C$350 million worth in Fiscal Year 2023.
With a market cap of C$10.38 billion, the buyback yield for 2023 equates to approximately 3.4% – for a combined dividend and buyback yield of just under 4.9%.
Analyst Recommendations
Empire has a Hold consensus rating based on two Holds assigned in the past three months. The average Empire Company price target of C$46 implies 17.4% upside potential.
Final Thoughts
Empire saw a strong quarter, as revenue grew over 13% year-over-year. However, earnings per share fell short of estimates while same-store sales and gross profit margins decreased. Nonetheless, analysts remain positive on the stock, as it continues to return capital to shareholders and acts as a good hedge against food inflation.
