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A&P Stays On Its Game as Pathmark Merger Looms

Impending nuptials are proving to be little distraction for A&P. The retailer last week reported its highest quarterly comparable-store sales gains in six years results that officials said provide momentum for A&P's upcoming merger with Pathmark, while showing competitors it won't be vulnerable as that event approaches. I am sure that people think that while we are doing Pathmark

MONTALE, N.J. — Impending nuptials are proving to be little distraction for A&P.

The retailer here last week reported its highest quarterly comparable-store sales gains in six years — results that officials said provide momentum for A&P's upcoming merger with Pathmark, while showing competitors it won't be vulnerable as that event approaches.

“I am sure that people think that while we are doing Pathmark planning and integration, that they can get us off our game,” Eric Claus, chief executive officer, said in a conference call discussing A&P's second-quarter results last week. “But that just gives us more drive to be on our game.”

Claus said A&P brought an “intelligent, strategic” approach to competition during the quarter, using a blend of promotions and a new program emphasizing everyday low prices in Center Store. A store remodeling program and increased penetration of private-label items also helped effect the sales increase, Claus said.

Sales for the quarter — excluding recently divested businesses in New Orleans and the Midwest — increased 3% to $1.3 billion, with comparable-store sales increasing by 3.2%. The comps were the company's highest since a 3.8% gain reported in the first quarter of fiscal 2002.

Analysts said they were impressed at how little profit A&P shed in pursuit of the higher sales. Gross margins as a percent of sales fell by just six basis points, excluding the effects of an expired IT contract with Metro.

“They've been able to blend promotional and regular prices without destroying their profits, and that's something they haven't been able to do in the past,” Perry Caicco, an analyst for CIBC World Markets, Toronto, told SN. “Too often, they have found competing on price to be unaffordable.”

2ND-QUARTER RESULTS*
Qtr Ended 9/8/07 9/9/06
Sales $1.27 billion $1.24 billion
Change +3%
Comp-store +3.2%
Net Income (Loss) ($2.9 million) ($2.2 million)
Change N/A
Inc (loss)/Share (7 cents) (5 cents)
28 Weeks 2007 2006
Sales $2.95 billion $2.89 billion
Change +2.1%
Comp-store +1.9
Net Income (Loss) $58.5 million ($8.5 million)
Inc (Loss)/Share $1.39 (21 cents)
* Results from continuing operations only. Including discontinued operations, A&P posted a quarterly loss of $91.3 million, or $2.18 per share.

Officials said they expected the merger with Pathmark would close before the end of the calendar year. According to Christian Haub, A&P's executive chairman, several parties are bidding on stores the Federal Trade Commission has asked the company to divest as a means to win antitrust approval. That process is in the “final stages,” he said.

Haub added that the company has agreed to surrender a maximum of $36 million in EBITDA from stores to be divested. Analysts said that was difficult to translate into a number of stores, as the collection of A&P and Pathmark stores varies widely in productivity. Shareholders for both companies are expected to vote on the merger plan Nov. 8.

A&P may take up to 20 days following FTC approval to issue debt to help pay for the $1.3 billion transaction, Haub said, adding that the company has secured other financing commitments if the debt market proves too challenging. The merger is expected to unleash millions in cost savings and create market leadership positions in the Northeast for A&P.

Claus said he expected A&P could make merchandising improvements immediately upon completing the merger. John Ruane, whom Claus described as Pathmark's top merchant, with expertise in Center Store, is among the Pathmark executives set to join A&P upon the merger.

In other matters, Claus said the Food Basics discount stores have been performing exceptionally well. The stores, transformed from money-losing conventional stores, are showing strong sales gains and improved bottom lines. Claus said the company would likely step up its rate of converting stores to that format following the merger.

Brenda Galgano, chief financial officer, said A&P intends to spend another $70 million this fiscal year on seven new fresh store renovations, two gourmet stores, and one liquor store.

She said the recently announced deal to sell Sav-A-Center stores in New Orleans will generate proceeds of around $70 million.

The company is continuing to discuss a new supply contract with C&S Wholesale Grocers, the wholesaler for both A&P and Pathmark. According to Haub, the new deal would be more “logistics-driven” than the agreements it replaces, which were conceived on a wholesale procurement basis.