Empire Company (A) (EMP.A.TO)

This company has had a tough time. They had a “drop the ball” situation in Alberta. They now have a three-year plan and are going to spend $500 million to bring their stores up. However, it is early yet. He would sit on the sidelines for a while, to see how it works out.

They made a huge purchase of Safeway at just the wrong time, just before the Western economy fell apart. This isn’t the 1^st time they have stumbled, in one way or another. They will eventually pull out of this, but they are behind the 8 ball right now. He prefers Loblaws (L-T), which is the dominant player in Canada. It also has the biggest reach into the discount outlets.

(Top Pick Mar 18/16, Down 6%) He thought the bad news was in the stock, but then they wrote off the other half of the costs. They have a new CEO now. It will get turned around eventually.

They took on a horrendously big acquisition at the wrong time. No one could have foreseen the downturn that would take place in Alberta, which compounded the problem. This can happen when companies pay aggressively for acquisitions. It is going to take them some time to work through. If you have a really, really long time horizon, this can correct. Prefers some of their competitors.

Groceries is a difficult business. They spectacularly botched the acquisition of Safeway Canada in 2013, paying $5.5-$6 billion. Since announcing the acquisition, EPS has dropped from about $1.75 to about $.65-$.70. The debt has been downgraded, and the stock has fallen off a cliff. Just brought in a new CEO. His concern is that the new CEO is unproven in grocery retailing. The company has a lot to wrap its arms around in terms of untangling the mess.

Most of the chatter on this is the Sobey’s position. It’s an OK business, but when you look at its competitors, both Metro and Loblaw’s, it is sort of a 3^rd tier. An extremely cheap stock. The grocery market is a tough one and he would put Holds on all these names. They are really going to rely on food inflation, and he is positive on that side, but the competition is going to be very, very intense.

He doesn’t like falling knives. This one has been a train wreck. They bought Safeway Canada stores about 2-3 years ago, and bungled it spectacularly. They overpaid and over promised. This was at a time when the grocer consumer was becoming more and more price sensitive. Grocery stores have very high operating leverage. As much is their sales are falling, their earnings are falling off a cliff. A big massive beast and is not going to turn around on a dime.

The road ahead is uncertain. This is a disaster to say the least. We don’t know what is going to happen, but thinks that the issues are fixable. They are trying to transform their business into a low-cost provider of food. Sales aren’t that bad, and that will continue until Alberta turns around.

This company’s big problem is their acquisition of Safeway. They thought they would get the diversification outside of Ontario and the Maritimes, but just don’t understand that the Western supermarket business is a lot different. They dropped the ball and are paying the price for it. Stock was down 17% today. Feels this is more of a tax loss situation right now.

He doesn’t cover this closely. This is Sobey’s, which is going through some operational concerns. He is pretty confident in management and that they are going to get through that. You want to buy a good quality name when it has kind of fallen on itself. This is a good time to be picking away at this, particularly during the tax loss selling season.

(Market Call Minute.) He would like to own these businesses if they maybe yielded 4%-5%, because they are relatively mature. Very low yields, so just not enough to get him interested for his clients.

(Market Call Minute.) If you are willing to bet on a turnaround, this has massive opportunity to the upside, if they get it right.

The space went on a pretty good run over the previous 6 months, so over the last month or so it has really come down a lot. Part of that is competition. Food deflation is a real thing where prices and margins are coming down. He would prefer either Loblaw’s (L-T) or Metro (MRU-T), but these could come down a little.

(Market Call Minute) It is a value trap. Management is not delivering.

He is bearish on the grocery space in Canada, but he thinks most of the damage has already been done to this one. It is more reasonably valued than its peers.