Empire Company (TSX: EMP.A) just dropped more than 9% from its summer highs. A falling stock isn’t automatically a bargain, but when a solid business declines, it can be worth asking whether the market has become too pessimistic.
For Empire, the answer depends largely on whether its long-term strategy can overcome today’s margin pressures.
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Empire is adapting to a more price-sensitive consumer
Empire operates more than 1,600 grocery and pharmacy stores across all 10 Canadian provinces under banners including Sobeys, Safeway, IGA, FreshCo, Farm Boy, Longo’s, Thrifty Foods, and Lawtons Drugs. It also has more than 350 retail fuel locations.
The challenge is that Canadian shoppers have become increasingly focused on value. That has benefited discount grocery formats, forcing Empire to expand FreshCo and other value-oriented offerings. While discount stores can generate lower margins, they can also help Empire defend market share and remain relevant as consumer preferences change.
Management plans to open roughly 70 stores over three years, with about 75% expected to be discount supermarkets. More than 25 new stores are planned for fiscal 2027 alone.
That investment could pressure margins in the near term, but it also gives Empire a potential avenue for longer-term growth.
The latest results offer some encouragement
Empire’s fiscal first-quarter 2027 results help explain the recent pullback. Revenue increased 2.6% year over year to $8.5 billion, while food same-store sales growth slowed to 1.2% from 1.9% a year earlier.
Gross profit rose 1.5% to $2.3 billion, although gross margin slipped to 26.8% from 27.1%. Importantly, earnings before interest, taxes, depreciation, and amortization (EBITDA), a cash flow proxy, increased 6.1% to $712 million, with the EBITDA margin improving to 8.4% from 8.1%.
Even more encouraging, diluted earnings per share (EPS) jumped 14% to $1.04. Management expects fiscal 2027 EPS growth toward the high end of its 8% to 11% outlook.
That’s hardly a picture of a business in retreat, but more of a company with resilient growth.
The dividend adds to the appeal
At $46.41 per share at writing, Empire trades at about 13.8 times earnings. This valuation offers a bit of a discount for investors who believe the company’s margin pressures are manageable.
The dividend is another reason to keep Empire on the watch list. The company has increased its dividend for roughly 30 consecutive years, with a 20-year dividend-growth rate of 8.2%. Its most recent increase, announced in June, was a healthy 10.2%.
At the recent share price, the dividend yield was approximately 2.1%, which is above its five-year average of about 1.8%. This suggests investors are getting a somewhat better entry yield than they have historically.
Empire isn’t without risks, particularly if consumers remain intensely focused on discount shopping and margins continue to deteriorate. However, the combination of a reasonable valuation, growing earnings, and a long record of dividend increases makes the recent pullback worth investigating.
Empire stock is obviously having a period of weakness currently. Long-term investors could observe if it holds the recent levels of about $46 over the next few weeks before further consideration.
The bottom line
Empire stock has pulled back from its recent highs, but the weakness may be creating an opportunity for long-term dividend investors. Its grocery business faces margin pressure as shoppers prioritize value, yet improving earnings, discount-store expansion, and a growing dividend could make the stock worth a closer look, especially if it holds the $46 level.
