SYRACUSE, N.Y. -- Penn Traffic Co. here disclosed several initiatives that it said are designed to turn around the company's slumping financial performance by the end of 1998.
That timetable was set by Phil Hawkins, president and chief executive officer, in remarks last Monday at a closed meeting with securities analysts in New York -- the same day the chain released disappointing numbers for the first quarter ended May 3, the latest in a series of financial declines.
According to analysts at the meeting, Hawkins' prediction came in response to a question on how the situation at Penn Traffic compares with problems faced four years ago by Hawkins' former employer, Vons Cos., Arcadia, Calif.
"Hawkins said it took Vons a little over a year to effect a turnaround, and while acknowledging that Penn Traffic's situation is more complicated because it has multiple divisions, he said it would be reasonable to expect to see improved results within the same timeframe," one analyst told SN.
Hawkins could not be reached last week for comment. Analysts contacted by SN last week said they were generally buoyed by Hawkins' performance at the analysts' meeting -- and by the willingness of Penn Traffic's bank syndicate to loosen up some of its financial covenants -- although they said they remain uncertain how long it will take the chain to halt its decline.
Penn Traffic disclosed several initiatives publicly last week that it said it hopes will improve its financial performance, including:
In the near term, improving the selection of promotional items, placing additional emphasis on in-stock conditions at store level and strengthening programs to communicate better with consumers.
In the longer term, finding ways to take costs out of the system and invest them in merchandising and developing a corporate culture that improves employee performance. Penn Traffic and its banks have agreed to modify several financial covenants, chain officials said. That will give the company some breathing room while it implements the initiatives, analysts told SN.
Gary D. Hirsch, chairman, said he expects the new initiatives "to begin to mitigate the sales decline, thereby enabling us to achieve improvements in our financial performance."
The company disclosed the initiatives in the wake of releasing financial results for the 13-week first quarter, during which sales fell 8.3% to $759.4 million, cash flow declined 13.4% to $38.7 million and same-store sales dropped 8.1%. Same-store sales continued in the negative range for the month of May, declining 7.3%.
The company also said last week it had a net loss for the quarter of $13.9 million -- prior to one-time pretax charges totalling $15 million -- compared with a loss of $9 million a year ago.
"The sales decline prevented us from achieving our short-term profit goals for the quarter," Hawkins said.
Howard Goldberg, a high-yield analyst with Smith Barney, New York, told SN he feels better about Penn Traffic's prospects "because of the bank waivers and because of Phil Hawkins' performance in answering questions."
According to Goldberg, the bank syndicate was willing to make amendments in the covenants "because the company's borrowings have been flat for two quarters in a row -- the first time in at least five years that that has happened -- and it believes Phil Hawkins and his new management team may be able to effect programs to turn things around." Goldberg said Hawkins told analysts it may take up to six months to get employees on management's side "before Penn Traffic can drive for more sales. But he said the company is setting objectives to improve relationships and communicate better with its employees who impact customers at the point-of-sale.
"The question facing the company now is, does Penn Traffic have enough time to effect the changes that are needed? There are no miraculous cures in sight, but now that it has some flexibility with the covenants, the new team may be able to pull it off -- though it will take a lot of good blocking and tackling to do it."
Bob Lupo, an analyst with BA Securities, Chicago, said that, while there's room for longterm optimism, "there's still no light there, and Penn Traffic is still operating in the basement, in the dark.
"But I like the steps it plans to implement, especially the emphasis on communicating its strategies and philosophies with employees, because although it sounds hokey, that's what every successful turnaround company has done.
"Getting employees motivated is the first stop on the train, and the second stop is communicating with the customer base. And while it takes time to accomplish those goals, Penn Traffic has the time, now that the banks have given it to them."
Taking a more pessimistic view, however, Ted Bernstein, an analyst with Grantchester Securities, New York, said he is skeptical about the company's ultimate chances for success. "Penn Traffic faces an incredibly difficult challenge because, even with new top management, the company is severely handicapped by allocating only $40 million to capital expenditures this year, compared with $125 million-plus in prior years.
"That will make it hard for Penn Traffic to maintain its store base while trying to stay on top of technology, and it remains to be seen if the challenge is insurmountable."
According to Martin A. Fox, Penn Traffic's vice chairman of finance, the amendment to the company's bank credit agreement "demonstrates the ongoing support of our bank group for the company."
Analysts said the new covenants require cash flow for the year ending in January 1998 of $164 million, compared with $190 million under the previous covenant; interest coverage of 1.1 times cash flow instead of 1.2, and a lower consolidated adjusted net worth.
Bernstein said the latest amendments represent the 15th time the banks have adjusted Penn Traffic's covenants downward since March 1993.
1ST-QUARTER RESULTS
Qtr Ended 5/3/97 5/4/96
Sales $759.4 million $827.7 million
Change - 8.3%
Same-store - 8.1%
Net Income ($13.9 million) ($9.0 million)
Inc/share ($2.10) (83 cents)
Net loss for the quarter prior to one-time pretax charges of $15 million for management reorganization and retention of certain executives.
