MONTVALE, N.J. - A&P here said last week that it had botched the delivery of a proposed cure for its struggling Farmer Jack banner in Michigan.
The company had previously touted the conversion of the chain to a "fresh-discount hybrid," which was to be rolled out in the 67-store Farmer Jack region during the second quarter, but Eric Claus, president and chief executive officer, last week confessed that "we didn't execute against what we had actually strategized. I don't think we did a very good job of delivering the format we wanted to."
Claus cited difficulties in the sales flier program and poor execution of fresh-food merchandising among the troubles encountered in Michigan. As a result, he said, A&P suspended rolling out the format and intends to resume later this quarter.
The Farmer Jack banner has long been a problem for A&P, which sought to divest it last year and has implemented a series of failed marketing and merchandising initiatives, including the conversion of some stores to the Food Basics format. Those stores were closed along with 34 others last year.
Sales results in the company's fiscal second quarter, which ended Sept. 9, were considerably better in A&P's Northeast home base, Claus said, despite difficult weather, multiple store renovations and a heightened promotional environment. Comps in the Northeast were positive in the quarter and running positive in the first five weeks of the third quarter, Claus said.
The retailer reported overall U.S. sales of $1.57 billion, a decline of 1.6%, with identical-store sales improving by 0.2% during the second quarter.
Claus said A&P's 23-store Sav-A-Center banner in New Orleans has come up against extraordinary sales gains a year ago in the wake of Hurricane Katrina. Sav-A-Center was able to reopen faster than many of its competitors following the storm, he said. But with more businesses operating today, Claus said he anticipates double-digit comparable-store sales declines in New Orleans "for some time to come."
Unusually hot weather during the quarter - and a rainy Labor Day holiday - negatively impacted sales and contributed to higher shrink, Claus said. A summer heat wave put extra strain on equipment to keep fresh goods, which arrived is worse shape than usual, he noted.
The company completed four Fresh remodels during the quarter and has 15 more planned for the balance of the fiscal year. The majority of those remaining renovations are due for completion in coming weeks, said Brenda Galgano, chief financial officer.
Renovated stores are also the basis of improved financials at the company, officials said. Stores that have been remodeled into the A&P Fresh concept are experiencing overall sales lifts in the double digits due to larger baskets and more traffic, Claus said, while the sales mix at such stores tilts 4% to 5% toward fresh departments, helping boost margins.
At the same time, A&P is investing its cost reductions into sharper pricing in Center Store, which Claus said would improve price image among shoppers.
"The strategy is not necessarily to drive unrealistic merchandising income or gross margin numbers," he said. "What we really try to do is drive more income through the fresh departments and become much more competitive in the Center Store. We actually take a reduction in Center Store margins."
Profit margins of 30.62% in the quarter improved from 30.15% in the same period a year ago, reflecting the superior sales mix and reduced costs. And although A&P posted a quarterly loss of $500,000, or 1 cent per share, EBITDA improved by 38% to $35 million.
Karen Short, an analyst with Freidman Billings Ramsey, New York, estimated comparable sales in the Northeast were up 0.5% during the quarter "in part due to strong performance at remodeled stores." In a research note, Short described quarterly results as "solid," with EBITDA and margin percentage above her previous estimates.
Results also surpassed published estimates of Perry Caicco, an analyst with CIBC World markets, Tor-onto. Caicco said he expected flat comp growth and EBITDA of $30.5 million.
Newly renovated Food Basics locations - five were complete by the end of the quarter - feature cleaner environments and assortments geared more toward particular store demographics, Claus said. Overall, the chain added around 2,000 SKUs to the assortments at Food Basics.
Those stores were experiencing comparable sales lifts of more than 20% in the first weeks, Claus said.
Claus said Food Basics in the U.S. has required a more delicate touch than the successful discount banner in Canada after which it is modeled.
"In the very first years of Food Basics in Canada, you could get by with a coat of paint and fixing up some of the very basic things in the store," said Claus, who oversaw the Food Basics operation as CEO of A&P Canada before coming to the U.S. a little over a year ago. "That didn't work here. People really wanted a better environment in which to shop."