MONTVALE, N.J. -- A&P here said last week it will invest gross margin to shore up sales and protect its market share in a fiscal year that has turned out to be more difficult and less predictable than anticipated.
"We were able to improve profitability and achieve modest comparable-store sales gains in the first quarter despite difficult market conditions," Christian Haub, chairman and chief executive officer, told securities analysts. "But we didn't meet our performance goals, and we can't achieve the sales and earnings goals we had set for the full year."
For the 16-week first quarter ended June 15, sales fell 2.4% to $3.3 billion, comparable-store sales rose 0.2% and earnings were positive compared with a loss a year ago -- results Haub called "unsatisfactory, but positive in light of the operating environment, the most difficult operating environment in the past 20 years because of the harsh economic business climate and the intensified competition that has emerged."
Haub said the end of that cycle is not in sight.
"There's nothing positive to look at. We see no turnaround [in the economy]. In fact, everything seems to be going in the other direction," he said. "A few months ago, people were talking about a recovery in the first half or the second half of 2002. But no one is talking about recovery now."
Analysts contacted by SN said the economic downturn has clouded prospects for A&P's own financial turnaround.
"The situation is truly bleak," Gary Giblen, director of research for C L King Associates, New York, said, "and for companies that are not top-notch operators, it's especially bleak. If Safeway and Kroger are struggling, then other chains like A&P are really in trouble.
"The way I see it, there is no turnaround for A&P. It's simply plugging holes in a leaky dike, and now that there are 15 holes instead of 10, they're running out of fingers."
According to Jack Murphy, vice president, Credit Suisse First Boston, New York, "A&P is a troubled asset base, and with the company trading at only 3.5 times EBITDA [earnings before interest, taxes, depreciation and amortization], it's a company that has to make a decision on whether to buy in or sell out."
Ted Bernstein, managing director for Dresdner Kleinwort Wasserstein, New York, said A&P's position as a turnaround company is questionable. -"After undergoing a series of operational and strategic revampings for the last four years and spending the last six to 12 months running some division managements through a revolving door, it's hard to see this whole 'turnaround' as anywhere near completion," he said.
Speaking with analysts during the conference call, Haub said the impact of the harsh competitive environment on A&P will be lower-than-anticipated sales growth for the year and intense pressure on gross margins because of the need to increase promotional activity. "So we'll invest gross margins to protect our sales and market shares and to beat back promotions in alternative retail channels," he said. "But do we invest 20 points? 30 points? 50 points? We're not sure."
Other supermarket operators have also expressed their intentions to invest gross margins to drive sales, Haub pointed out, "and that requires us to develop a new pricing and promotions strategy. I can't disclose any details, but we will invest margin as necessary to maintain our market position."
Beth Culligan, president and chief operating officer, said A&P is testing the levels of pricing and promotions it may pursue "because you can get into trouble when those are the only things you have. So what we're trying to do is change the paradigm by offering more than promotions and pricing across all banners that gives us more room to satisfy customers.
"For example, in Canada we have a 'fresh-obsessed' campaign, which offers more than just price, and that's the direction we're headed."
Culligan said the economic situation has resulted in a significant shift in consumer behavior. "There's been a temporary paradigm shift in which people are more willing to spend time to save money, and that makes the competitive environment very intense," she explained.
One potential area of opportunity for A&P is private label, Culligan said. "That's an area we've focussed on recently, but we see more opportunities for profitable spending."