Gross margins flat for the quarter
A cyberattack late last year at Empire Co. Ltd., Canada’s second-largest grocery chain, disrupted operations for weeks and dented sales, costing the company more than $54 million in profits in the the third quarter — though the company said the final cost after insurance payouts is expected to be less.
Empire, which oversees a network of roughly 1,600 stores that includes Sobeys, Safeway, IGA, Foodland and Farm Boy, said a “cybersecurity event” in November knocked out self-checkouts, as well as access to gift cards and its new loyalty program, Scene+, for a week. The chain was forced to shut down its pharmacies for four days, and some of its operational systems were offline for several weeks, Empire said in an earnings update on March 16.
“Other than this, customers would have noticed very few changes to their normal shopping experience,” the company said, adding that the “availability of some products was temporarily impacted.”
Empire has so far refused to explain what caused the outages last year, or who was behind it — other than to say it “experienced IT system issues related to a cybersecurity event.” The attack amplified warnings from researchers and national intelligence officials that the agri-food industry has become a target of cyber criminals and state-sponsored hackers.
The November attack forced Empire to spend millions on fees for lawyers and professional services, software and hardware upgrades and lost inventory. The company said it brought in “leading cyber defence firms” to help its in-house security teams solve the problem.
Those direct costs cut earnings in the quarter by an estimated $39.1 million, after accounting for all insurance payouts to date. If not for insurance, the blow would have been bigger. Empire said lost sales and operations snarls related to the incident slashed another $15 million off the bottom line. Empire said it temporarily lost access to advanced planning and promotion tools, as well as the system it uses to manage its fresh inventory, all of which contributed to the declines.
But the grocery chain suggested it could recover more money from insurance in the coming quarters, further dampening the final cost of the attack.
In its previous earnings update, on Dec. 15, Empire estimated the cyberattack would cut $25 million from annual net earnings in 2023, based on an “initial assessment.” On March 16, however, the company updated the estimate to $32 million.
“Empire estimates, based on available information, that the final impact on net earnings over fiscal 2023 and fiscal 2024 will be approximately $32.0 million, net of estimated insurance recoveries,” the company said.
‘Extremely noisy quarter’
Empire booked profits of $125.7 million, or 49 cents per share, on sales of $7.5 billion in the quarter ended Feb. 4. On an adjusted basis, net earnings were $164.8 million, down about 19 per cent compared to the same quarter last year, when Empire recorded an “unusually large real estate income” that boosted earnings in the third quarter of 2022 by 14 cents per share.
Empire excluded $39.1 million in direct costs related to the cyberattack from the latest adjusted quarterly earnings. But the $15 million from lost sales and efficiency wasn’t excluded, pulling down adjusted earnings by six cents per share, the company noted.
Adjusted earnings per share of 64 cents missed forecasts of 71 cents. RBC analyst Irene Nattel said Empire had an “extremely noisy quarter,” with a “negative impact on revenues of event as operations were severely disrupted” by the cybersecurity woes. But the results were roughly in line with forecasts excluding the six-cent drag from the attack, Nattel wrote in a note to investors.
Empire said its gross margins in the quarter were flat, year over year, excluding fuel. The metric has received a lot of attention in the grocery business over the past year, as the big supermarket chains faced accusations of price gouging in the middle of an inflation crisis. Gross margin, which measures the amount of revenue left over after subtracting the cost of sales, is seen by many in the industry as the best test of whether a grocery chain is taking advantage of inflation to jack up prices more than necessary.
While flat margins may absolve supermarkets from price-gouging claims, it also could be a sign of deeper problems in the grocery industry, according to David Soberman, a professor at the University of Toronto’s Rotman School of Management.
Soberman said keeping margins steady, while inflation continues to blunt consumer spending power, is a luxury only businesses in heavily consolidated sectors get to enjoy. In a sector with healthy competition, he argued, retailers would be absorbing inflationary cost increases by taking slimmer margins, to keep their prices lower and lure customers away from rivals.
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“These companies don’t compete to the degree they should, which is why we pay higher prices,” he said in an interview last month. “If you have a competitor that says, ‘Well you know, you have a four per cent markup, I’m going to show you that I can do well with a three per cent markup.’ Then someone else is at two-and-a-half per cent markup.”
Empire chief executive Michael Medline pushed back against the scrutiny on profits during a hearing at a House of Commons committee last week, as part of a parliamentary study into the price gouging allegations.
“We at Empire are not profiting from inflation,” he said. “It doesn’t matter how many times you say it, write it or tweet it. It is simply not true.”
• Email: firstname.lastname@example.org | Twitter: jakeedmiston
(Except for the headline, this story has not been edited by PostX News and is published from a syndicated feed.)
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