Empire Company Limited

Good morning, ladies and gentlemen, and welcome to the Empire fourth quarter 2025 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, June 19, 2025. I would now like to turn the conference over to Katie Bryan, Vice President of Investor Relations. Please go ahead.

Thank you, Joelle. Good morning, and thank you all for joining us for our fourth part of the conference call. Today, we will provide summary comments on our results and then open the call for questions. This call is being recorded, and the audio recording will be available on the company's website at empirecone.ca. There is a short summary document outlining the points of our quarter available on our website. Joining me on the call this morning are Michael Medline, President and Chief Executive Officer, Costa Papanis, our new Chief Financial Officer, Pierre St. Laurent, Chief Operating Officer, and Matt Rangel, our former Chief Financial Officer. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I will refer you to our news release and MD&A for more information on these assumptions and factors. I will now turn the call over to Michael Medline.

Thank you, Katie. Good morning, everyone. This was a very strong quarter for Empire, and I am pleased with the way our team finished the fiscal year. We have become a disciplined grocer that is focused on delivering earnings growth. Our results this year have improved quarter after quarter as our hard work from prior years has enabled us to effectively navigate through the macroeconomic uncertainty in the latter half of our fiscal year. In Q4, we saw positive results across every major financial measure. we demonstrated strong gross margin control, capital discipline, and FD&A containment while delivering strong same-store sales growth. This was our fourth consecutive quarter of sequential same-store sales growth, and our momentum continues to build throughout the year. Altogether, this amount is meeting our financial framework goals this year, with annual growth of adjusted EPS at 8.8%. Our financial framework aims to grow our adjusted EPS at an average annual rate of 80% to 11% over the long term. Today I'll focus on three topics. Our Q4 results, market trends, the current environment, and capital allocation. Starting with our fourth quarter, overall we delivered an EPS of 74 cents this quarter. This translates to 17.5% EPS growth year over year. This was supported by strong things for sales growth of 3.8%, which was driven by the continued strengthening of our full service banners and sustained performance of our discount banners. we also gained market share this quarter. Over the last three quarters, we've been seeing that we were seeing green shoots, or early indicators that customers are returning to more favorable and predictable shopping behaviors. What we're seeing in our customer behavior is tough to reconcile against published consumer sentiment, which is near its lowest level in many years. But, as one of our key suppliers recently said, we have to parse sentiment from behavior. In Q4, there is no doubt that our customers' behavior continues to improve. In Q4, we continue to see sales growth in our fresh department, which indicates customers are trading up from non-fresh to fresh products. Backyard size continues to improve. We see customers shopping fewer stores than last year, and a continued decline in promotional penetration. As well, our data from a trusted third party shows that there has been a shift of buying from U.S. identified retailers to Canadian retailers. We believe that much of this customer shift will stick. Having said that, we continue to keep our eyes on the health of Canadian consumers. These remain very volatile and unpredictable times for Canadians and the economy. As well, we are glad to see spring weather finally started over the last couple of weeks across much of the country, as we're now into our busiest time of the year. Gross margin continues to improve this quarter, driven by operating efficiencies and a strong focus on executing with excellence in our stores. Market improvement of 32 basis points was better than our medium-term expectations of growth of 10 to 20 basis points per year. In Q4, the increase was largely due to continued struggle, growth, and full service, which has a stronger margin profile. The benefits of space productivity and disciplined execution within our stores with enhanced tools and processes that enable us to continue to improve and focus on areas such as non-theft shrink. Now to SG&A. At first glance, our report to SG&A does not tell the whole story. In Q4, our stock price grew by an unprecedented amount, the highest market cap increase within a quarter in our history. This is great for our shareholders, and we wouldn't want it any other way. But similar to Q3 and even more so in Q4, that contributed significantly to the non-cash accounting increase in total compensation expenses of $49 million over last year. Said another way, our EPS would have been an extra 15 cents this quarter without this. Excluding our incentive programs, our SG&A dollars grew by a reasonable 2.9%. Now let's talk about work we're seeing in the current environment, because I know you want to hear about that. Let me be crystal clear. We are not seeing inflation in our business outside of historical norms, and Empire's price inflation has remained very stable. Our internal inflation this quarter was way under CPI's food inflation purchase from stores and significantly below our same-store sales. Looking ahead, we expect food inflation will remain in line with long-term averages. Over the last 25 years, CPI's food inflation purchase from stores has averaged 3%. And while there may be some ups and downs, we believe this trend will hold. All to say, we are unable to reconcile what we are hearing or reading about inflation in the media, in food, or for some in the industry, to what we are actually experiencing. Last quarter, we spoke about our approach to managing tariffs and protecting our customers. Our approach had three major components. Elevating our local strategy, further topping into non-U.S. alternate supply sources, and having tough discussions with suppliers on tariff-related cost increases. This quarter, we are confident that our approach was the right one for our business and our customers, and has ultimately kept pricing and therefore inflation down. Let's dig into this in more detail. First, last quarter we said we heard loud and clear from our customers that they want Canadian products. We have been actively doing our part, not just the last few months, but the last few years by moving to a more local Canadian supply. A trusted retail and consumer intelligence third party recently confirmed that we have the highest Canadian product assortment in our banners versus our competitors, and by a significant margin. It is clear that our customers are voting with their wallets as our sales of Canadian products continue to rise. Secondly, over the years we have devolved a much larger and diversified source of supply to proactively manage threats, and we have accelerated these efforts in recent months. Our sourcing of U.S. products has continued to drop, and we expect this number to continue to decline as we enter the growing season for produce in Canada. Finally, we continue to work with our suppliers to ensure that reactionary or unjustified costs are not passed on to our customers. We're committed to building long-term partnerships with our suppliers, and passing through tariff-related increases can lead to their products becoming uncompetitive versus other viable alternatives. While these are not always easy conversations, we strongly believe our approach is the right one. With this three-pronged approach to tariffs, we are protecting our customers and doing our part to keep food inflation down. Next, I want to talk about our capital allocation plan for fiscal 2026. Our business is generating a very healthy amount of cash, $1.5 billion of free cash flow before capping, and we will continue to invest your capital wisely. Through the transformation period spanning fiscal 18 to fiscal 23, we focused our investment on getting our store network back to a healthy state, largely through renovations. We're now in a place where we can bring an increased focus on new store growth, filling gaps in our network to gain market share in pockets where we don't have significant exposure, but our competitors certainly do. We expect to put up 24 new stores in fiscal 26 compared to an average of eight per year through the six years of the transformation. We've increased our capital to account for this and estimate that we will invest $850 million with half of this on our store network. And Costa will give you more details on this shortly. Today, we announced a 10% increase in Empire's quarterly dividend per share, which brings our five-year dividend category to 10.8%, and represents an increase in our dividends for the 30th year in a row. We also announced that we renewed our NCID to repurchase up to 11.5 million shares, representing about 10% of our public flow. In fiscal 2026, we plan to repurchase up to $400 million of shares. We remain committed to returning free cash flow to our shareholders and continue to see this as a highly effective use of cash. And as you heard when we kicked off the call, We have both Matt and Costa with us today, and the transition has gone swimmingly. Matt has been working closely with Costa the last two months, and will be winding down next week. Matt will be sitting on a few of our partner boards to represent us, but has now stepped back from the day-to-day operations. With that, I'd like to say a final thanks to Matt for his hard work the last six years, and this will be his last conference call before retirement.