NEW YORK -- Pathmark Stores expects inflation to keep pressuring gross margins for the foreseeable future, Eileen Scott, chief executive officer, told an investors conference here this month.
"We are trying to get comparable-store sales back by making changes in our promotional strategy," she said, "but until inflation abates a bit, the pressure will remain on gross margins.
"However, we're comfortable that our promotional tactics will get us back to where we need and want to be on comps."
Pathmark's comp sales fell 1.4% during the first quarter ended May 1 after four quarters of positive gains. The company attributed the decline to steep inflation in commodity items and its inability to pass along the full increases because of competitive pressures.
"I've been with Pathmark 35 years, and I've never seen such steep inflation in so many key destination categories all at once," Scott told the 4th Annual Goldman Sachs Small-Cap Consumer-Retail Conference held here this month. "Moderate inflation is good for retailers, but what we've seen recently has been more than moderate.
"Milk prices, for example, went up $1.03 in May and another 25 cents on June 1, and we've been unable to pass the full $1.28 through. But what goes up must come down, and over time, we think we'll be able to pass all cost increases through at retail, though it will take time."
Scott said Pathmark has been able to pass about 80% of the increases through, "but these are very competitive items, and no one wants to be the first to raise prices."
Pathmark attempted to maintain its gross margins by promoting secondary items during the first quarter, but that strategy failed, Scott said.
"For example, we switched from Tide detergent, a destination item, to Purex, which is No. 3 or No. 4 in the laundry detergent category, and didn't drive as much traffic or sales as we had hoped. On chicken breasts, which average $1.79 to $1.99 per pound as a destination item, we went out at $2.49 per pound, and we were embarrassed because the competition didn't reflect the higher retail, so we backed off.
"At the end of the day, all of us are thinking about the consumers and how much they can absorb all at once. But pricing is an art, not a science."
Asked which competitors were holding the line on prices, Scott said, "It's all the key competitors -- the operators you would expect." Frank Vitrano, president and chief financial officer, said more specifically it was ShopRite that was holding the line.
Looking ahead to the second half, Scott said consumer confidence has been slow to grow in the Northeast, "and we haven't seen a change in the economy. But from what we hear, the outlook at the national level is better, and we find that encouraging."
In response to a question, Scott said Pathmark's growth strategy is focused on expanding sales at existing stores and opening three to five new stores a year.
"Each of our stores, with a few exceptions, is built to do more business than it's doing today, and that's why we concentrate on remodeling -- to enable us to expand categories like natural foods and general merchandise. And there are probably 40 or 50 locations within our trading area where we would like to open new stores."
Harvey Gutman, senior vice president, retail development, said potential growth is slowed by the amount of lead time required to get a store opened. "We signed the lease 10 years ago on a store we'll open next month in Crotona Park in the Bronx, so it takes a long time to develop a store," he noted.
