Empire's Buyback Bonanza: A Strategic Gamble or Shareholder Triumph?

The grocery and retail sector has long been a battlefield of consolidation and cost-cutting, but Empire Company Limited (TSX:EMP.A) is making a bold move to return capital to shareholders through an aggressive equity buyback plan. Let's dissect whether this strategy is a masterstroke or a risky bet in today's volatile market.

The Buyback Blueprint: Size, Timing, and Tax Headwinds

Empire's Normal Course Issuer Bid (NCIB) allows the repurchase of up to 9.9% of its public float, targeting $400 million in share buybacks for fiscal 2025. As of December 2024, the company had already spent $212.7 million, buying shares at an average price of $37.38. But here's the catch: a new 2% Canadian tax on equity repurchases, effective January 2024, has already cost the company $6.4 million in charges to retained earnings.

This tax adds a layer of complexity, but Empire's management remains undeterred. The company argues that buybacks are critical to boosting long-term adjusted EPS, a metric that rose to $0.90 in Q1 2025, up from $0.63 a year ago.

Strategic Implications: Why Now?

The buyback is part of a broader strategy to rein in dilution from new store expansions and digital investments. Here's why the timing makes sense:

1. Cash Flow Resilience: Despite a dip in operating income due to higher expenses, adjusted EBITDA rose by $17.7 million in Q1 2025, signaling underlying strength. The company generates $262 million in free cash flow over six months, giving it the flexibility to execute buybacks without over-leveraging.
2. Store Turnarounds: Empire plans to renovate 20-25% of its store network by 2026, focusing on sustainability upgrades. These projects, while costly, position the company to appeal to eco-conscious shoppers.
3. Digital Momentum: Its Voilà e-commerce division grew 26%, and its Scene+ loyalty program now boasts 15 million members. These digital levers could drive top-line growth, freeing up cash for buybacks.

Market Timing: A Bull or Bear Play?

The buyback's timing is a double-edged sword. On one hand, Empire is buying shares at depressed prices compared to its 52-week high of $56.08, suggesting confidence in its stock's value. The June 19 closing price of $54.12 (the day of its Q4 earnings report) reflects investor optimism.

However, the grocery sector faces headwinds:
- Rising food costs could squeeze margins.
- E-commerce giants like Amazon are muscling into the grocery space.

Empire's defense? Scale and localization. Its FreshCo discount stores and Farm Boy banners cater to price-sensitive shoppers, while its Full-Service banners maintain premium pricing. The buyback also sends a signal to investors: management believes the stock is undervalued.

Risks to Watch

1. Tax Headaches: The 2% buyback tax isn't going away, and future repurchases will face higher costs.
2. Debt Levels: While Empire's leverage is manageable now, aggressive buybacks could strain balance sheets if sales stumble.
3. Consumer Sentiment: A recession could hit discretionary spending, hurting grocery margins.

The Bottom Line: Buy the Dips, Hold for EPS

Empire's buyback plan is a win for long-term shareholders if executed correctly. The company's focus on renovations, digital growth, and margin discipline aligns with its EPS targets.

Investment Advice:
- Buy on dips below $50, using the $47–$52 range as a safety net.
- Hold for the long term: EPS growth and buybacks could push the stock toward $60 by year-end 2026.

In Cramer's words: “When a company is buying back shares at these levels, it's either desperate or desperate to win. In Empire's case, I'm leaning toward the latter.”

Final Verdict: Empire's buyback is a strategic move to capitalize on its operational strengths. Investors who bet on its execution could reap rewards, but keep a close eye on those pesky taxes and consumer trends!