MONTVALE, N.J. -- Strong rebounds in Canada and Michigan contributed to a 50% first-quarter surge in net income for A&P, representing another sign of continued profit recovery in several of its operating groups.
Noting the quarter's performance followed a strong second half, James Wood, chairman and chief executive officer, said in a conference call with analysts, "This year our ambitious targets should be met."
The Canadian operation has represented "the most gratifying development," as conversions of many units to franchise stores have reversed losses.
The Michigan segment has seen a major turnaround and may be among the top three division performers of 1996.
The Northeast remains difficult, with metro New York stores suffering from a tough economy and cannibalization from new A&P units.
The company as a whole expects its first net square-footage growth in five years in 1996 and plans more for capital expenditures than at any other time in this decade.
A&P's results show "the turnaround is continuing," said Debra Levin, an analyst at Morgan Stanley, New York. "They are definitely making progress in Canada. The margins are a little less than expected because conversions to franchise stores mean they are relying more on wholesale income."
In the 16-week quarter ended June 15, the company's net earnings jumped to $218.7 million from $145.5 million the year before. Sales were $3.09 billion, down from $3.14 billion a year earlier. A&P's comparable-store sales dipped 0.4% as it continued its new-store development program in the United States and store restructuring in Canada, according to the company, which said it continued to keep a tight rein on expenses.
During the call with analysts, Wood said he will make progress on the company's management transition in 1997. Company spokesman Michael Rourke said Christian Haub, A&P's president and chief operating officer, is expected to assume more duties in 1997 but did not indicate a certain date for the transition. When Haub became president in December 1993, Wood signed a contract calling for him to remain chairman and chief executive until April 1998. Wood underlined how fast the Canadian operation has come on, noting that its best year was 1990, when it posted a group contribution of about $76 million (Canadian). "Believe it or not, if we get to where we want to be, we will probably get up to 80% to 85% of this figure this year," Wood said. "So by next year, we would hope to get back to a better year and maybe make a peak year."
A&P now operates a number of banners in Canada, including 36 Dominion stores, 128 Super Fresh/A&P units and 32 Food Basics units. About 30 stores have been closed, and many may reopen as Food Basics franchised units. The Food Basics banner has been the biggest turnaround story. A&P has been converting stores with higher-cost union contracts to the low-cost Food Basics, a limited-assortment format. Those moves followed a major strike in the region against A&P a few years ago that focused on labor contract rates. A&P formed a new subsidiary last November to open the new Food Basics stores.
"We've been opening the Food Basics stores at the rate of one to two a week," Wood said. "Currently, about 32 are open. They are highly successful from day one. The SG&A for the company has improved dramatically from this one factor alone. Our profits in Canada are up to expectations in the quarter.
"We have the ability to double the number of Basics from where we are this year, and that probably is the way it will go. Sales for Basics next year could be $500 million. This is a rescue operation for loss-making stores."
Wood cited an example of the Basics success story. "In April, we converted five stores to Basics. Those stores last year lost $5 million. This year they are profitable. So the upside is huge by turning loss-making stores into profit."
A&P expects to finish the year with about 60 franchise stores and expects another 40 in 1997. "We'll have 100 franchise stores within the next two years," he said.
The company as a whole is posting overall good sales trends in the second quarter in the Mid-Atlantic, South and Midwest. The Northeast is still a difficult area for the company, Wood noted. There is some apprehension about the effects of Dutch-based Ahold's pending acquisition of Stop & Shop Cos., Quincy, Mass., though New England isn't a major market for A&P, he said.
A major problem is the metro New York economy. "[The economy on] Long Island and the whole of the metro area is depressed," Wood said. "Our ID [comp-store] sales have improved, but not greatly. Our main problems on Long Island are more competition from club stores and the need for changes in the economy to help us there. "The Mel Weitz [Foodtown] stores [acquired by Stop & Shop] are not having an impact on our stores. Our sales tend to be better against them than others. There are no adverse implications now, with the change in ownership."
The metro New York/New Jersey area has also been affected by cannibalization. A&P replacement stores are larger and affect other A&Ps in adjoining areas. "There'll be some continued cannibalization in metro New York," Haub said. "This year, at least six to 10 more stores will open in the metro area, so there will be some further impact on the market."
However, Wood noted that the new 55,000- to 65,000-square-foot stores in this region have been stellar performers. "Every one has been a home run," he said.
For the company as a whole in the first quarter, U.S. square footage grew 140,000 square feet and Canadian square footage 100,000 square feet, Haub said. For the year, the company expects 1% to 1.5% growth in total square footage, the first increase in five years, Wood said.
The company's capital expenditure plan is also on track. The $310 million slated for this year is the highest this decade, Wood said.