MONTVALE, N.J. -- A&P continued to tally losses in the first quarter as it faced competitive pricing pressures and invested in the conversion of stores to the Food Basics format.
Sales trended positive for the period, however, led by the company's Canadian operations. Comparable-store sales in the 16-week period ended June 19 were up 1% over year-ago levels, including a 2.7% gain in Canada and a 0.5% gain in the United States.
"Although our results for the first quarter remain unprofitable, we were again encouraged by our ongoing progress in the U.S.," said Christian Haub, chairman and chief executive officer, in a conference call discussing first-quarter results.
He said comps were positive at most of the company's U.S. banners, which include A&P, Food Basics, Food Emporium, Waldbaum's, Super Fresh, Farmer Jack and Save-A-Center. Farmer Jack, which underwent a repositioning last year, had the largest year-to-year improvement, Haub said.
The company's rate of gross margin decline also slowed in the period, although at 28.29% it was still 0.3% below last year's rate. The company attributed the decline in the more recent quarter in part to the increase in Food Basics stores in the quarter -- the company now operates 25 outlets of the price-impact format -- and to the sales gains in Canada. Food Basics operates at a lower gross margin rate than A&P's traditional supermarkets.
In response to a question, Haub said A&P was "quite pleased" with the progress of its Food Basics stores in the Northeast, where it operates 11 stores in the Philadelphia-New York corridor. He said the stores in that region, many of which have been open for more than a year, have experienced increases in customer counts and basket sizes.
"We can see jumps in volume as the stores mature after six months and 12 months and 18 months," Haub said. "That was part of the reason we've decided to launch Food Basics in Detroit and Toledo."
He said competitive pricing pressures have stabilized somewhat, but have not abated.
"Although the period of irrational gross margin sacrifice associated with the economic downturn in recent years seems to have passed, I do not foresee a significant and sequential improvement in the gross margin trend," he said.
Product cost inflation also pressured the retailer's margins in the period as it was unable to immediately pass those increases on to consumers.
A&P also has been generating cash from sale-leaseback transactions, but analysts foresee that those opportunities will be diminished in the coming months.
Karen Miller, high-yield analyst at Bear Sterns, New York, said in a report that she has concerns about the company's relatively low level of capital spending and the potential need to draw on its revolving credit facility, although she retained the "hold" rating on the company's notes.
"It appears management has stabilized the business, as evidenced by improving comp-store sales and relatively stable gross margins," she said in the report.
In the conference call, Mitch Goldstein, chief financial officer, said the company might need to tap its credit revolver by the end of this year. He projected capital spending of $275 million for 2004, much of which would be spent on remodels and converting stores to Food Basics.
He also said the company currently spends about $25 million annually on vacated leases.
The company posted a loss of $42.85 million for the quarter, compared with a gain of $11.95 million in the year-ago period, which included a one-time benefit of $52.1 million. The loss on continuing operations was $41.5 million in the first quarter of 2004, vs. a loss of $20.6 million on continuing operations in the year-ago period, which included a tax benefit of $23 million. Earnings before interest, taxes, depreciation and amortization totaled $73 million in the recently ended first quarter, vs. $75 million in the first quarter of 2003.
Sales grew 1.8% to $3.29 billion, vs. year-ago results. However, the company attributed all but 0.1% of that gain to the change in the exchange rate for the Canadian dollar.
"In our opinion, the turmoil in A&P's domestic operations has stabilized, and the company's liquidity issues have been quenched by a new bank facility, sale-leasebacks and asset sales," said Bryan Hunt, high-yield debt analyst at Wachovia Securities, Charlotte, N.C., in a report. "In 2004 and 2005, profitability should benefit from store conversions, technology spending and new labor agreements."