Restructuring, Business Costs Eat Into Sobeys' Q4 Earnings

STELLARTON, N.S. -- Sobeys, Inc. yesterday reported quarterly basic net earnings per share of 66 cents, or CAN $43.0 million (US $40.6 million), for its fourth quarter ended May 5, 2007 vs. the 77 cents, or CAN $49.7 million (US $46.9 million), reported in the year-ago period.

Included in the calculation of earnings for the quarter are CAN $4.9 million (US $4.6 million), as opposed to CAN $5.3 million (US $5.0 million) for the fourth quarter of last year, of costs connected with an ongoing business process and system initiative, CAN $5.6 million (US $5.3 million) of pretax costs related to the rationalization of Sobeys' Quebec distribution network, and CAN $2.6 million (US $2.5 million) of pre-tax costs related to the privatization of the company, according to Sobeys.

Sales for the fourth quarter were CAN $3.24 billion (US $3.06 billion), compared with CAN $3.13 billion (US $2.96 billion) last year, an increase of CAN $117.9 million (US $111.4 million), or 3.8 percent. Same-store sales rose 2.3 percent in the quarter, and Sobeys posted a net profit margin of 1.33 percent, compared with 1.59 percent last year.

For fiscal 2007 the company reported sales of CAN $13.0 billion (US $12.3 billion), up CAN $313.9 million (US $296.4 million), or 2.5 percent, and basic net earnings per share of $2.67 (CAN $173.4 million, or US $163.4 million), vs. $2.93 (CAN $189.4 million, or US $178.9 million) in the year-ago period, while same-store sales grew 2.4 percent. The net profit margin was 1.33 percent, compared to 1.49 percent last year.

In April Empire Co., Ltd. and Sobeys entered into an arrangement agreement according to which Empire would acquire common shares of Sobeys, other than those owned by Empire or its subsidiaries, at a price of CAN $58 (US $54.75) per share. The transaction valued the Sobeys shares not currently owned by Empire at about CAN $1.06 billion (US $1.00 billion). After approvals by non-Empire-related Sobeys shareholders and the Supreme Court of Nova Scotia, Empire acquired on June 15 all the outstanding common shares of Sobeys that it didn't previously own, and Sobeys common shares were delisted from the Toronto Stock Exchange on June 18.

On June 27, according to the terms of Empire's credit facilities, Empire and Sobeys filed notice with the lenders, requesting the establishment of a new CAN $300 (US $283.19) five-year unsecured revolving credit facility in favor of Sobeys. The credit facilities are subject to certain financial covenants. Interest on the debt varies based on the designation of the loan, fluctuations in the underlying rates, and in the case of BA rate loans, the margin applicable to financial covenants.

On July 23 Sobeys will draw down CAN $300 from the new credit facility, the proceeds of which will be used to pay a dividend to Empire. On that date Empire also intends to transfer to Sobeys a $20 five year fixed rate interest rate swap at a rate of 5.051 percent.

A wholly owned subsidiary of Empire Co., Ltd., Sobeys owns or franchises over 1,300 stores in all 10 provinces under such retail banners as Sobeys, IGA, Foodland, Price Chopper food stores, and Lawton's Drug Stores.
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