MONTVALE, N.J. — A&P is planning a cost-effective “refresh” program at its recently acquired Pathmark stores designed to modernize their look, enhance perishable sections and reinforce a “price impact” message.
Eric Claus, president and chief executive officer of A&P, last week estimated the retailer could complete such renovations at all Pathmark stores within three years. He said the company would reveal more details of the plan as the integration progresses this year, but his comments indicate the changes in mind for Pathmark are less dramatic than the million-dollar renovations that in recent years have turned around performance at A&P's core store base.
“The overall state of affairs in those stores was not as bad as the A&P portfolio a couple of years ago,” said Claus during the first earnings conference call since the acquisition of Pathmark was completed last month. “They are a little dated, and they require some face-lifting.”
Perry Caicco, an analyst for CIBC World Markets, Toronto, estimated the plan would call for “clean and bright” renovations at a cost of a few hundred thousand dollars per store. Caicco said he believes A&P will gravitate toward converting suburban Pathmark locations to the A&P banner while strengthening Pathmark's status as an urban-focused price operator. A&P, however, has not announced any plans to change banners.
“They are not in this to reform Pathmark — it's not a bad company, it's a neglected company,” Caicco said. “They see Pathmark for its strengths.”
Claus estimated the renovations planned at Pathmark could generate comparable sales increases in the mid-single digits. Renovated A&P Fresh stores, although starting from a lower base, have seen identical-store sales spikes in the high teens during the first year, officials said last week.
Officials said other aspects of the Pathmark integration were progressing smoothly, with plans calling for A&P to reach $75 million of its $150 million, two-year synergy target by this summer. A&P is meeting with vendors as part of creating a new private-label program, and is nearing an agreement with supplier C&S Wholesale Grocers on a single supply contract.
A&P said sales for the third quarter, which ended Dec. 1, prior to the closing of the Pathmark deal, improved by 3.3% to $1.25 billion, excluding discontinued operations, with same-store sales improving by 3.1% on the strength of a new pricing program and Fresh store remodels. Net income of $57.3 million, or $1.36 per share, improved by 40.8%.
The performance slightly exceeded analyst expectations and represented a significant sales improvement from the same period a year ago, when A&P resisted entering a Thanksgiving price war and saw comps fall by 3%.
A&P said it heightened promotional activity during the quarter as part of its “Red Tag” program, which features everyday low prices on a slate of items designed to be competitive with the price leaders in the local market. These items were not adjusted to keep pace with inflation, which according to Claus represented around 1.5% of the chain's comp-store gains during the quarter.
Claus said the new pricing program is slowly chipping away at A&P's pricing perception in the marketplace. Pathmark, he added, may need to make similar price adjustments to better define its niche.
“I think our pricing [at A&P] is where it needs to be. Do we get credit for it from our customers? No. And that's going to take some time and some marketing,” Claus said. “We believe that at Pathmark there is some correction to be made, that Pathmark over time has allowed [prices] to creep up a little bit. Being a price impact banner for us, it's got to be more aggressively priced.”
Quarterly gross margins, excluding $4.1 million related to a technology services agreement with Metro, decreased a modest 12 basis points to 30.51% — a performance applauded by analysts.
John Heinbockel of Goldman Sachs in a research note called it a “solid” quarter, “confirming that its ongoing turnaround is essentially on track.”
Karen Short of Freidman Billings Ramsey said the results showed A&P had gained sufficient momentum to allow officials to address sales at Pathmark. Officials said Pathmark's comparable-store sales have improved in the first weeks since A&P took over Dec. 3. A&P sales have also improved in the early weeks of the fourth quarter.