Empire’s Six-Year Turnaround Now Complete

Empire Company Limited (“Empire” or the “Company”) (TSX: EMP.A) has announced its financial results for the fourth quarter and full year ended May 6, 2023. For the quarter, the Company recorded net earnings of $182.9 million ($0.72 per share) compared to $178.5 million ($0.68 per share) last year. The Company is excluding the estimated direct impact of the Cybersecurity Event(2), net of insurance recoveries and the estimated one-time costs associated with the integration of Grocery Gateway into Voilà in its Adjusted Metrics(1). For the quarter, the Company recorded adjusted net earnings of $184.9 million ($0.72 per share) compared to $178.5 million ($0.68 per share) last year.

“With our six-year turnaround now complete, we have the tools, team, assets and capabilities needed to thrill our customers, compete and win,” said Michael Medline, President & Chief Executive Officer, Empire. “Our focus going forward will be on turbocharging our business, with an even greater emphasis on our stores and supply chain, enhancing our digital capabilities and driving efficiency.”

PROJECT HORIZON

The Company successfully completed its three-year growth strategy, Project Horizon, at the end of fiscal 2023. As part of this strategy, the Company realized significant benefits from the store renovation program, new store expansion (including FreshCo conversions and Farm Boy expansion), promotional optimization and data analytics, Scene+ (a new loyalty program), personalization of customer offers, growing and enhancing the Own Brand portfolio, and generating strategic sourcing cost efficiencies. The Company achieved management’s target of an incremental $500 million in annualized EBITDA.

Project Horizon initiatives will continue to provide benefits in fiscal 2024 and beyond, including Scene+, personalization and a continued emphasis on developing the store network through renovations and new store expansion.

Over Project Horizon’s three-year timeframe, the Company achieved a compound annual growth rate (“CAGR”) in EPS of approximately 13% and an increase in EBITDA margin of approximately 60 basis points, consistent with management’s updated expectations provided in the third quarter of fiscal 2023. Differences compared to the original Project Horizon targets of improving EBITDA margin by 100 basis points, which was expected to generate an EPS CAGR of at least 15% was largely due to delays in delivering some key initiatives as a result of the novel coronavirus (“COVID-19” or “pandemic”) and the Cybersecurity Event (as defined under the heading “Business Update – Cybersecurity Event”), higher depreciation than originally anticipated resulting from higher capital spend, and the impact of significant and unexpected inflation.

The Company’s calculation of the EPS CAGR and the EBITDA margin increase excludes the full impacts of the Cybersecurity Event (due to its unusual nature and the expectation that the timing of certain insurance recoveries will occur after the fiscal year end) and the one-time costs associated with the Grocery Gateway integration. See “Business Updates – Cybersecurity Event” and “Business Updates – Voilà” for more information on these adjustments.

COMPANY PRIORITIES

Over the last six years, the Company has successfully completed two transformation strategies, Project Sunrise and Project Horizon. These strategies have comprehensively reset Empire’s foundation, enhanced the Company’s data capabilities, deepened the understanding of customers, and prepared the business to effectively capture emerging trends. With these transformation strategies now accomplished and the turnaround complete, the Company aims to grow total adjusted EPS over the long-term through net earnings growth and share repurchases. The Company intends to continue improving sales, gross margin (excluding fuel) and adjusted EBITDA margin by focusing on priorities such as:

Continued Focus on Store:

Over recent years, the Company has accelerated investments in renovations, conversions, and new stores along with store processes, communications, training, technology and tools. Beyond fiscal 2023, investing in the store network will remain a priority, demonstrated by a sustained emphasis on renovations and continued store expansion in Discount. The Own Brands program enhancement will remain a priority through increased distribution, shelf placement and product innovation.

The Company intends to invest capital in its store network and is planning to renovate approximately 20% to 25% of the network over the next three years. This capital investment includes important sustainability initiatives such as refrigeration system upgrades, heating, ventilation and air conditioning (“HVAC”) system upgrades and other energy efficiency initiatives.

Enhanced Focus on Digital and Data:

The focus on digital and data will include continued e-commerce expansion with Voilà, loyalty, through Scene+ (see “Business Updates – Voilà” and “Business Updates – Scene+” for more information), personalization, improved space productivity and the continued improvement of promotional optimization. Space productivity will further enhance the customer experience by improving store layouts, optimizing category and product adjacencies and tailoring product assortment for each store. The advanced analytics tools built for promotional optimization will continue to be refined through the partnership between the advanced analytics team and category merchants.

Efficiency and Cost Control:

The Company has significantly improved its efficiency and cost effectiveness through sourcing efficiencies, optimizing supply chain productivity and improving systems and processes. Beyond fiscal 2023, the Company will continue to focus on driving efficiency and cost effectiveness through initiatives related to strategic sourcing and supply chain productivity.

SUMMARY RESULTS – FOURTH QUARTER & FISCAL YEAR

The Company’s fourth quarter and fiscal year ends on the first Saturday in May. As a result, the fourth quarter and fiscal year are usually 13 weeks and 52 weeks, respectively, but include results for an additional week every five to six years. The quarters ended May 6, 2023 and May 7, 2022 were 13 and 14 weeks respectively. The years ended May 6, 2023 and May 7, 2022 were 52 and 53 weeks, respectively. The 53rd week of operations in fiscal 2022 accounted for approximately $551.0 million in sales and generated earnings per share of approximately $0.07.

On November 4, 2022, Empire experienced IT system issues related to a Cybersecurity Event. The Company has included in its Adjusted Metrics an adjustment for direct costs such as inventory shrink, hardware and software restoration costs, legal and professional fees, and labour costs, net of insurance recoveries to date. The adjustment to net earnings for the quarter ended May 6, 2023 was a recovery of $5.0 million. The adjustment to net earnings for fiscal 2023 was ($34.1) million.

In addition, the Cybersecurity Event required certain operational systems to be shut down for several weeks. The inability to utilize these systems had a temporary negative impact on Empire’s sales and operational effectiveness, further impacting third quarter and fiscal 2023 net earnings by at least ($15.0) million (($0.06) per share). There was no incremental impact in the fourth quarter.

Empire is in the process of working with its insurance providers to make claims under its policies. Due to the complexity of the cyber insurance coverage and related claims, there is a time lag between the initial incurrence of costs and the recognition of anticipated insurance proceeds.

Longo’s e-commerce business, Grocery Gateway, will be merged into Voilà in July 2023. The Company has included in its Adjusted Metrics an adjustment for the costs of the integration charged to earnings in the fourth quarter of fiscal 2023 which were approximately $7.0 million, net of tax and non-controlling interest.