A&P Swings to a Profit in Q3, but Sales Are a Turkey

MONTVALE, N.J. — A&P's “no gimmicks” stand on Thanksgiving turkey promotions gobbled away sales gains at the company's Northeast banners during its fiscal third quarter, the retailer here said last week.

“We followed through on our commitment not to give the farm away during the Thanksgiving holiday season with promotions like free turkeys,” Eric Claus, chief executive officer, told analysts in a conference call. “We were very deliberate in our strategy to drive profitability, even at the expense of foregoing unprofitable sales.”

A&P promoted turkeys during the Thanksgiving season at 49 cents per pound, eschewing “giveaway” deals typical of Northeast retailers. Competitors like Pathmark Stores and ShopRite, for example, offered free turkeys as part of a reward program. A&P's relatively tame promotion accompanied a slip in comparable sales, from positive 1% in September to negative 2% during November, officials said. For the quarter ending Dec. 2, comps were flat in the Northeast and down by 3% overall as divisions in New Orleans and Michigan continued to bleed sales, Claus said.

Claus defended A&P's Thanksgiving strategy, maintaining the company had little to gain in a race to out-promote its competitors even as it fights to improve its price image. Brenda Galgano, chief financial officer, noted the promotion had a net benefit “if you look at turkeys and nothing else,” but said it was hard to quantify its total effect, considering potential losses from sales of other items that may have accompanied cheaper birds.

The uneasy trade-off between sales, price perception and earnings was emblematic of a bumpy quarter for A&P where the turnaround appears to be requiring an increasingly delicate touch. Competition remains relentless in the Northeast, which some observers say cries out for consolidation.

A&P's earnings swung to $41 million, compared with a $71 million loss a year ago. The profits, however, were supported by a $45 million tax gain, and EBITDA, after several quarters of robust growth, was flat.

John Heinbockel, an analyst for Goldman Sachs, New York, called the quarter a “disappointment.” In a research note, Heinbockel said the slowdown in EBITDA, which cycles cost-cuts from a year ago, suggests the renaissance at A&P is headed toward “a more tenuous, sales-driven turnaround.”

Heinbockel, who also noted that cash to fund a major remodeling program had dwindled, said the path to profitability for A&P “might be tougher than we previously thought.”

Other observers had a sunnier outlook. Karen Short, an analyst at Friedman, Billings, Ramsey, New York, noted that strength in the Northeast helped overcome significant struggles in New Orleans and Michigan. Comparable sales in New Orleans were down by nearly 30% during the quarter due to the effects of reduced competition in the year-ago period following Hurricane Katrina.

That deficit — as well as nearly $1 million in expenses incurred converting acquired Clemens Markets locations to SuperFresh during the quarter — obscured a stronger financial performance in A&P's core Northeast market, Short told SN.

“The core Northeast is showing improvement, and that's what I care about,” Short said. “I don't think Michigan is going to be a part of the business going forward, and New Orleans might not be either. But the Northeast is their focus, and that business made up for nearly $7 million in headwinds from the rest of the business.”

Perry Caicco, an analyst with CIBC World Markets, Toronto, said effects of the turkey promotions illustrate the urgency for consolidation in the Northeast — “a zero-sum, no-growth market where a refusal to match free turkeys can hammer results,” he said in a research note.

Christian Haub, chairman of A&P, who for more than a year has been outspoken on the company's desire to participate in consolidation, declined to comment when an analyst asked whether he was more positive a deal could get done now than he was a year ago. Analysts remain unsure. Heinbockel said he believes consolidation is “unlikely in the short term.” Short by contrast predicted “an extremely busy first few months of the calendar year” for A&P's management team as it tries to find partners in the Northeast while looking to unload non-core assets like Michigan.

In other items addressed during the call:

• The remerchandised Bridge Market Food Emporium store in Manhattan launching A&P's gourmet concept this fall “definitely cut too deeply into Center Store grocery assortment,” and alienated some regular shoppers, Claus said. “This is being corrected as we speak.” Claus said the overall reaction to the changes has been positive, although he doesn't expect the new store to produce anticipated sales levels for about nine months.

• A&P's capital budget for fiscal 2008 should resemble the $200 million it is expected to spend this fiscal year, with tentative plans for 20 fresh store remodels; three to five Food Basics conversions; three to five Food Emporium conversions; and five new stores, including replacement locations, officials said. The difference for next year is that officials expect 75% of the fresh conversions to be “offensive” rather than “defensive.” Galgano said around 70% of all fresh conversions this year are considered “defensive” and tend to have less dramatic sales results than the “high-teens” sales lifts accompanying “offensive” fresh conversions.

  Disruptions associated with fresh store remodels negatively affected comparable-store sales by 15 basis points during the quarter, officials said, but completed stores continue to outperform projections. Claus said the company this year will build a “more exciting” fresh prototype.

• The company paid $25 million — “a very reasonable cost,” according to Claus — for the six former Clemens Markets locations in the Philadelphia region it has since reopened under the SuperFresh banner.