CARTERET, N.J. - John Standley marked the first anniversary of his tenure as Pathmark's chief executive last week noting that merchandising initiatives launched under his watch have begun to improve sales but failed to stem red ink as quickly as he might have hoped.
The retailer here said losses during its fiscal second quarter that ended July 29 totaled $8.8 million, vs. $5.1 million a year ago, while overall sales increased by 0.2% to $1 billion and comparable-store sales gained 0.5%. Overall store traffic decreased.
"We're a little behind our objectives from an earnings perspective but we're gaining traction with our [sales and merchandising] initiatives," Standley told analysts in a conference call.
Consumers switching their prescription programs from Medicaid to Medicare Part D caused margins to decrease in pharmacy and depressed profits during the quarter, officials said. Higher workers' compensation and liability claims, and slightly higher shrink, also negatively affected earnings. Those losses were somewhat offset by the company's recognition of $3.2 million in income related to gift cards that were sold but went unused, Frank Vitrano, chief financial officer, explained.
Stock in Pathmark fell by 3.75% following the announcement.
"Even though the loss may have been greater than the street expected, this is a company where massive changes were needed and changes are happening, and I think people are recognizing that," Jonathan Ziegler, an analyst with J.M. Dutton Associates, El Dorado, Calif., told SN.
Sluggish results could dictate a lower price for Pathmark in the event of consolidation, Perry Caicco, an analyst with CIBC World Markets, Toronto, said in a report last week. This may pressure majority owned Yucaipa Cos., Los Angeles, to pursue consolidation sooner rather than later, Caicco added. "Pathmark's recovery is happening slowly and investors should be concerned that without a deal, the company is worth much less than what it's trading for," the report said.
Sales growth in the produce department outpaced overall company sales by more than 3%, reflecting early successes of merchandising and advertising designed to boost produce sales in the last year, Standley said. These moves included increasing perishable sales space in stores, maintaining a better selection and quality of goods, and emphasizing produce in store advertisements, said Ken Martindale, co-president and chief merchandising and marketing officer.
Employees at Pathmark are receiving additional training to improve product knowledge and suggestive selling techniques, Martindale added. Programs similar to the produce initiative are currently being rolled out to other perimeter departments, he added.
Recent initiatives to boost nonfood items like kitchen goods, dollar items and toys have also been successful, Martindale said. Sales declined, however, in deli, frozen foods and in some Center Store categories. Martindale said the company would look to rationalize SKUs in certain Center Store departments, particularly as the company expands store perimeters. Sales dollars were down in dairy as the result of deflation in the category, he added.
Lower margins in pharmacy associated with the Medicare Part D program eroded EBITDA by about $1 million during the quarter. Overall EBITDA fell by $4.8 million, to $26.9 million. Gross margin as a percentage of sales decreased to 28.4% during the quarter from 28.6%.
The company also experienced higher liability costs due to a jury decision, and workers' compensation claims in a particular jurisdiction higher than traditional averages, Vitrano said.
Selling, general and administrative expenses increased during the quarter to 26% of sales, but Vitrano noted the rate of such expense growth was the company's lowest in a year. This he attributed to the previously announced labor buyout and corporate layoffs, as well as savings derived from auctioning for goods and services.