Is It Time To Take Profits with Empire?

EMP.A - Empire CompanyEmpire Company is a leading Canadian food retailing and real estate company. Empire’s reportable segments are food retailing (Sobeys Inc.), investment and other operations. Sobeys is one of only two national grocery retailers in Canada.

Sobeys is the larger segment accounting for nearly 85% of the operating income. Sobeys serves millions of Canadians with more than 1,500 retail stores and 350 retail fuel locations, operating in all ten provinces and in more than 900 communities across Canada. The company operates under retail banners that include Sobeys, Safeway, IGA, Foodland, FreshCo, Thrifty Foods, and Farm Boy. Empire Company has a 41.5% equity interest in Crombie REIT, and equity interest in residential real estate through Genstar. Its portfolio of properties consists of high-quality grocery and drug store anchored shopping centers, freestanding stores, and mixed-use developments primarily in Canada’s major urban and suburban markets. In addition, the company also operates a pharmacy business with free-standing locations through Lawton’s Drug Stores. Empire Company owns and operates fuel and convenience stores, and liquor operations.

With more than a century’s experience under its belt, Empire Company has built a strong reputation of Canada’s most trusted grocer. Customers prefer Empire Company for its fresh and quality products. The company along with an alliance with Ocado will launch a central pickup, home delivery online grocery shopping business by mid-2020.

Investment Data

Revenue Growth & Market Exposure

Empire Company’s Project Sunrise, a three-year transformation program is intended to simplify the organizational structure and reduce costs, which would subsequently, result in at least $500 million in annualized benefits by 2020. It is already making good progress in this direction with Empire realizing $100 million of these benefits during FY18 and $200 million in FY19.

Empire’s agreement with Ocado is expected to bring an integrated grocery e-commerce platform online to the Greater Toronto Area by the start of FY2020. It also rebranded its poor performing Safeway and Sobeys stores to discount stores (FreshCo) in a few markets. Eleven more FreshCo stores will open in Western Canada in fiscal 2020. Empire also acquired the business of Farm Boy, a food retailer with a network of 26 stores in Ontario, in September 2018. Empire Company is further investing in operational improvements in stores and the related supply chains in order to make sure that the stores have the items that customers want most.

Empire Company is pursuing data analytics and artificial intelligence to drive smarter merchandising decisions and more relevant customer communications. It is one of the best retail chain stores for individuals with sensory challenges. Given its strong national reputation, and a century’s old existence Empire Company is in a good position to meet the evolving needs of its customers. A strong innovative and customer-centric approach is its key competitive advantage.

Dividends

Empire Company is experiencing consistent cash flow generation, on the back of solid top line, margin improvement, and successful progress of Project Sunrise. It last raised its dividend by 9%. Empire Company is a Canadian Dividend Aristocrat and has been raising its dividends handsomely. It has grown them at 6.7% CAGR over the last decade. The company currently has a dividend yield of 1.35% and a reasonable payout ratio of 34%. Empire has also announced a share buyback program and has expressed an intention to repurchase up to $100 million of its shares in FY20.

A large majority of Sobeys’ sales are generated from food products which are necessary products and hence recession-proof. Its food retail stores such as Sobeys’, FreshCo, Safeway, IGA, are well known across Canada. Empire’s Lawton Drugs store is also a critical business. These businesses make Empire’s cash flows very safe. Moreover, Empire’s stake in Crombie REIT also diversifies its earnings.

Empire Company’s agreement with Ocado, the world’s leading online supermarket and Farm Boy, Canada’s fastest-growing food retailer should also prove to be incremental to the company’s earnings. In addition, its Sunrise project is also expected to generate annual benefits.

Rising demand for food and medicines should act as a tailwind for this Dividend Aristocrat. There are plenty of opportunities for Empire Company to diversify in its food segment and cross-sell products. Growing dividends, recession-proof business model, established market share position and strong geographic diversification should support future dividend hikes by the company.

Competition

Empire’s food retailing business, Sobeys, competes with other national and regional food distribution companies, non-traditional competitors and online retailers. The company is expanding online shopping as well as delivery options as it faces acute pressure from online grocery stores. On the conventional front, Empire competes with Metro Inc., a leading food and pharmaceutical Canadian company and Loblaw Companies Ltd. which is another leading grocery chain in Canada. Empire’s real estate operations compete with numerous other managers and owners of real estate properties.

TickerCompanySectorIndustryScoreQuoteMarketCapPEFPEEPSYieldPayoutRatioPaymentsDividendChowderGraph
ATD.BAlimentation Couche-Tard Inc.Consumer DefensiveRetail - Defensive6983.8047.3019.5719.264.280.6011.6840.5024.191
LLoblawConsumer DefensiveRetail - Defensive5372.8726.6833.5817.312.191.7357.5341.264.961
WNGeorge Weston LimitedConsumer DefensiveRetail - Defensive29108.1716.61277.3614.870.411.94512.2042.105.021
DOLDollarama IncConsumer DefensiveRetail - Defensive4950.9516.0429.9727.341.710.3510.2940.1811.551
MRUMetroConsumer DefensiveRetail - Defensive5956.4914.3521.9019.732.591.4230.8940.8017.121
EMP.AEmpire Co Ltd A NvtgConsumer DefensiveRetail - Defensive5736.739.9826.0517.731.411.3134.0440.486.581
NWCThe North West Company Inc.Consumer DefensiveRetail - Defensive6030.941.5116.1117.561.944.2768.0441.324.271

Bottom Line

Sobeys maintains a strong national presence in the Canadian retail food and food distribution industry. People living in the more than 900 communities across Canada depend on the company for food. The company leverages the strength of its brand and continues to build strong ties with customers. Empire Company should win more customers from continued investments in existing stores, launching new discount stores and an e-commerce platform. This positions the company well for future dividend hikes.

The recent hike in stock value has made Empire pricey in my opinion. Alimentation Couche-Tard is a “true” growth stock with a lower P/E for comparison. At these levels, it could be a profit taking opportunity but not an entry point.

EMP.A vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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