Skip navigation

PENN TRAFFIC SEES COST, SALES PLAN WORKING

SYRACUSE, N.Y. -- Penn Traffic Co. here said reductions in its cost structure and promotional efforts to rebuild its sales base are showing signs of reversing two years of negative trends. "We believe we now have an appropriate pricing structure to improve sales trends," Phillip E. Hawkins, president and chief executive officer, said in disclosing the chain's results for the third quarter ended Nov.

SYRACUSE, N.Y. -- Penn Traffic Co. here said reductions in its cost structure and promotional efforts to rebuild its sales base are showing signs of reversing two years of negative trends. "We believe we now have an appropriate pricing structure to improve sales trends," Phillip E. Hawkins, president and chief executive officer, said in disclosing the chain's results for the third quarter ended Nov. 1. "Where necessary, we are making further investments to meet the reaction of our competitors to our efforts."

The company said earnings before interest, taxes, depreciation and amortization rose 11.7% for the 13-week quarter to $39.1 million, or 5.4% of sales, compared with $35 million a year ago, but fell 1.2% for the 39 weeks to $122.8 million, also representing 5.4% of sales, compared with $124.3 million last year.

EBITDA and operating income for last year's quarter were down approximately $2.5 million because of a work stoppage in the company's dairy division, the company noted.

As previously disclosed, sales at Penn Traffic fell 10.5% for the quarter to $726.2 million and 9% for the year to date to $2.3 billion. The company also previously indicated same-store sales fell 9.7% for the quarter. The company told SN comparable-store sales for the year-to-date were down 8.7%.

For the four-week period ended Nov. 29, the company said same-store sales were down 4.8%. Penn Traffic had a net loss of $13.5 million for the quarter and $48.3 million for the 39-week period.

The company said selling and administrative expenses for the quarter were reduced by more than $21 million -- from $169.9 million to $148.2 million.

According to Gary D. Hirsch, chairman, "We [continued to] reduce our operating cost structure during the third quarter, and we expect to see additional improvement in the fourth quarter, [which] has enabled us to invest in our gross margins, supporting the launch of our new sales-building program in late September. As expected, gross margins for the quarter were reduced somewhat."

Hawkins said Penn Traffic is pleased with initial customer reaction to its new marketing programs and its efforts to improve store operations -- all of which are aimed at reversing a two-year erosion in its sales base. "We continue to believe that our efforts will only pay dividends after proving to our customers and employees, over time, that we really are listening to them and are becoming in every way the store to shop," he said. "We expect that our dramatically improved cost structure will allow us to maintain acceptable levels of financial performance in the near term while we continue to rebuild our sales base." High-yield securities analysts contacted by SN expressed mixed opinions about the company's prospects.

According to Bob Lupo, an analyst with BA Securities, Chicago, "Things appear to be in place for a slow turnaround of operating results, which has been the hardest piece of the puzzle for Penn Traffic -- to turn the sales line around and begin to address that challenge. "So I expect a steady improvement. And though the company will probably show negative comps through the second or third quarter of 1998, the trends should be positive. And over the next two years, it should begin to recapture some part of the sales it has lost."

Howard Goldberg, an analyst with Salomon Smith Barney, New York, also took a positive outlook, saying, "Penn Traffic has achieved a level of cost-cutting that is unprecedented and that has revitalized operations tremendously. And for the first time it's made a break with previous sales trends and bought itself more time to make further progress.

"In addition to reducing expenses, it's been able to motivate employees to improve productivity and give customers the perception of better service while at the same time it's reducing labor hours. It's also improved its scheduling programs and provided benchmarks for employees to judge their own productivity, and it's improved the stores' in-stock conditions -- all despite a decline of nearly 10% in sales."

However, Ted Bernstein, an analyst with Grantchester Securities, New York, said most of Penn Traffic's real cost savings were achieved through consolidation of its management structure, "and while the company is putting those savings back into the business with lower prices, the quarter reflected the benefit of three months of cost savings and only one month of lower pricing. "We need to see if the company can generate top-line growth when the lower pricing program is in effect for a full quarter."