Sobeys’ cybersecurity breach results in $54M hit to earnings in Q3

“Cyber attacks are a nasty piece of business. I wouldn't wish them on my worst enemy," said Empire CEO Michael Medline

Truro, Canada - May 02, 2022:  Sobeys Inc. is Canada's second largest food retailer with more than 1,500 supermarkets.
Sobeys’ parent company says the cybersecurity breach that temporarily shut down pharmacy operations and led to reduced sales cost the grocery retailer $54 million in profit in its most recent quarter. (Getty Images)
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Sobeys’ parent company says the cybersecurity breach, that temporarily shut down pharmacy operations and led to reduced sales, cost the grocery retailer $54 million in profit in its most recent quarter, net of insurance recoveries.

Empire Co. (EMP-A.TO), the second largest grocery chain owner in Canada that operates Sobeys, Freshco, IGA, Farm Boy and Safeway, said on Thursday that it also expects November’s cybersecurity event to result in a $32 million hit to net earnings over fiscal 2023 and fiscal 2024, more than previously expected. The company said in December that it anticipated the breach would result in a $25 million hit to net earnings.

“This was not a straightforward quarter,” Empire chief executive Michael Medline said on a conference call with analysts on Thursday.

“Cyber attacks are a nasty piece of business. I wouldn't wish them on my worst enemy.”

Sobeys was hit by what it first called an “IT systems issue” on Nov. 4, leaving customers unable to fill prescriptions for four days, with many of the grocer’s systems experiencing technical difficulties.

Empire said the direct costs related to the cybersecurity event, including hardware and software restoration costs and professional and legal service fees, resulted in a $39.1 million hit to net earnings to date, including insurance recoveries.

The breach also led to declines in sales, as the company lost access to tools that help with the management of fresh items and promotions. It also could not redeem gift cards and loyalty points. Empire said the impact on "operational effectiveness" resulted in an additional $15 million hit to net earnings in the quarter.

The company is still working on its claims to insurance companies. However, it warned there will be a lag between the incurrence of costs and the insurance proceeds, because of the "complexity" of cyber insurance coverage.

Still, Medline said the cybersecurity event is behind the company, and it has “fully returned to business as usual” in the fourth quarter of the year.

Despite the cybersecurity setback, Empire reported net earnings of $125.7 million in the quarter, or 49 cents per share, down from $203.4 million, or 77 per share, during the same period last year. The company noted that last year’s earnings included “unusually large lease termination income and higher property sales from Crombie Real Estate Investment Trust.”

Total sales, driven by the expansion of FreshCo in Western Canada, higher food inflation and increased fuel sales, reached $7.49 billion compared with $7.38 billion last year.

Empire has been among the Canadian grocers that have faced increasing public scrutiny in recent months over persistently high food prices. Medline was one of three chief executives who appeared before the House of Commons agriculture committee as part of an investigation into food prices. Medline and the other two CEOs said grocers were not responsible for soaring food prices, noting that high food inflation is a global phenomenon.

On Thursday Medline said Empire has received hundreds of new cost increase requests from suppliers, similar to what the company experienced in the fall of 2022.

“So we expect inflation to remain high for a few months,” he said.

“However, as we look forward, we believe that supplier partner requests for cost increase have peaked and we will also be cycling high inflation numbers from last year. We are hopeful that food inflation will soon peak, then abate, then end, which will be very good news.”

With files from the Canadian Press

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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