MONTVALE, N.J. -- A&P has narrowed its losses, but stopping them will require more profitable sales and additional cost reductions amid heavy competition and consumer uncertainty, Christian Haub, chairman, president and chief executive officer, said in a conference call here last week.
"We are confident with our progress in merchandising and operations, which is moving our results in the right direction," Haub said, "but we are not so confident that the business environment -- specifically, consumer spending patterns -- will allow that progress to be as rapid as we'd like."
A&P lost $64.2 million on sales of $2.5 billion in the second quarter ended Sept. 11. Overall sales were up by 1%. The quarterly loss, which included a $24.7 million charge to settle a lawsuit brought by Food Basics franchisees in Canada, was down from $83.7 million a year ago. Earnings before taxes, interest, depreciation and amortization (EBITDA) in the quarter totaled $43 million, an increase from $38 million a year ago and the chain's first year-over-year improvement in three quarters.
Haub said the narrowing losses and overall sales increase indicate that A&P's strategy of changing some stores to its deep-discount Food Basics concept and upgrading others to a fresh format is having a positive impact. However, he noted competition was fierce in some U.S. markets, and unfavorable weather affected sales at summer resort locations. Same-store sales in the United States decreased by 1% during the quarter; in Canada, same-store sales were up by 3.9%. Overall, comps were positive by 0.1%.
Specifically, Haub cited Meijer stores in Michigan and Pathmark in the Northeast as being particularly competitive on price -- a trend he felt would continue for the balance of the year. "We have begun to see fairly aggressive programs launched in some U.S. markets suggesting that the fall and year-end holiday season will once again be hard-fought." Improved operating earnings among remodeled Farmer Jack stores in Michigan, and the potential to establish Food Basics as the low-price leader in the Northeast, are positive developments for A&P, Bryan Hunt, vice president of fixed income for Wachovia Securities, Charlotte, N.C., told SN.
He added that Food Basics could provide an edge in the Northeast, where A&P's conventional stores are pressured to keep up in price battles with competitors, such as Carteret, N.J.-based Pathmark and members of Wakefern Food Cooperative, Elizabeth, N.J., operating under the ShopRite banner.
"The potential for Food Basics to establish itself as the new low-price leader has significant ramifications for A&P as a stand-alone entity, but also significant strategic implications for the whole marketplace," he said. "Food Basics could be the only price-impact store with any significant share in the New York-New Jersey area. If that happens without significant hiccups, and if the format gets traction with consumers, [competitors'] responses will be muted by the fact that they'll have to go back and renegotiate labor contracts and change their cost structure and the way they operate. It will be extremely interesting."
Gary Giblen, director of research for C L King Associates, New York, told SN he was skeptical of A&P's ability to execute its strategies over the long term, particularly with the company focused on reducing its costs.
"A&P was bailed out this quarter by Canada, but I'm not convinced that's sustainable. I can see competitors getting more aggressive there," he said. "In the U.S., they're still losing money every quarter and they had negative comps. 'Whole Foods-izing' their stores is the right idea, but it's execution-intensive, and A&P has a history of opening beautiful stores that don't stay that way."
A&P operates 25 Food Basics stores in the United States and has 101 in Canada. It has also opened six new or remodeled stores -- under the Waldbaum's, Super Fresh, Farmer Jack and A&P banners -- featuring a revamped fresh format that, according to Haub, incorporates "best-of-class" elements from fresh food retailers across North America. "It's more than just a new look and more upscale products," Haub said. "It's a comprehensive concept evolution."
Fresh stores, which have performed well, Haub said, provide the opportunity to claim the profitable sales growth A&P needs to reverse operating losses.