Empire Company Limited (TSX: EMP.A) is the Canadian firm behind popular Canadian supermarket chains, including Safeway and Sobeys. In 2015, the firm fell over 50% from peak to trough thanks to an inefficient and complex organizational mess that has since begun to improve under ex-Canadian Tire Corporation Limited CEO Michael Medline, who has done an impeccable job since taking the helm of what seemed to be a sinking ship at the time.
Empire was one of my top contrarian picks for 2017, but after surging as high as ~64% over the course of 2017, the stock had flat-lined in a really choppy fashion for the first half of 2018. At this point, it appears that the low-hanging fruit may have already been picked by the new management team. As industry-wide headwinds prevail, it’s likely that the turbulent times are just getting started for Empire, and a breakout in shares is unlikely over the medium term.
The company is still making moves to restructure its operations to enhance the in-store experience to regain the business of customers who have appeared to have fled to lower-cost options, most notably Loblaw Companies Ltd. stores.
Between a rock and a hard place
Safeway and Sobeys chains aren’t generally as massive as your typical supermarket. They’re a scattered chain of mid-sized grocery stores that offer a higher degree of convenience to those in close proximity to its locations.
The product offerings, on average, are more expensive than those of massive supermarkets, like a Superstore for instance, but the quality of the food, well, let’s just say it’s on par with Loblaw-owned stores at best.
Canadians, as you may know, are pretty heavily indebted, so for budget-conscious grocery shoppers, it’s much more economical to do a weekly grocery haul at a massive Superstore than it is to do bi-weekly trips to Safeway for arguably the same quality and quantity of food. By opting to go the extra mile for a Loblaw-owned supermarket, a grocery shopper stands to save tens of dollars per haul!
On the other end of the spectrum, quality-conscious grocery shoppers — especially millennials — are all about organic, no-GMOs, grain-fed, free-range food. These folks really have no incentive to go to an Empire-owned store, as the produce quality is nowhere close to that of Whole Foods Market.
So, what group of customers are Empire stores catering to, exactly?
Not budget-conscious or quality-conscious grocery shoppers, and certainly not those looking for a premium grocery shopping experience! Empire is relying solely on the fact that it may be more convenient for a select few based on the location of its stores. In an industry that’s about to be disrupted by grocery delivery services from technological disruptors, that’s simply not going to cut it. Even if Mr. Medline is able to continue to improve operational efficiencies, it’s going to take a whole lot more to thrive in an environment that’s going to become cut-throat!
Bottom line
At this point, Empire is still playing catch-up to its peers that currently possess superior margins. With no real catalysts on the horizon, and a bleak long-term outlook, I’d avoid the stock and potentially recommend it as a compelling opportunity for those looking to take on a big short.
Stay hungry. Stay Foolish.
