Empire Company Limited's Q4 2025 Results: Sustainable Growth in a Competitive Retail Landscape?

Empire Company Limited (TSX: EMP.A), Canada's largest grocery retailer, delivered mixed but encouraging results in its Q4 2025 earnings report. While same-store sales growth and margin expansion provided optimism, the company faces headwinds from rising labor costs, e-commerce competition, and a new tax on share buybacks. Let's dissect the numbers to determine if this growth is durable—and whether investors should jump in now.

Key Metrics: Growth Amid Challenges

1. Same-Store Sales:
2. Q4 same-store sales (excluding fuel) rose 3.8% year-over-year, driven by strong performance in Full-Service banners like Farm Boy and premium offerings. For the full fiscal year, the metric grew 2.3%, modest but consistent.

4. While this outpaces the Canadian grocery sector's 1.5% annual average growth, Empire's reliance on price-sensitive discount formats (e.g., FreshCo) could limit upside in a cost-of-living crisis.

5. Margin Trends:

6. Gross margin improved to 27.6% in Q4 (vs. 27.1% in 2024), aided by a lower fuel sales mix and operational efficiencies. Excluding fuel, the margin rose 32 basis points.

8. This outperformed peers like Loblaw (26.8%) and Metro (25.5%) but faces pressure from rising labor costs, which rose 6% in Q4.

9. E-Commerce and Strategic Shifts:

10. Empire paused construction of a fourth Voilà fulfillment center in Vancouver to optimize existing operations. Instead, it partnered with Instacart and Uber Eats, expanding delivery options across 15 million Scene+ loyalty members.

11. These moves reduce dependency on costly proprietary infrastructure while leveraging third-party networks—a pragmatic pivot in a sector where e-commerce losses remain high.

12. Balance Sheet and Capital Allocation:

13. The company repurchased $400 million in shares in fiscal 2025, with plans to renew its Normal Course Issuer Bid (NCIB) for another $400 million in 2026. However, a 2% Canadian tax on buybacks added $6.4 million to costs, reducing flexibility.
14. A 10% dividend hike marked the 30th straight year of increases, signaling financial stability but diverting capital from growth initiatives.

Competitive Positioning: Strengths and Weaknesses

Strengths:
- Scale and Localization: Empire's 128,000-employee workforce and store network (including banners like Sobeys, Farm Boy, and FreshCo) allow it to compete on price and convenience.
- Margin Resilience: Gross margin improvements suggest effective cost control and pricing discipline, critical in a low-margin sector.

Weaknesses:
- E-Commerce Headwinds: While partnerships reduce costs, Voilà's growth (26% in Q4) still trails Amazon's dominance in grocery delivery.
- Labor Cost Pressures: Rising wages (up 5% in 2025) could squeeze margins further unless productivity improves.

Investment Case: Buy, Hold, or Wait?

Bull Case:
- Empire's 3.8% same-store sales growth and margin expansion suggest structural improvements. With $728 million in free cash flow (despite capex), it can fund store renovations and e-commerce partnerships without overleveraging.
- A $54.12 share price (vs. a 52-week high of $56.08) offers modest upside if same-store sales beat expectations in 2026.

Bear Case:
- The 2% buyback tax and labor inflation could cap EPS growth. If e-commerce partnerships fail to offset declining fuel sales (down 7.8% in Q4), revenue momentum may stall.
- Competitors like Walmart and Loblaws are also investing in e-commerce and discount formats, intensifying price wars.

Investment Recommendation:
- Hold for the Long Term: Empire's dividend yield of 2.3% and 30-year dividend growth streak make it a defensive play. Investors should focus on $50–$52 as a buy zone, with a $60 target by late 2026 if margins hold.
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- Avoid Aggressive Bets: The stock's sensitivity to consumer spending (and recession risks) demands caution.

Final Take

Empire's Q4 results highlight a company balancing growth and profitability—but its future hinges on execution. If it can sustain margin expansion, leverage e-commerce partnerships effectively, and navigate labor costs, it could maintain its leadership. However, investors should proceed with a long-term lens, mindful of macroeconomic risks. For now, Empire remains a hold—steady but not soaring.

Disclosure: This analysis is for informational purposes only and not financial advice. Always consult a professional before making investment decisions.