AI And Analytics Will Drive Margin Expansion And Long Term Earnings Upside

Catalysts

About Empire

Empire is a Canadian food retailer operating a national network of Full-Service and Discount grocery stores supported by real estate and technology investments.

What are the underlying business or industry changes driving this perspective?

• Continued rollout of roughly 20 new stores this year, focused on white-space regions and higher returning new builds versus renovations, is expected to lift market share and accelerate top line growth while improving operating leverage on fixed costs and earnings.
• Ongoing deployment of advanced analytics and AI across merchandising, pricing, inventory and shrink management is structurally raising gross margin above historic norms, supporting sustained net margin expansion and EPS growth.
• Phased implementation of the new ERP platform over the next two years is expected to streamline procurement, financial reporting and supply chain, unlocking cost efficiencies in SG&A and enhancing future margin resilience and earnings quality.
• Strengthening private label penetration and a growing fresh offering, especially in meat and prepared foods, align with consumer trade-up behavior and value-seeking, supporting higher basket size, improved mix, gross margin gains and revenue growth.
• Diversified and deepened supplier relationships, including a stronger tilt toward Canadian sourcing and disciplined tariff management, are expected to enhance supply resilience, stabilize input costs and underpin steady gross margin and cash flow generation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Empire's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 2.6% in 3 years time.
• Analysts expect earnings to reach CA$873.1 million (and earnings per share of CA$4.01) by about December 2028, up from CA$704.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, up from 16.6x today. This future PE is lower than the current PE for the CA Consumer Retailing industry at 22.9x.
• Analysts expect the number of shares outstanding to decline by 2.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.94%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The industry wide uptick in grocery square footage, even if modest in historical context, could still intensify competition in key regions, limiting Empire’s ability to sustain same store sales growth and eroding revenue over time.
• Empire’s reliance on continuous gross margin gains from shrink reduction, advanced analytics and AI may face diminishing returns, while any missteps in execution could reverse recent 63 basis point margin gains and compress net margins and earnings.
• The multi year migration of the legacy ERP system introduces operational and implementation risk. Disruptions to supply chain, procurement or store operations could offset expected efficiencies and weigh on both revenue and net margins.
• Moderating Buy Canadian sentiment and potential normalization of tariff related cost dynamics may reduce Empire’s relative price advantage, pressuring its value proposition and potentially slowing private label growth. This could soften gross margin expansion and earnings.
• Rising labor costs, higher incentive program expenses and continued investment needs risk keeping SG&A growth structurally elevated above revenue growth. This may constrain operating leverage and limit long term earnings progression.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$57.62 for Empire based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CA$34.2 billion, earnings will come to CA$873.1 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of CA$50.84, the analyst price target of CA$57.62 is 11.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.