SYRACUSE, N.Y. -- Encouraged by the progress of its remerchandising program, Penn Traffic Co. here expressed optimism last week about its long-term financial performance, despite third-quarter declines.
Analysts questioned by SN last week were more guarded in their outlooks, but they expressed cautious optimism about a potential turnaround.
For the 13-week quarter ended Nov. 2, Penn Traffic reported a $15.9 million net loss vs. a $350,000 loss a year ago. Sales fell 4% to $811.1 million, and same-store sales dipped 1.9%. In the 39-week period, the net loss was $35.1 million, compared with $51.9 million a year earlier. Sales declined 4.2% to $2.5 billion, and same-store sales fell 2.1%. Cash flow dropped to $35 million from $52.8 million for the quarter and to $124.3 million from $166.4 million for the year to date.
Chairman Gary D. Hirsch said Penn Traffic has been engaged in a companywide repositioning program to improve customer service and perishables. "And we're generally seeing a good response from our customers wherever we have effectively implemented these programs."
In the third quarter, Penn Traffic began upgrading dry grocery merchandising. Improvements include enhanced displays and signs plus computer-assisted ordering programs to help the company monitor high-turn items more closely to maintain an improved in-stock position and better promotional information.
So far, the dry grocery program is in only half the company's Pennsylvania stores. But Hirsch said he expects the merchandising and operational enhancements to be rolled out companywide in early fiscal 1997 and to lead to "improved sales trends" in the category. Gross margin rates have been improving since mid-September, "and we have been able to refine the ongoing costs of our repositioning program and are experiencing the expected benefits of our cost-containment programs," Hirsch said.
"Assuming the continuation of current profitability trends, we expect the company's cash flow performance in the fourth quarter will be the highest of the four quarters of the current fiscal year, and as we begin to see benefits from our grocery department merchandising enhancements, we expect continued improvement in the first half of fiscal 1998." Bob Lupo, managing director of BA Securities, Chicago, told SN he is "more constructive in my outlook [about Penn Traffic] than I've been for a year, although there is still no real hard evidence to support that feeling.
"But I have the sense, which I haven't had for most of the year, that the company is finally seeing benefits from the merchandising changes and cost restructuring it has introduced and the way it does business throughout most of the stores."
Any turnaround must be accompanied by positive comparisons in some category, whether it's sales, earnings or margins, Lupo noted. "Penn Traffic will have to show evidence in its financial results of benefits from its merchandising programs before people will believe it's a turnaround situation," he said.
Howard Goldberg, a high-yield analyst with Smith Barney, New York, also said Penn Traffic has to post better results to reflect the improvements it says are occurring. "While the company continues to be optimistic, that optimism has not yet translated to better results, and many analysts remain a bit skeptical as long as the reported results remain negative." A year ago, Penn Traffic officials said they expected improvements in the first and second quarters of the current fiscal year, "but they now admit they were overly optimistic, and they say the turnaround has accelerated and the results going forward will be less negative, if not yet quite positive," Goldberg said. "So the light at the end of the tunnel is still a long way off."
The third-quarter results do not support the company's optimism, Goldberg said. And fourth-quarter results, expected to be the best of the year, still will be mostly negative, he added. "So Penn Traffic needs to start putting up better results by the first quarter to reflect the improvements in operations it says are taking place," he said.
Penn Traffic attributed the third-quarter results to declines in gross-margin levels in the first half of the quarter -- to 22.11% from 23.01%, Goldberg noted -- as it completed its rollout of the perishables merchandising programs. The company also cited the adverse effect of a seven-week work stoppage at its Sani-Dairy division in Johnstown, Pa., which cut operating income by about $2.5 million.
Company officials also noted that the repositioning program has required more spending for payroll, advertising and consulting services -- costs they said will not be necessary to support the program on an ongoing basis. Penn Traffic, a voluntary wholesaler, operates 266 supermarkets under the names Big Bear, Big Bear Plus, Bi-Lo Foods, Insalaco's, P&C Foods, Quality Markets and Riverside.
