Empire can win back Safeway customers, says CEO

TORONTO — Supermarket owner Empire Co. Ltd. has a lot of work to do before it can regain customer loyalty lost due to mistakes made after its purchase of Safeway Canada, its new chief executive said on Wednesday.

Focus groups suggest “we really did let them down” but there’s still loyalty to Safeway in the West that can be recaptured, Michael Medline told analysts. It was his first conference call since becoming the head of Canada’s second-largest grocery chain, which also owns Sobeys.

“You’ve got to be priced right and that’s pretty basic. But I think we strayed away about talking about our overall value proposition,” Medline said.

“Canadians should shop (with) us for a variety of reasons … and we got focused on talking only about price.”

The former Canadian Tire executive said investors would likely only see incremental improvements in the company’s fiscal fourth quarter.

Empire (TSX:EMP.A) reported a modest profit on Wednesday after recovering from a huge loss in last year’s third quarter, when its previous CEO oversaw a writedown involving its businesses in Western Canada.

Excluding the writedowns, Empire’s earnings in this year’s third quarter fell by 58 per cent to $34.6 million. Its revenue dropped by $137.4 million to $5.89 billion.

Medline said that company management has made progress on getting product pricing right and stabilizing the profit margins.

But it needs to cut out costs further to improve margins and make the organization easier to manage, he said, without disclosing exactly how those goals will be achieved. He did, however, point to the company’s “highly regionalized” structure.

“I can tell you, every single day that goes by, I realize that the current regional structure we have is very, very difficult to get things done,” he said.

Based in Stellarton, N.S., Empire had $30.5 million of net income for the company’s fiscal third quarter ended Feb. 4, or 11 cents per share under generally accepted accounting principles.

Irene Nattel, who covers Canadian retailers for RBC Dominion Securities, said in a brief note that Empire’s third-quarter results were “no worse than expected” and that earnings per share were above her forecast of seven cents per share.

The stock closed up 4.7 per cent at $17.32 in Toronto.

But the grocer was also hit with a downgrade by debt ratings agency DBRS, which lowered it to BB (high) from BBB (low) and maintained its negative trend, suggesting it could be cut even further. DBRS said the change reflected Sobeys’ underperformance relative to its peers, resulting in lost market share.

A year earlier, Empire had a loss of $1.37 billion or $5.03 per share, mostly due to a writedown of the Safeway chain — which Sobeys purchased for $5.8 billion in cash in November 2013 .

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