Empire Company Limited (EMP.A:CA) Q1 2026 Earnings Call Transcript

Empire Company Limited (EMP.A:CA) reported Q1 2026 adjusted EPS of $0.91, reflecting a robust 14.3% year-over-year growth in core operations, despite a modest 1.9% same-store sales increase attributed to challenging prior-year comparables and unseasonable weather. The company achieved a significant 63 basis point improvement in gross margin, driven by disciplined execution, advanced analytics for inventory management, and optimized promotional mix. Management noted improving consumer sentiment and basket size, with private label penetration continuing to grow. Empire plans to open approximately 20 new stores in FY26 and is undertaking a multi-year ERP system migration to enhance operational efficiency, reaffirming confidence in its long-term adjusted EPS growth targets.

Analysis

Empire Company reported a solid start to fiscal 2026, delivering adjusted EPS of $0.91, with core business earnings growing a robust 14.3% year-over-year. This strong bottom-line performance occurred despite a softer-than-expected top line, with same-store sales growth of 1.9%. Management attributed the modest sales growth to cycling several non-recurring benefits from the prior year, including a competitor boycott and a liquor store strike, compounded by an unseasonably cold May that dampened seasonal purchases. Importantly, the company noted that Q2 has started with a sales trend ahead of the Q1 result. The quarter's standout metric was a 63 basis point expansion in gross margin, substantially exceeding the company's 10-20 bps annual target. This was driven by disciplined execution, a normalization of promotional intensity from elevated prior-year levels, and the application of advanced analytics to improve inventory control and reduce shrink. This margin strength helped offset a 4.7% increase in adjusted SG&A, which was pressured by higher labor costs and a $20 million year-over-year increase in incentive program accruals, negatively impacting EPS by $0.06. Management anticipates Q1 will represent the peak SG&A dollar spend for the fiscal year. Strategically, Empire is proceeding with a disciplined network expansion of approximately 20 new stores and is in the execution phase of a multi-year ERP system migration aimed at streamlining operations. The company's internal food inflation remained significantly below the 3.1% CPI, a result of its firm negotiating stance with suppliers, reinforcing its value proposition to a consumer who is showing signs of improved sentiment and larger basket sizes.

Key Decisions for Investors

• Investors should look past the headline 1.9% same-store sales figure, as it was weighed down by specific non-recurring prior-year events and adverse weather, and instead focus on the 14.3% core operational EPS growth and management's report of a stronger sales start to Q2.
• The exceptional 63 basis point gross margin expansion, driven by analytics and execution, warrants close attention; while management's long-term guidance remains a conservative 10-20 bps, continued outperformance could signal a structural improvement in profitability, though investors should remain cautious about modeling this level of expansion quarterly.
• Monitor SG&A trends in coming quarters, as management has guided that Q1 was the peak dollar spend for the year; achieving operating leverage as sales growth accelerates will be a key determinant of future earnings growth.
• Evaluate the long-term potential of the ongoing ERP system migration and the disciplined new store rollout, as these initiatives are foundational to achieving future efficiencies and market share gains that underpin the company's long-term EPS growth framework.