Market Exits Widen First-Quarter Loss at A&P

MONTVALE, N.J. — Costly exits from Detroit and New Orleans caused A&P to post wider losses during its fiscal first quarter, officials of the retailer here said.

Results for the first quarter, which ended June 16, included a total of $125 million in losses associated with A&P's wind-down of operations of its Farmer Jack division in Michigan, as well as preparations to sell the Sav-A-Center banner in New Orleans. Those losses were partially offset with gains from the sale of Metro stock, resulting in a net loss of $43 million in the quarter. A&P lost $16 million in the same period a year ago.

Both market exits, which were previously disclosed, will allow A&P to focus on its core Northeast U.S. business, officials said. That division is still awaiting approval of a takeover of Pathmark, an event that analysts last week said provides the potential for significant improvements in profits for 2008.

A&P has sold 43 of its 66 Farmer Jack stores, said Eric Claus, chief executive officer, A&P. The 23 remaining stores, as well as two distribution centers, have been closed and are being marketed for sale by the company. “Some of those stores are actually pretty decent stores. They just did not work for the independents who were buying them,” Claus said. “We are pretty positive about the potential to market a good portion of those in a relatively short period of time.”

Claus indicated A&P was in discussions to sell its New Orleans division to a single buyer. “We expect to conclude a deal and close for early fall,” Claus said, adding, however, that a deal was not certain as yet.

Karen Short, an analyst for Friedman Billings Ramsey, New York, in a research note said the 23-store New Orleans division could generate proceeds of $90 million to $120 million. By contrast, departing Michigan has cost A&P more than $100 million, including $43 million in pension payments, $23 million in severance, impairment charges of $31 million and $5 million in inventory write-downs, officials said.

Results were better in A&P's core Northeast market, although utility expenses drove costs higher by $7 million during the quarter, officials said. Claus said A&P was installing a software program designed to better manage energy at the store level by reducing utilization during peak demand periods.

Overall sales for the quarter were flat at $2 billion, although the core Northeast region saw sales increase slightly and comparable-store sales increase by 5%. A&P completed five store remodels during the quarter and currently has 78 new or remodeled “fresh” stores in its base. Those locations, which receive extensive renovation so as to effect a shift toward more perishable items, tend to spark comparable sales increases of around 14% in their first year, Short said, and around 7% in subsequent years.

A&P plans 20 major remodels for the fiscal year, said Brenda Galgano, chief financial officer.

While overall store traffic was down during the quarter, Claus said the loss mainly consisted of unprofitable “cherry-pickers” discouraged by newly instituted restrictions on specials. A&P in the meantime forged stronger relationships with its existing customers, Claus said.

“The sales we are getting are coming from an improved customer base,” he said. “We are getting away from the cherry-picking, and that, combined with the mix that we have in fresh, has allowed us to drive sales while at the same time manage our merchandising gross margin mix.”

Claus said the chain has not been particularly affected by recent product price inflation, saying a new pricing strategy, incorporating more EDLP “red tag” items and fewer promotional sales, has more than made up margins lost to rapid price increases on items such as milk.