MONTVALE, N.J. -- A&P here said it hopes to improve corporate profitability by holding onto most of the savings it expects to realize from centralization, rather than reinvesting those savings in the company.
Christian Haub, chairman and chief executive officer, said the company has identified $75 million in potential cost savings since it centralized administrative and buying operations late last year, of which it expects to realize $50 million in fiscal 2005 and $25 million in fiscal 2006.
With the company operating at a loss, he said A&P would rather use that money to strengthen profitability, "but that has to be balanced with what the competitive environment is going to be like and whether there are additional investments we would have to make above and beyond what we've invested into driving our business this year. "But now that we have centralized merchandising and marketing and a focus on what is best for our stores overall, I expect some benefits in terms of potentially sharper and more efficient promotions."
Mitch Goldstein, executive vice president and chief financial officer, said A&P already has several initiatives under way -- involving product procurement, corporate brands, supply and logistics, and labor standards at store level to drive productivity and improved service -- "so the preponderance of the savings ought to be new and additive to the actual profitability of the company."
Some cost savings will come from a head-count reduction, Haub said. He declined to pinpoint how many positions might be eliminated, "but you can imagine it's going to be in the hundreds."
Other savings will come from information technology "as we realize the maximum productivity of our systems," he added.
Haub and Goldstein made their remarks in a conference call with securities analysts to discuss financial results for the third quarter and 40 weeks ended Dec. 4, 2004, during which sales rose, comparable-store sales declined, and the company operated at a net loss.
Although sales have been growing slowly at the Food Basics limited-assortment stores the company opened last year in the Midwest, Haub said consumers have been quick to accept A&P's new fresh format, which the chain has in place at about 10 to 12 U.S. stores under various banners, including A&P, Waldbaum, Super Fresh, Farmer Jack and Save-A-Center.
Customer response to the fresh format has been "exceptional," Haub said, "and we are also encouraged by the margin structure and bottom-line picture beginning to emerge as the concept is refined in successive locations."
A&P's goal for both its fresh and discount formats is to work within its existing store base "and improve many of the conventional stores to the fresh concept, while those stores that don't make sense as a fresh store will be evaluated as potential discount locations," Haub said.
"I see a lot more stores [adapting to] the fresh concept just because of the nature of locations and markets that these stores are operating in and therefore only a smaller number as potential candidates for Food Basics conversions.
"But Food Basics really is probably more of a growth opportunity in certain markets that we are not penetrating, where the concept should do very well."
Haub also said he is encouraged by A&P's ability to maintain overall market share, despite an inability to grow sales significantly, "in the difficult retail environment in most of our U.S. markets."
He said he sees no significant changes in that environment. "Consumer spending is likely to remain cautious, and recent sales trends have indicated no sustained vitality. The continued high fuel prices and considerable increases in medical insurance costs will continue to limit disposable income and heighten price consciousness in many population segments."
However, Haub said he is optimistic "about our ability to continue moving forward at a greater pace, once the benefits of our U.S. reorganization materialize and our fresh/discount retail strategy takes hold in our core markets. However, the timing of these improvements remains tied to the variable factors of the economy and the marketplace."
Qtr Ended; 12/4/04; 11/29//03
Sales*; $2.52 billion; $2.48 billion
Net Income**: ($75.3 million); ($25.3 million)
Inc/Share: ($1.96); (66 cents)
40 Weeks: 2004; 2003
Sales*: $8.3 billion; $8.2 billion
Net Income**: ($182.4 million); ($97 million)
Inc/Share: ($4.74); ($2.51)
*Volume totals reflect A&P's purchase of 24 franchised Food Basics stores in Canada, including franchisee sales of $203.5 million for the third quarter and $720.3 million for the year to date, compared with $216 million and $714.7 million, respectively, in the prior-year periods.
**Income results include charges totaling $37 million, which A&P said it considers non-recurring, including $35 million related to impairment charges on long-lived assets in the Midwest; $1 million for costs related to settlement of a lawsuit in Canada, which resulted in A&P acquiring 24 franchised Food Basics stores; and $4 million related to severance costs incurred in its 2004 restructuring of administrative, support services and operating staffs, offset by a $3 million reversal of prior-year restructuring charges; prior-year results include $60 million related to asset impairment charges in the Midwest.