SYRACUSE, N.Y. -- Penn Traffic Co. here said the write-off of its Harts general merchandise business and other one-time charges resulted in a net loss for the second quarter and 26 weeks ended July 29. Sales increased 5.8% for the 13-week quarter to $884.2 million and 6% for the half to $1.7 billion, which the company attributed to the addition of 31 Acme stores acquired in January from American Stores Co., Salt Lake City. However, same-store sales declined 0.9% for the quarter and 1.2% for the half. The net loss amounted to $51.7 million for the quarter and $51.6 million for the half following unusual items of $65.2 million. As previously reported, Penn Traffic said it will close 11 of its 15 stand-alone Harts units over the next 12 months and convert the other four to its Plus or Plus Lite expanded format. The 11 stores generate approximately $50 million annually, or 1.4% of Penn Traffic's revenues. Penn Traffic operates 20 Plus and Plus Lite stores and plans to add four or five more stores in fiscal 1997, said Gary D. Hirsch, chairman. He said the company expects the closures to boost operating income by approximately $2 million annually, beginning in the third quarter of fiscal 1997. Despite the closures, he said Penn Traffic will continue to increase the merchandising of nonfood in its supermarkets. "After exiting the Harts business, Penn Traffic will focus all its nonfood management resources on our 269 supermarkets," he said. The unusual items consisted of the following:
A pretax charge of $53 million related to the future closure of the Harts units ($51 million for the write-off of fixed assets and goodwill ascribed to Harts and inventory markdowns, and $2 million for cash outlays related to the closings).
A charge of $12.2 million, including $8 million related to the write-off of equipment the company said it will no longer use, $2 million worth of costs incurred in implementing the company's expense-reduction program and $2.2 million to cover an increase in the company's closed-store reserve. Hirsch said deducting the $2 million of cash wind-down costs from closing the Harts operation would generate net one-time cash proceeds of approximately $15 million by the middle of fiscal 1997, which he said would be used to retire debt and reduce ongoing interest expense. According to Hirsch, second-quarter results were adversely affected by competitive activity in upstate New York and by Penn Traffic's efforts "to match increased competitive promotional activity to maintain our market share." Hirsch said results were also affected by weak consumer spending, particularly in upstate New York, and the entry of Wegmans in the Jamestown, N.Y., market -- an area where Penn Traffic has operated virtually the only supermarkets in town. According to Howard Goldberg, a high-yield analyst with Smith Barney, New York, Penn Traffic said it expects the competitive situation in Jamestown to have a negative effect on profits of $4 million to $5 million for the year. "The company says the competitive fires have abated and, with reduced head counts in several market areas, it expects cash flow margins, which fell 125 basis points in the second quarter, to improve through the balance of this year."
However, Goldberg also said Penn Traffic's same-store sales continued to fall early in the current quarter, dropping 2.5% during the month of August. John T. Dixon, Penn Traffic president, said the company is in the final stages of implementing certain cost-reduction initiatives that are expected to result in cost savings of $10 million to $15 million a year beginning in fiscal 1997. Those initiatives -- which were put in place in 1993, after the company's principal business units were merged into a single corporate entity -- are designed "to take advantage of our business units' combined purchasing power and our ability to efficiently consolidate certain previously decentralized functions," Dixon said. The initiatives, Dixon said, include consolidation of certain accounting and administrative functions, resulting in annual cost savings of approximately $4 million; opening a new nonfood distribution center in Columbus, Ohio, last month that will be servicing all stores by October and simultaneously getting out of a grocery warehouse in Montgomery, N.Y., that was operated in a joint venture with Grand Union, Wayne, N.J.; and opening a new distribution center in Scranton, Pa., in July to serve 45 Insalaco Markets.