BOISE, Idaho -- Albertson's here plans to merchandise each category in the center store "as if it is the only category we have," Peter Lynch, president and chief operating officer, said last week during a conference call with securities analysts in the wake of an earnings shortfall in the second quarter ended Aug. 3.
"We'll eliminate underperforming stockkeeping units to accommodate the appropriate varieties and to avoid duplication," he said, "with the objective in each category of providing more value for customers so center store can win back a share of the customers already shopping in our stores."
Lynch said Albertson's goal is to fine-tune "the heart of the store" at each location to meet the demands of the local neighborhood. "We'll take out some SKU's that don't sell well and put in others. And we're talking more to vendors as our partners in this effort."
However, the changes Albertson's intends to make in the center of its stores will not be too radical, Gary E. Michael, chairman and chief executive officer, said in the call. "We'll never get to the point where we become a club store," he said. "We have to be competitive with what we traditionally bring to the marketplace."
During last week's call, Albertson's reiterated its intention to invest gross profits to improve pricing and promotions in key markets on a market-by-market basis as a way of making up the shortfall.
While it did not indicate which markets would receive the bulk of that effort, Michael said competitive pressures were occurring "in the old Albertson's markets, though we see an upside in our existing markets to improve results.
"Because the integration is progressing smoothly, we're able to focus on our core business and solidify our long-term strategies."
Lynch said the chain's pricing in some markets, which he did not specify, is "a little higher than the competition, while in others we're at or below competition."
Third quarter results closely followed preliminary numbers previously reported.
Albertson's sales, excluding the 145 stores the chain was required to divest last year, rose 4.6% to $9.2 billion for the 13-week second quarter and 4.4% to $18.2 billion for the half, while comparable store sales were up 1.4% for the quarter and 1.1% for the year to date.
Net earnings were $194 million for the quarter, or 46 cents per share, including $17 million in merger-related costs and onetime charges, compared with a loss in the prior-year period; for the half, net earnings were $373 million, including $64 million in merger-related and onetime costs, compared with $10 million a year ago.
Analysts had forecast Albertson's earnings would be closer to 62 cents for the quarter. "Clearly we are not happy with earnings results," Lynch said last week.
Asked to indicate where the shortfall occurred, he said about one-third was a result of overstaffing perimeter service departments, one-third from competitive pressures and one-third from integration costs in California.
In other developments discussed during the conference call:
Albertson's likes the fuel centers it has opened adjacent to supermarkets, Michael said, "and we will probably add fuel centers adjacent to some drugstores in the future."
Relocating pharmacies to a corner location in some stores has resulted in sales increases as high as 23%, Michael said.
Although Albertson's said last month it does not plan to enter new territories while it seeks to improve earnings, Michael said he would not rule out acquisitions. "We've got enough to work on and improve right now, but we'd never say never -- although acquisitions are not a high priority right now."
"It depends what you mean by acquisition," Mike Rueling, vice chairman, added. "We would look at in-market transactions of one, two or five stores if it makes sense. But on anything more significant, we must be very careful."
Albertson's has formed employee task forces "to help us pinpoint excessive costs [that] we will drive out of the operation," A. Craig Olson, executive vice president and chief financial officer, said. "This does not mean we will cut corners or set unrealistic expectations. It does mean we will eliminate all secondary costs that do not directly benefit ongoing operations or contribute to the success of our business."
The company is remodeling one of the Jewel distribution centers in the Chicago area to make it operate more efficiently, Lynch said. As previously disclosed, he said the company will close a warehouse in Buena Park, Calif., in October and consolidate it with existing facilities; the company has already consolidated a Phoenix liquor warehouse into its Tolleson, Ariz., facility and consolidated three Acme warehouses into a single facility in Lancaster, Pa.
Plans to reduce capital spending by $500 million over the next two and a half years will reduce the chain's square footage growth this year to 2.5%, rather than the 5% originally planned, Olson said. Square footage growth in 2001 and 2002 will be about 5% a year, he added.
To accomplish its goal of increasing average ticket sales, Lynch said Albertson's must look at its advertised items. "Maybe instead of promoting a six-pack of water, you feature a 24-count case."
He also said the jury is still out on the effectiveness of loyalty cards, which Albertson's offers in its Acme division while relying on a "bonus buy" program elsewhere. "The data [from the cards] can be very important to us, so we're looking at both approaches in the Acme group," he said.
